Northern Oil and Gas, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and six months ended June 30, 2019. Northern is a non-operated oil and gas producer focused on the Bakken and Three Forks formations in North Dakota and Montana. In Q2, average production was approximately 34,965 Boe per day, about 81% oil; production increased 66% year over year.
Financial performance and liquidity
| Metric | Q2 2019 | Six months 2019 |
|---|---|---|
| Oil and gas sales | $149.8 million | $282.5 million |
| Total revenue, including derivative gains/losses | $186.4 million | $179.5 million |
| Operating income (loss) | $92.2 million | $(3.1) million |
| Net income (loss) | $44.4 million; $0.12 per diluted share | $(62.8) million; $(0.17) per diluted share |
| Adjusted EBITDA, non-GAAP | $110.8 million | $215.6 million |
| Cash from operating activities | Not separately presented | $198.3 million |
| Cash used in investing activities | Not separately presented | $191.1 million |
Q2 production expenses were $26.1 million ($8.21/Boe), production taxes $14.0 million, G&A $5.3 million and DD&A $46.1 million ($14.49/Boe). Q2 realized price including cash derivative settlements was $48.58/Boe. No income tax expense or benefit was recorded; a valuation allowance was maintained against deferred tax assets.
At June 30, cash was $2.8 million and working capital was a deficit of $99.7 million. The company reported $254.8 million of liquidity, comprising $252.0 million of revolver availability and cash. Principal debt was $861.5 million: $688.5 million of 8.5% second-lien notes due 2023 and $173.0 million drawn on the revolving facility. The facility’s borrowing base was $425.0 million.
Material changes versus prior periods
- Q2 total revenue rose 179% from $66.8 million, reflecting higher oil and gas sales and a $36.6 million derivative gain versus a $42.2 million loss in Q2 2018. Six-month total revenue was $179.5 million versus $133.5 million, despite a larger mark-to-market derivative loss.
- Q2 net income improved from a $96.5 million loss in 2018. The six-month net loss narrowed from $93.6 million, but remained a loss; 2018 included a $90.8 million debt-extinguishment loss.
- Six-month production rose 78% year over year, while oil and gas sales increased 44%. Lower commodity prices partly offset volume growth: average NYMEX oil was $57.42/Bbl versus $65.49/Bbl.
- Six-month operating cash flow increased to $198.3 million from $63.6 million. Drilling and development cash expenditures were $140.1 million; total cash spend on development and acquisitions was $159.5 million.
- Working capital deficit widened from $3.1 million at year-end, largely as current derivative assets fell. Debt increased to $861.5 million principal from $835.1 million at December 31, 2018.
Outlook, risks and unusual items
- Management said operating cash flow exceeded drilling and development cash spend by $58.2 million for the first half, excluding property acquisitions, and expected a cash flow surplus in future periods excluding acquisitions. It believed available cash flow and revolver capacity would fund budgeted expenditures and operating needs for at least 12 months, while noting additional capital might be sought and may not be available on favorable terms.
- On July 1, 2019, after quarter-end, Northern closed the VEN Bakken acquisition: approximately 87.8 net producing wells, 4.1 net wells in process and 18,000 net acres. Consideration included $170.1 million cash, 5.6 million shares and a $130.0 million 6% unsecured note due 2022. The cash portion was funded with revolver borrowings; post-closing purchase-price adjustments remained subject to settlement.
- Commodity exposure remains significant. Northern hedged approximately 75% of Q2 oil production and had swaps covering 15.4 million barrels at a weighted average price of about $59.91/Bbl. Derivatives are not designated for hedge accounting, so mark-to-market changes can materially affect reported revenue and earnings without corresponding current-period cash flow.
- Q2 included a $24.8 million contingent-consideration fair-value loss and a $4.9 million debt-exchange derivative loss. At quarter-end, related Level 3 liabilities were $37.0 million and $2.8 million, respectively; their valuations are sensitive to Northern’s share price and other unobservable assumptions.
- The company cited oil-price volatility, Williston Basin differentials, drilling and disposal costs, operator activity, infrastructure and weather as business risks. A Missouri River mineral-title dispute could require reversal of approximately $4.9 million in accrued revenue if resolved adversely; management stated it maintains the validity of its interests. Other ordinary-course legal matters were not expected by management to have a material financial impact.
- No specific numerical production, revenue or earnings guidance was provided. Management noted capital spending is discretionary and could be reduced if cash flows fall below expectations.
Important facts for investors to verify
- Post-acquisition debt, revolver availability and covenant headroom after funding the VEN Bakken purchase; the filing gives quarter-end liquidity, before the July 1 closing.
- VEN Bakken’s final purchase-price adjustments and the acquired assets’ contribution to production, cash flow and leverage.
- Hedge volumes, settlement prices and mark-to-market effects, distinguishing cash settlements from non-cash valuation changes.
- Drivers of the six-month GAAP loss and the assumptions behind non-GAAP Adjusted EBITDA and Adjusted Net Income.
- Resolution and potential financial exposure of the Missouri River mineral-title dispute and the share-price-linked contingent consideration.