Northern Oil and Gas, Inc. — Q3 2016 Form 10-Q
Business and reporting period. The unaudited quarter and nine months ended September 30, 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 156,074 net acres, approximately 77% developed, and average third-quarter production of 13,442 Boe per day, approximately 86% oil.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Oil and gas sales | $41.7 million, down from $49.8 million | $112.6 million, down from $163.3 million |
| Total revenue, including derivative gains or losses | $45.1 million, versus $101.2 million | $109.0 million, versus $218.1 million |
| Net loss | $45.6 million ($0.74 per diluted share), versus $323.2 million ($5.33) | $281.2 million ($4.60 per diluted share), versus $803.0 million ($13.25) |
| Adjusted EBITDA (non-GAAP) | $33.0 million, versus $71.7 million | $113.4 million, versus $209.6 million |
| Operating cash flow | Not stated separately for the quarter | $97.7 million, versus $174.8 million |
| Capital spending cash outflow | Not stated separately for the quarter | $66.9 million for oil and gas properties, versus $233.4 million |
- At September 30, cash was $3.3 million; working capital was negative $26.3 million, compared with positive $43.9 million at December 31, 2015.
- Total debt was $807.8 million, down from $835.3 million at year-end 2015. This included $687.8 million net carrying value of 8% senior notes due 2020 and $120.0 million drawn on the revolving facility. Revolver availability was $230.0 million, subject to borrowing-base redetermination.
- Stockholders’ deficit was $476.1 million, compared with $197.6 million at December 31, 2015. Net property and equipment fell to $355.4 million from $589.3 million, reflecting substantial impairment charges.
- The filing does not present a single comparable operating-margin measure. Production expense was $8.83 per Boe in Q3 and $9.09 per Boe for the nine-month period; reported DD&A was $11.08 and $12.77 per Boe, respectively.
Changes versus prior comparable periods
- Production declined 15% in Q3 and 17% over nine months year over year. Nine-month production was 3.74 million Boe, versus 4.50 million Boe.
- Lower production and commodity prices, as well as weaker hedge benefits, contributed to lower sales and adjusted results. Realized price including derivative settlements was $41.03 per Boe in Q3 versus $63.62, and $44.70 for nine months versus $61.63.
- Derivative results shifted from a $51.4 million gain to a $3.4 million gain in Q3, and from a $54.8 million gain to a $3.7 million loss for nine months. The nine-month 2016 result included a $58.1 million non-cash mark-to-market loss; cash receipts on settled derivatives were $54.5 million.
- Non-cash oil and gas property impairments were $43.8 million in Q3 and $237.0 million for nine months, versus $354.4 million and $996.8 million, respectively, in 2015. The charges reduced reported earnings but not cash flow.
- Cash operating flow fell to $97.7 million from $174.8 million, while property investment declined substantially. The company used excess cash flow to repay $30 million of revolver borrowings year to date.
Outlook, risks, and unusual items
- Management said cash flow from operations and revolver availability should be sufficient to fund budgeted capital expenditures and operating expenses for at least the next 12 months. This is conditional: lower commodity prices could reduce cash flow, reserves and borrowing capacity, and the company said capital spending could be curtailed further.
- No specific production, revenue, earnings, or capital-spending guidance was provided. Management’s stated strategy is to preserve liquidity, selectively participate in drilling and completion, and pursue acquisitions or dispositions as liquidity permits.
- Management expected further ceiling-test write-downs if commodity prices remained depressed; future impairments also depend on production, proved reserves, development costs, and other factors. A $336.3 million valuation allowance against deferred tax assets meant no income tax benefit was recorded on 2016 losses.
- The revolving facility was in covenant compliance at quarter-end. Its interest-coverage minimum steps down from 2.5-to-1 through September 2016 to 1.75-to-1 for the 12 months ending December 2016, then declines on a stated schedule before returning to 2.5-to-1 beginning with the period ending June 2018. Borrowing-base redeterminations and future covenant compliance are key uncertainties.
- Hedges covered 450,000 barrels for the remainder of 2016 at a weighted average $65.00 per barrel and 1.14 million barrels in 2017 at $51.04. Derivatives are not designated for hedge accounting, so fair-value movements affect reported revenue and earnings.
- CEO Michael Reger was terminated in August 2016; he filed a breach-of-contract and defamation suit seeking unspecified damages and other relief. The company also faces a putative federal securities class action. The filing describes an ongoing SEC investigation concerning 2012 trading patterns in Dakota Plains Holdings securities and increased legal costs related in part to that matter.
- A separate North Dakota mineral-title dispute could require reversal of approximately $6.8 million of accrued revenue if resolved adversely. Management said other ordinary-course legal proceedings were not expected to have a material effect, while noting outcomes are uncertain.
Important facts for investors to verify
- Subsequent borrowing-base redeterminations, remaining revolver capacity, and covenant headroom as production, prices, and reserve values change.
- Whether operating cash flow and available liquidity remain adequate, given the working-capital deficit, low cash balance, debt service, and reduced drilling activity.
- Production trends, operator drilling and completion activity, and the extent to which natural declines or shut-ins continue to affect output.
- Commodity-price exposure and hedge coverage, including actual derivative settlements, mark-to-market changes, and counterparty performance.
- Future ceiling-test impairments and the recoverability of deferred tax assets; the $336.3 million valuation allowance reflects substantial uncertainty.
- Developments and potential financial consequences of the former CEO litigation, securities class action, SEC investigation, and North Dakota mineral-title dispute.