Northern Oil & Gas, Inc. — FY 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing. The company is a non-operating oil and gas producer with interests primarily in the Williston, Appalachian and Permian Basins.
Key financial and operating metrics
| Metric | FY 2021 | FY 2020 |
|---|---|---|
| Oil and natural gas sales, before derivative gains/losses | $975.1 million | $324.1 million |
| Total revenue, including derivatives | $496.9 million | $552.2 million |
| Net income (loss) | $6.4 million | $(906.0) million |
| Net income (loss) attributable to common shareholders | $(8.4) million; $(0.13) per share | $(921.3) million; $(21.55) per share |
| Cash flow from operating activities | $396.5 million | $331.7 million |
| Cash flow used in investing activities | $(634.4) million | $(283.9) million |
| Cash flow from (used in) financing activities | $246.1 million | $(62.4) million |
| Average daily production | 53,792 Boe; Q4: 64,155 Boe | 33,078 Boe |
| Production expense | $8.70 per Boe | $9.61 per Boe |
FY 2021 oil and gas sales rose 201%, reflecting a 62% increase in production and higher realized prices. Total revenue nevertheless declined because the company recorded a $478.2 million net derivative loss, versus a $228.1 million gain in 2020. Operating income was $78.0 million; interest expense was $59.0 million. No proved-property impairment was recorded in 2021, compared with a non-cash $1.067 billion impairment in 2020.
At year-end, cash was $9.5 million and working capital was negative $112.2 million. Liquidity was reported as $704.5 million, including $695.0 million of committed revolver availability. Debt principal totaled $805.0 million: $750.0 million of 8.125% notes due 2028 and $55.0 million drawn under the revolver. The company reduced debt from $949.8 million at year-end 2020 and reported compliance with credit-facility covenants.
Proved reserves increased 135% to 287.7 MMBoe, mainly from acquisitions and higher SEC pricing; 41% were proved undeveloped. Year-end reserve PV-10 was $3.34 billion and the standardized measure was $2.89 billion; these are reserve valuation measures, not market value. The 2021 average realized price per Boe including settled derivatives was $41.21, versus $42.32 in 2020.
Material changes and transactions
- Completed the Reliance Appalachian acquisition, CM Resources Permian acquisition and Comstock Williston acquisition in 2021. These acquisitions, along with drilling, contributed to production growth and basin diversification.
- Issued $750 million of 8.125% senior notes due 2028 and raised $438.1 million net through common-stock offerings. Proceeds funded acquisitions, refinanced debt and supported liquidity; common shares outstanding increased from 45.9 million to 77.3 million.
- Retired the $287.8 million second-lien notes and $130 million VEN Bakken note, and reduced revolver borrowings from $532 million to $55 million.
- Started quarterly common dividends in 2021, increasing from $0.03 per share for Q2 to $0.08 for Q4. A $0.14-per-share dividend was declared in January 2022, subject to board and other applicable conditions.
- The Veritas Permian acquisition closed January 27, 2022, after year-end, for $419.4 million cash plus warrants to purchase approximately 1.94 million shares. It is not included in year-end production, reserves or results.
Outlook, risks and unusual items
- Management budgeted $350–$415 million of 2022 capital expenditures, including development and routine “ground game” acquisitions, excluding larger acquisitions. It expects to fund spending through operating cash flow and revolver availability and stated it expects adequate liquidity for at least 12 months.
- Management intends to use a significant portion of expected 2022 free cash flow to reduce revolver borrowings, targeting leverage closer to 1.0x Debt/Adjusted EBITDA. It also described a rolling goal of hedging at least 65% of anticipated production for the next 18 months.
- Material exposures include oil and gas price volatility, third-party operator decisions, acquisition integration and execution, reserve-estimation uncertainty, cost inflation, infrastructure and transportation constraints, and environmental, climate and regulatory changes. The Dakota Access Pipeline litigation could affect Williston Basin takeaway capacity.
- Derivative accounting created significant earnings volatility: derivatives were not designated for hedge accounting, and year-end derivatives were a net liability of $277.7 million. Settled hedges reduced 2021 realized oil and gas prices, while open-contract fair-value changes affected reported earnings but were largely non-cash until settlement.
- Approximately 41% of proved reserves were undeveloped; development depends on operator activity, capital availability and project returns. The company planned to drill approximately 126.5 net PUD wells by 2026 at estimated cost of $833.2 million.
- Appalachian properties carry firm gas delivery commitments totaling 59.6 Bcf for 2022–2025; shortfalls may require deficiency payments. A North Dakota mineral-title dispute could require reversal of about $4.0 million of previously accrued revenue if resolved adversely.
- The company reported an unqualified financial-statement audit opinion and effective internal control over financial reporting. The auditor identified reserve quantities and related future cash flows as a critical audit matter because of significant estimates and limited operator control.
Most important facts for investors to verify
- Reconcile oil and gas sales with total revenue and cash flow, recognizing the scale and timing of derivative settlements and mark-to-market losses.
- Review the 2022 capital-spending plan, acquisition funding and post-Veritas debt and liquidity; Veritas closed after the balance-sheet date.
- Assess reserve quality and execution risk, especially the PUD share, planned development costs, price assumptions and dependence on third-party operators.
- Check the current borrowing base, covenant headroom, interest costs and any restrictions on debt reduction or common dividends.
- Monitor commodity hedges, potential counterparty or liquidity demands, DAPL proceedings, firm gas commitments and the North Dakota title dispute.