Northern Oil and Gas, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. Financial statements are unaudited. Northern is a non-operated oil and gas producer focused on the Bakken and Three Forks formations in North Dakota and Montana.
Business context and operating performance
- Average production was 16,988 Boe per day, up 28% year over year; total quarterly production was 1.529 million Boe. Oil accounted for approximately 87% of average production.
- At quarter-end, Northern held 180,633 net acres, approximately 65% developed, and participated in 2,436 gross (192.3 net) producing wells.
- Average realized price, including settled derivatives, was $59.16 per Boe, down 21% year over year. Oil price differentials to NYMEX WTI narrowed to $12.45 per barrel from $13.42.
Financial results and liquidity
- Total revenue was $76.1 million, down 7% from $82.1 million. Oil and gas sales declined 48% to $50.5 million, while settled derivatives produced a $40.0 million gain versus a $6.8 million loss in Q1 2014; mark-to-market derivative losses were $14.3 million versus $7.9 million.
- GAAP net loss was $229.7 million, or $3.79 per diluted share, compared with net income of $6.6 million, or $0.11 per diluted share. Results include a $360.4 million non-cash oil and gas property impairment and a $135.5 million deferred income tax benefit.
- Management-reported non-GAAP Adjusted Net Income was $6.0 million ($0.10 per diluted share), down from $11.4 million ($0.19); Adjusted EBITDA was $67.5 million, up from $65.1 million. These measures are not GAAP results.
- Operating cash flow was $66.9 million, versus $72.7 million. Investing cash use was $110.4 million, including $110.5 million of cash spending on oil and gas properties and development. Financing provided $39.9 million; cash declined $3.6 million to $5.7 million.
- Production expense was $14.2 million, or $9.29 per Boe, versus $11.7 million, or $9.76 per Boe. DD&A was $45.2 million; depletion was $29.45 per Boe. Impairment was $235.74 per Boe. Interest expense, net of capitalization, was $11.7 million.
- At March 31, total debt was $845.7 million: $338.0 million under the revolving facility and $507.7 million carrying value of 8% senior notes. Cash was $5.7 million, stockholders’ equity was $542.9 million, and debt to total book capitalization was 60.9%. Revolver capacity available was $212 million; the $550 million borrowing base was reaffirmed in April. The company reported compliance with credit covenants.
- Current assets were $212.2 million and current liabilities $221.8 million. The balance sheet included $139.0 million of net derivative assets; cash alone was $5.7 million.
Material changes versus Q1 2014 and outlook
- NYMEX oil averaged $48.57 per barrel versus $98.61; natural gas averaged $2.81 per Mcf versus $4.72. Lower prices sharply reduced unhedged sales, while production growth partly offset the decline.
- The $360.4 million ceiling-test impairment was triggered by low commodity prices. Management warned that further write-downs may occur if prices remain depressed; the charge reduced reported earnings but not cash flow.
- Open oil swaps covered 2.97 million barrels for 2015 at a weighted average $89.56 per barrel and 0.90 million barrels for 2016 at $90.00. Hedging covers only part of expected production and can limit participation in price increases.
- Management said available liquidity, operating cash flow and revolver capacity should fund budgeted capital expenditures and operating costs for at least the next 12 months. Significant acquisitions or increased drilling could require additional capital; availability and terms are not assured. No specific earnings or production guidance is provided in the filing.
- Key risks include continued commodity-price weakness, a possible reduction in the borrowing base, reserve-value and impairment changes, drilling and completion activity by operating partners, regional transportation capacity and price differentials, and floating-rate debt exposure.
Contingencies and unusual items
- A North Dakota quiet-title case concerns certain leases. An adverse final judgment could require reversal of approximately $1.7 million of revenue accrued since 2008; the company says it is defending its lease interests. Management said other ordinary-course legal matters are not expected to have a material impact, while noting outcomes are uncertain.
- Capital expenditures included in accounts payable were $155.5 million at March 31, 2015. Cash spending can lag costs incurred, so reported investing cash flow may not reflect current development activity.
- Related-party activity includes Emerald Oil-operated wells; Northern reported $2.0 million revenue from Emerald in Q1 2015 and owed Emerald $7.6 million at quarter-end.
Important facts for investors to verify
- Whether commodity prices and the SEC ceiling-test calculation lead to additional impairments or changes in proved reserves.
- Whether the $550 million borrowing base remains sufficient at subsequent lender redeterminations and whether covenant compliance is maintained.
- How much of expected production is hedged, how derivative settlements affect realized prices and cash flow, and the related counterparty exposure.
- Cash obligations associated with unpaid capital expenditures, planned development spending, and potential funding needs if prices or operating cash flow weaken.
- Developments in the quiet-title action and any effect on the company’s lease interests or previously recognized revenue.