Northern Oil and Gas, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. The filing was signed August 5, 2021. Northern is a U.S. oil and gas company focused primarily on non-operated minority working and mineral interests.
Financial and operating highlights
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Oil and gas sales, excluding derivative gains/losses | $225.7 million | $20.7 million | $383.0 million | $150.9 million |
| Total revenues, including commodity derivatives | $24.8 million | $(52.0) million | $46.2 million | $454.8 million |
| Net loss | $(90.6) million | $(899.2) million | $(180.9) million | $(530.9) million |
| Operating cash flow | Not separately presented for the quarter | $169.0 million | $202.2 million |
Q2 production was 4.97 million Boe, or approximately 54,623 Boe per day, about 61% oil. Production increased 129% year over year and 42% sequentially; the filing attributes growth to the Reliance acquisition, returned shut-in/curtailed volumes, and new wells. Six-month production rose 37% to 8.43 million Boe.
Q2 oil and gas sales rose with higher prices and volumes, but derivative losses drove the gap between sales and reported total revenue: commodity derivative loss was $200.9 million, including $173.1 million of non-cash mark-to-market loss. Six-month derivative loss was $336.8 million, versus a $303.9 million gain in the prior-year period. Q2 realized price including settled derivatives was $39.81/Boe, down 12% year over year; excluding settlements it was $45.41/Boe. Q2 production expense was $8.59/Boe, down from $12.30; DD&A was $6.22/Boe, down from $16.97.
The prior-year comparisons include a $762.7 million non-cash oil and gas property impairment in Q2 and the first half of 2020. No impairment of proved properties was recorded in the first half of 2021.
Liquidity, debt, and capital
- At June 30, cash was $4.8 million; total debt was $802.0 million carrying value, or $813.0 million principal. Debt comprised $263.0 million drawn on the revolving facility and $550.0 million of 8.125% unsecured notes due 2028.
- Reported liquidity was $401.8 million: $397.0 million of revolver availability plus cash. The facility had a $725.0 million borrowing base and $660.0 million elected commitments. The company reported compliance with its financial covenants.
- Working capital deficit was $161.2 million, compared with $56.8 million at year-end 2020. Management attributes much of the increase to the fair value of commodity derivative liabilities and higher accrued operating costs.
- First-half cash flows: operating +$169.0 million; investing $(213.5) million; financing +$48.0 million. Cash increased $3.4 million to $4.8 million. Capitalized oil and gas property costs were $256.2 million, while related cash spending was $204.1 million.
- During the first half, Northern issued $550 million of 2028 notes and raised $228.2 million net from two common-stock offerings. It retired the $130 million VEN Bakken note and all $287.8 million of second-lien notes, and reduced revolver borrowings by $269 million.
- Stockholders’ deficit was $168.2 million. Northern paid $22.0 million of accumulated preferred dividends and declared a $0.03-per-share common dividend payable July 30, 2021.
Material developments, outlook, and risks
- Northern completed the Reliance Appalachian acquisition on April 1 for estimated consideration of $139.7 million, including $109.2 million cash and warrants for 3.25 million shares at a $14 exercise price. It added about 61,712 net acres and contributed an estimated 10,593 Boe/d in Q2. Acquisition-related costs were $5.5 million in the first half.
- A Permian acquisition for estimated consideration of $105.6 million closed August 2, 2021, after quarter-end. A $9.4 million deposit was recorded at June 30. The filing does not provide a complete operating or asset breakdown for this acquisition.
- No quantified production, capital-spending, or earnings guidance is provided. Management says development and acquisition spending is discretionary and may be adjusted based on commodity prices, cash flows, and returns. It notes market conditions improved from 2020 but remain uncertain.
- Hedging reduces exposure to price declines but limits participation in price increases and creates earnings volatility under mark-to-market accounting. At June 30, derivative positions were a net liability of $267.7 million; Q2 production was hedged approximately 70%. Certain options may increase hedged volumes if counterparties exercise them.
- Key risks include volatile oil and gas prices, COVID-19-related market uncertainty, infrastructure and regional transportation constraints, and the potential shutdown of the Dakota Access Pipeline. Northern is a non-operator and depends on third-party operators; its four largest operators accounted for 57% of first-half sales. A North Dakota mineral-title dispute could require reversal of approximately $4.2 million of accrued revenue if resolved adversely.
- The company maintained a full valuation allowance on deferred tax assets and recorded no income tax provision for the periods presented. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- How much of reported revenue and net loss reflects non-cash derivative revaluation versus settled hedge cash flows, and how will the hedge book affect later periods?
- Whether production, realized prices, operating costs, and acquisition contributions persist; review the subsequent Permian acquisition’s final terms and performance.
- Liquidity and covenant headroom under commodity-price stress, including the effect of derivative liabilities, working-capital needs, and the 8.125% notes.
- Potential dilution and cash claims from common offerings, Reliance warrants, convertible preferred stock, and preferred dividends.
- Developments in DAPL litigation, the Missouri River mineral-title dispute, and concentration among operators and producing regions.