Northern Oil and Gas, Inc. — Q2 2015 Form 10-Q
Business context and reporting period. The unaudited quarter and six months ended June 30, 2015 cover Northern’s non-operated oil and gas interests, primarily in the Bakken and Three Forks formations of North Dakota and Montana. At quarter-end, it held approximately 178,137 net acres, about 66% developed, and had 199.2 net producing wells.
Financial and operating performance
| Metric | Q2 2015 | Comparable period |
|---|---|---|
| Oil and gas sales, excluding derivatives | $63.1 million | $121.2 million in Q2 2014 |
| Total revenue, including derivative results | $40.9 million | $74.6 million in Q2 2014 |
| Net loss | $250.1 million | $4.4 million loss in Q2 2014 |
| Adjusted net income (non-GAAP) | $11.5 million | $17.3 million in Q2 2014 |
| Adjusted EBITDA (non-GAAP) | $70.4 million | $81.4 million in Q2 2014 |
| Average production | 16,610 Boe per day, up 8% | 15,396 Boe per day in Q2 2014 |
For the six months, total revenue was $117.0 million versus $156.7 million; net loss was $479.8 million versus net income of $2.2 million. Adjusted EBITDA was $137.9 million versus $146.5 million. The reported losses primarily reflect non-cash oil and gas property impairment charges of $282.0 million in Q2 and $642.4 million for the half year. Management said these charges reduced reported earnings, not cash flow. The filing provides operating costs per Boe, but no conventional operating margin: Q2 production expense was $8.97/Boe, production taxes $4.55/Boe, and DD&A $24.31/Boe.
Six-month operating cash flow was $111.7 million, down from $128.9 million. Investing cash outflow was $188.2 million, compared with $228.9 million; financing provided $74.2 million. Cash fell to $7.1 million from $9.3 million at year-end. Working capital was positive $21.5 million, versus a $59.7 million deficit at December 31, 2014.
At June 30, total debt carrying value was $885.5 million, comprising $697.5 million of 8% senior notes and $188.0 million drawn on the revolving facility. Debt-to-total-book-capitalization was 75%, and equity was $293.8 million. The $550 million borrowing base was reaffirmed in April; $362 million remained available. The company reported compliance with facility financial covenants.
Material changes versus prior periods
- Commodity prices weakened sharply: average Q2 NYMEX oil was $57.95/Bbl versus $102.99, while oil and gas sales excluding settled derivatives fell 48% year over year. Production nevertheless rose 8% in Q2 and 17% for the first half.
- Q2 derivative results were a $22.2 million loss, including $31.0 million in cash settlements received and a $53.2 million non-cash mark-to-market loss. For the first half, derivative results were a $3.5 million net gain, including $71.0 million in cash receipts and $67.5 million in non-cash losses.
- The company issued $200 million principal amount of additional 8% notes in May at 95% of par, receiving approximately $184.9 million net. Six-month net revolver repayments were $110 million. Interest expense rose to $26.1 million for the half year from $20.2 million.
- A $49.9 million valuation allowance was established against deferred tax assets, citing cumulative losses and uncertain commodity prices.
Outlook, risks, and contingencies
- Management set a 2015 capital expenditure budget of approximately $140 million, 74% below 2014 actual expenditures, and said it expected available cash, operating cash flow, and revolver capacity to fund budgeted spending and operating costs for at least 12 months. Spending may be reduced further if cash flows fall short; material acquisitions or increased drilling could require additional financing.
- At quarter-end, oil swaps covered 1.98 million barrels in 2015 at a weighted average $89.82/Bbl and 1.80 million barrels in 2016 at $77.50/Bbl. Total open swaps were 3.8 million barrels. Hedges reduce downside exposure but limit some upside; production not hedged remains exposed to prices.
- Management expected continued ceiling-test write-downs if depressed prices persist. Lower prices may also reduce cash flows, reserves, borrowing capacity, and access to capital. Other cited risks include drilling and completion activity, Williston Basin transport and weather constraints, cost changes, and floating-rate debt exposure.
- Ordinary-course litigation was not expected by management to have a material impact. An adverse outcome in a North Dakota quiet-title action could require reversal of approximately $1.7 million of previously accrued revenue, including about $34,000 in the first half of 2015; the company says it is vigorously defending its lease interest.
- Management assessed disclosure controls as effective at June 30, 2015; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether future commodity prices, reserve levels, and development costs trigger further full-cost ceiling impairments.
- The next borrowing-base redetermination and ongoing compliance with revolver covenants, given the company’s debt load and commodity-price exposure.
- Actual capital spending and production trends relative to the $140 million 2015 budget and management’s liquidity expectations.
- Hedge volumes, realized settlements, counterparty exposure, and the extent of unhedged production.
- The outcome of the quiet-title litigation and the assumptions supporting the deferred-tax valuation allowance.
Adjusted net income and Adjusted EBITDA are non-GAAP measures and should be considered alongside GAAP results.