Northern Oil & Gas, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing is an annual report, not a standalone fourth-quarter report; quarterly results are noted where useful. Northern is a non-operated oil and gas producer focused primarily on the Bakken and Three Forks formations in North Dakota and Montana.
Financial and operating highlights
| Metric | 2017 | 2016 |
|---|---|---|
| Oil and gas sales | $224.0 million | $159.7 million |
| Total revenue, including derivative results | $209.3 million | $144.9 million |
| Net loss | $9.2 million ($0.15 per share) | $293.5 million ($4.80 per share) |
| Adjusted net income, non-GAAP | $8.5 million | $12.2 million |
| Adjusted EBITDA, non-GAAP | $144.7 million | $148.5 million |
| Cash provided by operations | $73.0 million | $101.9 million |
| Cash used for investing | $119.2 million | $91.0 million |
| Cash and working capital | $102.2 million; $29.2 million surplus | $6.5 million; $30.5 million deficit |
| Debt, net carrying value | $979.3 million | $832.6 million |
| Stockholders’ deficit | $490.8 million | $487.4 million |
Production averaged 14,800 Boe per day, up 8.4%. Oil and gas production totaled 5.40 million Boe, versus 5.00 million in 2016. Average production expense was $9.21 per Boe. Oil sales averaged $45.09 per barrel before derivative settlements; realized price including settled derivatives was $42.16 per Boe, compared with $44.27 in 2016. The reported net derivative loss was $14.7 million, including an $18.4 million non-cash mark-to-market loss.
Year-end proved reserves were 75.8 million Boe, up 40% from 54.1 million Boe. Reserves were 83% oil and 61% proved developed. SEC-based PV-10 was $758.0 million before tax; the standardized measure was $754.0 million. These reserve valuations are estimates, not market value, and exclude the effect of commodity derivatives.
Material changes versus 2016
- Oil and gas sales increased 40%, primarily from higher commodity prices and an 8% production increase. The average oil differential to NYMEX narrowed to $5.87 per barrel from $8.25.
- Net loss narrowed substantially, principally because no impairment was recorded in 2017; 2016 included a $237.0 million non-cash property impairment. 2015 impairment was $1.2 billion.
- Operating cash flow declined to $73.0 million, partly because realized derivative cash gains fell to $3.8 million from $61.5 million.
- Development spending increased: capitalized oil and gas costs incurred were $156.0 million, up from $84.5 million, and the company added 16.9 net wells versus 10.7.
- Debt increased and financing changed materially. In November 2017, a $300 million initial term loan replaced the prior revolving facility; year-end principal debt was $1.0 billion, including $700 million of 8% senior notes and $300 million of term loans.
Liquidity, debt, outlook, and risks
- Liquidity and debt: Year-end liquidity included $102.2 million cash and $100 million of delayed-draw availability, subject to conditions. The term loan matures November 2022 and carries a floating rate of adjusted LIBOR, subject to a 1% floor, plus 7.75%. The 8% senior notes mature June 2020. The term loan is secured by substantially all assets and imposes financial and operating covenants; the company reported compliance at year-end.
- Refinancing transaction proposed after year-end: On January 31, 2018, the company agreed with holders of about 71% of its 2020 notes to exchange approximately $497 million principal for roughly $344 million of new second-lien notes due 2023 and about $155 million of common stock. Closing is conditional, including an equity raise of at least $156 million, shareholder and lender approvals, and other conditions; there is no assurance it will close. Separate investors agreed to subscribe for up to $40 million of shares, subject to closing.
- Outlook: The board approved a 2018 capital budget of up to $176.6 million. Management expected well costs to rise 5–10% in 2018 and stated it expected available cash, operating cash flow, and the term loan to fund the next 12 months. It cautioned that acquisitions or accelerated drilling may require additional capital and that resources over the next 24 months may not support continued growth.
- Hedges: At year-end, oil swaps covered approximately 3.05 million barrels in 2018 at $53.26 per barrel, 1.89 million in 2019 at $51.80, and 1.24 million in 2020 at $50.41. Hedges limit downside exposure but can also limit gains if prices rise; mark-to-market volatility affects reported earnings.
- Contingencies and unusual items: A former CEO settlement included $750,000 cash and 3 million shares, with a reported $3.6 million G&A charge. A securities class action remained pending after an amended complaint was filed in January 2018; the company said it would defend the case. A title dispute over Missouri River bed minerals could require reversal of about $5.5 million in accrued revenue if resolved adversely.
- Key risks: Commodity-price volatility, reserve-estimate uncertainty, dependence on third-party operators, transportation capacity and regional concentration, possible future impairment, debt service and covenant compliance, lease expirations, environmental and hydraulic-fracturing regulation, and potential dilution or refinancing needs.
For the fourth quarter of 2017, the filing reports a net loss of $23.8 million, or $0.37 per share, and a $35.5 million net derivative loss. Full-year financial statements received an unqualified audit opinion; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether the proposed note exchange and required equity raise closed, and their final dilution, debt terms, and effect on the 2020 maturity.
- Current liquidity, actual borrowing availability, covenant headroom, and compliance with the term loan’s reserve-value and leverage tests.
- Realized production prices after differentials and hedge settlements, as well as the volumes and counterparty exposure of outstanding hedges.
- Execution and funding of the $176.6 million 2018 capital budget, including development costs, production growth, and reserve conversion.
- Developments in the securities litigation and Missouri River mineral-title dispute, including any financial exposure or revenue reversals.
- Future proved-reserve revisions, impairment-test sensitivity to prices, and the company’s ability to fund proved undeveloped reserve development.