Northern Oil and Gas, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; unaudited. Northern is a non-operated oil and gas producer focused on the Bakken and Three Forks formations in the Williston Basin of North Dakota and Montana.
Key financial and operating metrics
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Oil and gas sales | $132.7 million | $86.9 million; up 53% |
| Net derivative loss | $139.6 million | $20.3 million loss |
| Total reported revenue | $(6.9) million | $66.6 million |
| Net income (loss) | $(107.2) million; $(0.29) per diluted share | $3.0 million; $0.05 per diluted share |
| Adjusted net income (non-GAAP) | $27.8 million; $0.07 per diluted share | $11.3 million; $0.17 per diluted share |
| Adjusted EBITDA (non-GAAP) | $104.8 million | $56.0 million |
| Operating cash flow | $98.9 million | $45.5 million |
| Investing cash flow | $(77.9) million | $(58.0) million |
| Cash at quarter-end | $3.9 million | $89.5 million at March 31, 2018 |
- Production averaged approximately 34,598 Boe per day, up 92% year over year; oil was 82% of volumes. Production rose from 3.1 million Boe to 1.6 million Boe in the prior-year quarter, mainly reflecting acquisitions and development activity.
- Oil and gas sales increased 53% as higher production more than offset lower realized prices. Realized price including settled derivatives was $46.64/Boe, down 4%; oil net of settled derivatives was $53.58/barrel, up 2%.
- Operating expenses were $88.4 million, including production expense of $24.7 million, production taxes of $12.5 million, G&A of $6.1 million and DD&A of $45.1 million. Production expense was $7.92/Boe; DD&A was $14.49/Boe.
- Cash flow from operations exceeded cash spending on drilling and development by $29.1 million, excluding property acquisitions. Capital expenditures and acquisitions used $77.9 million of cash.
- At March 31, total assets were $1.40 billion and stockholders’ equity was $312.8 million. Long-term debt, net, was $839.2 million; principal debt was $843.9 million, comprising $696.9 million of 8.5% second-lien notes and $147.0 million drawn on the revolving facility.
- Liquidity was reported as $281.9 million: $278.0 million of borrowing availability and $3.9 million cash. Working capital was a $99.6 million deficit, versus a $3.1 million deficit at year-end, primarily reflecting lower derivative assets.
Material changes versus the prior comparable period
- Production increased 92%, and oil and gas sales rose 53%, reflecting acquisition contributions and organic development; net producing wells increased 42% to 332.5.
- Reported results swung to a substantial loss, principally because the non-cash mark-to-market derivative loss increased to $152.2 million from $12.1 million. Derivative settlements, in contrast, generated $12.5 million of cash gains versus an $8.1 million loss in Q1 2018.
- NYMEX oil averaged $54.87/barrel, 13% below the prior-year quarter. The oil differential widened to $6.19/barrel from $4.46, while average AFE cost for elected wells rose to $8.2 million from $8.1 million.
- Operating cash flow more than doubled, while cash investment increased with development and acquisitions. G&A and DD&A increased, including higher non-cash compensation and depletion costs.
- Weighted-average common shares were 371.4 million versus 65.2 million in Q1 2018, following substantial 2018 equity issuance and acquisition consideration; therefore per-share comparisons are affected by the changed share base.
Outlook, risks and unusual items
- Management stated that cash on hand, operating cash flow and revolver availability were expected to fund budgeted capital spending and operating needs for at least the next 12 months. It anticipated continued cash flow surplus excluding acquisitions, but gave no specific earnings or production guidance and cautioned that capital spending could be reduced if cash flows weaken.
- Open oil swaps totaled 14.8 million barrels, at an average price of approximately $60.50/barrel; the company said it hedged approximately 70% of Q1 oil production. Derivative fair value was a net asset of $25.5 million at quarter-end, down from $177.7 million at year-end. Derivative mark-to-market movements can materially distort reported revenue and earnings.
- After quarter-end, Northern agreed to acquire additional properties, with anticipated closing July 1, 2019, for $165 million cash, 5,602,147 shares and a $130 million 6.0% unsecured note due 2022. Closing is subject to customary conditions; cash and note consideration are subject to adjustments.
- The revolver has a $425 million borrowing base, $147 million drawn, and financial covenants including maximum total net debt/EBITDAX of 4.00x and a minimum current ratio of 1.00x. A 1% increase in short-term rates was estimated to add about $1.5 million in annual interest expense.
- The 8.5% second-lien notes mature in 2023. Their 1.0% PIK component ceased accruing effective March 31, 2019, according to the filing. The revolving facility bears floating interest and is secured; the notes carry second-priority liens.
- A $149.6 million valuation allowance was recorded against deferred tax assets; no income tax benefit was recognized despite the quarterly loss. Management said it intended to maintain the allowance absent sufficient evidence of realizability.
- Contingent consideration related to 2018 acquisitions had a $37.2 million fair value and debt-exchange derivative liabilities were $9.2 million. Both are sensitive to the company’s share price and use Level 3 valuation inputs.
- A title dispute over certain Missouri River bed minerals could require reversal of approximately $5.0 million of accrued revenue if resolved adversely; the company maintains its lease interests. Management said other ordinary-course legal matters were not expected to have a material impact. No material risk-factor changes were reported.
Important facts for investors to verify
- Reconcile reported GAAP losses with non-GAAP adjusted income and EBITDA, particularly the large non-cash derivative mark-to-market charge and assumptions behind adjustments.
- Monitor working-capital pressure, accounts payable (including $133.9 million of oil and gas property costs), revolver availability, and compliance with credit-facility covenants.
- Confirm the closing, final consideration and funding of the Flywheel/VEN acquisition, including its impact on debt, shares outstanding and liquidity.
- Review hedge volumes, prices, settlement cash flows, counterparties and exposure to oil-price and basis changes.
- Track the contingent consideration and debt-exchange derivative liabilities, deferred-tax valuation allowance, and the Missouri River mineral-title dispute.