Northern Oil and Gas, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Northern is a non-operated oil and gas producer focused on the Bakken and Three Forks formations in North Dakota and Montana. It reported 164,894 net acres, approximately 73% developed.
Financial and operating highlights
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Total revenue, including derivative gains | $31.8 million | $76.1 million; down 58% |
| Oil and gas sales | $28.4 million | $50.5 million |
| Net loss | $126.6 million; $2.08 per diluted share | $229.7 million; $3.79 per diluted share |
| Operating cash flow | $55.2 million | $66.9 million |
| Cash capital spending | $20.1 million | $110.5 million |
| Adjusted EBITDA (non-GAAP) | $36.2 million | $67.5 million |
| Average production | 13,552 Boe/day; 90% oil | 19% lower year over year |
Average realized price, including cash derivative settlements, fell 26% to $43.64/Boe. Oil production declined 17%, natural gas and NGL production 38%, and total production 19%. The reported net loss included a $104.3 million non-cash ceiling-test impairment and a $22.0 million non-cash mark-to-market derivative loss. Adjusted net income, a non-GAAP measure, was $0.5 million ($0.01 per diluted share), versus $6.0 million ($0.10) a year earlier.
Production expenses were $12.0 million ($9.70/Boe); production taxes were $2.8 million; G&A was $4.3 million; DD&A was $17.8 million. Interest expense increased to $16.1 million from $11.7 million. No income tax benefit was recorded in Q1 2016; the company cited a $277.7 million valuation allowance against net deferred tax assets.
Balance sheet, debt and liquidity
At March 31, cash was $4.4 million, current assets $79.1 million, and current liabilities $86.8 million, resulting in a $7.7 million working-capital deficit. Total debt was $803.1 million, comprising $686.1 million net carrying value of 8% senior notes due 2020 and $117.0 million drawn on the revolving facility. Stockholders’ deficit was $322.5 million. Cash increased by $1.0 million during the quarter; $33.0 million of revolver repayments contributed to financing cash outflow.
At quarter-end the credit facility borrowing base was $550 million. A subsequent May 2016 redetermination cut it 36% to $350 million. With $117 million drawn, reported availability after that redetermination was $233 million. The amendment also increased borrowing rates by 50 basis points, restricted excess cash liquidity, and revised the interest-coverage covenant beginning in late 2016. The company was in compliance with facility covenants at March 31.
Material changes, outlook and risks
- Management attributed falling sales and cash flow primarily to lower commodity prices and reduced production. Average NYMEX oil was $33.63/Bbl, 31% below Q1 2015.
- Reduced drilling activity drove fewer new wells: 15.0 net wells were added to production in the twelve months through March 31, versus 41.5 in the prior-year period. Operators’ production curtailments reduced Q1 output by an estimated 1,600 Boe/day.
- The company participated in 41 gross (3.0 net) wells completed in Q1. Management described a selective drilling and acquisition strategy, with capital spending adjusted to prices, cash flow and returns; no specific full-year production or capital-spending guidance is provided in the supplied filing text.
- Management expected cash from operations and revolver availability to fund budgeted expenditures and operating needs for at least 12 months, while warning that further price weakness could reduce cash flow, borrowing capacity, capital spending and covenant headroom. Further full-cost impairments were expected if commodity prices remained depressed.
- Oil hedges covered 1.35 million barrels for 2016 at a weighted-average $73.33/Bbl; no 2017-and-beyond volumes were reported. Derivative gains and losses affect reported revenue and earnings, while settlements affect cash flow.
- Other noted exposures include natural production declines, oil-price differentials and transportation constraints, reserve and impairment-estimate uncertainty, floating-rate debt, and counterparty risk. A 1% increase in short-term rates was estimated to add about $1.2 million of annual interest expense.
- The company reported SEC requests related to an ongoing investigation of 2012 trading in Dakota Plains Holdings securities; it said it did not believe it or its conduct was the focus. Ordinary-course litigation was not expected by management to have a material impact.
Key facts for investors to verify
- How the May borrowing-base reduction and amended covenants affect liquidity, borrowing availability and future compliance.
- Whether operating cash flow and hedge settlements can support debt service and planned activity if prices remain low or production declines.
- The assumptions behind reserve valuations, the $104.3 million impairment, and potential additional ceiling-test write-downs.
- Hedge volumes, prices, settlement timing and the remaining portion of production exposed to market prices.
- The realization prospects for deferred tax assets and any material developments concerning the SEC inquiry or other contingencies.