Northern Oil & Gas, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports unaudited fourth-quarter results. The company is a non-operating oil and gas producer focused primarily on Bakken and Three Forks properties in North Dakota and Montana.
Financial and operating performance
| Metric | 2016 | 2015 |
|---|---|---|
| Oil and gas sales | $159.7 million | $202.6 million |
| Total revenue, including derivative gains/losses | $144.9 million | $275.1 million |
| Net income (loss) | $(293.5) million | $(975.4) million |
| Adjusted EBITDA (non-GAAP) | $148.5 million | $277.3 million |
| Net cash from operations | $101.9 million | $247.0 million |
| Capital expenditures for oil and gas properties | $84.5 million incurred; $92.9 million cash spend | $128.7 million incurred; $289.1 million cash spend |
| Production | 5.00 million Boe; 13,653 Boe/day | 5.94 million Boe; 16,285 Boe/day |
| Proved reserves at year-end | 54.1 million Boe | 65.3 million Boe |
| Production expense | $9.14/Boe | $8.77/Boe |
Oil represented about 87% of production. Average realized price including settled derivatives was $44.27/Boe, down from $61.19/Boe. Cash derivative settlements added $61.5 million in 2016, but mark-to-market losses of $76.3 million contributed to a $14.8 million net derivative loss recognized in revenue. The company reported a $237.0 million non-cash property impairment, versus $1.164 billion in 2015. Interest expense was $64.5 million. The income tax benefit was $1.4 million; a $341.3 million valuation allowance was recorded against deferred tax assets.
Cash and equivalents were $6.5 million. Working capital was a $30.5 million deficit. Total debt, net of issuance costs, was $832.6 million, including $144.0 million drawn on the revolving facility and $688.6 million carrying value of senior notes. Stockholders’ deficit was $487.4 million. The company reported $206 million of undrawn borrowing capacity under its $350 million borrowing base and compliance with its debt covenants at year-end.
Material changes versus 2015
- Total revenue fell 47%; production declined 16%, and oil and gas sales excluding settled derivative effects fell 21%.
- Operating cash flow declined by $145.1 million. Lower commodity prices, lower production, and a smaller benefit from settled derivatives contributed to the decrease.
- Capital spending was reduced 34%, and credit-facility borrowings fell by $6 million. The company added 10.7 net wells, compared with 18.6 net wells in 2015.
- Proved reserves fell 17%, mainly from lower SEC pricing, fewer economic development locations, and the five-year limit for booking proved undeveloped reserves.
- The company recorded a smaller impairment than in 2015, but still reported a substantial net loss. Adjusted EBITDA declined to $148.5 million from $277.3 million.
Outlook, risks, and unusual items
- The board approved a 2017 capital budget of up to $102.2 million. Management said it expects operating cash flow and available revolver capacity to fund budgeted spending and expenses for at least 12 months, while noting that spending may be reduced or additional capital sought if conditions change.
- Management intends to prioritize liquidity, selectively participate in drilling, and develop within available cash flows. It stated that 85% of proved-reserve PV-10 was supported by producing properties. PV-10 is a non-GAAP reserve valuation measure, not fair value.
- Open oil swaps covered 2.525 million barrels in 2017 at an average $52.55/bbl and 0.813 million barrels in 2018 at $54.40/bbl; 2017 collars covered 0.3 million barrels with floors near $50 and ceilings near $60. Counterparty extension options could add volume.
- Key risks include oil-price volatility, further impairment, reduced borrowing base, covenant compliance, substantial debt and interest costs, reliance on third-party operators, production decline, transportation capacity and differentials, lease expirations, and environmental and hydraulic-fracturing regulation. The revolver matures September 30, 2018; $700 million principal amount of 8% notes is due June 2020.
- Litigation includes a former CEO’s employment and defamation claims and a securities class action relating to securities acquired from March 2013 through August 2016. A separate dispute over mineral ownership beneath the Missouri River could require reversal of approximately $6.8 million of accrued revenue if decided adversely.
- The filing identifies the former CEO’s August 2016 termination and related reversal of compensation expense, as well as the $237.0 million impairment and valuation allowance, as notable items. The independent auditor issued an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Whether the 2017 capital budget, drilling plans, and production targets remain supportable by cash flow and liquidity.
- Results of borrowing-base redeterminations and covenant headroom, particularly given the revolver’s 2018 maturity and commodity-price sensitivity.
- Actual hedge volumes, settlement economics, counterparty exposure, and the extent of unhedged production.
- Reserve revisions, development timing and costs for the 16.4 million Boe of proved undeveloped reserves, and potential further ceiling-test impairments.
- Developments in the former CEO and securities litigation and the Missouri River mineral-title dispute.