Northern Oil and Gas, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The interim 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.
Key financial and operating metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $32.0 million | $40.9 million | $63.9 million | $117.0 million |
| GAAP net loss | $109.0 million | $250.1 million | $235.5 million | $479.8 million |
| Adjusted EBITDA (non-GAAP) | $44.3 million | $70.4 million | $80.4 million | $137.9 million |
| Adjusted net income (non-GAAP) | $6.5 million | $11.5 million | $7.1 million | $17.5 million |
| Net production | 1.27 million Boe | 1.51 million Boe | 2.50 million Boe | 3.04 million Boe |
- Q2 average production was approximately 13,933 Boe per day, about 86% oil. Q2 production fell 16% year over year; first-half production fell 18%.
- Q2 realized price including settled derivatives was $49.30 per Boe, down 21% year over year. First-half realized price was $46.51 per Boe, down 23%.
- Q2 impairment of oil and gas properties was $88.9 million; the first-half charge was $193.2 million. These non-cash ceiling-test impairments reduced reported earnings, not cash flow.
- Cash provided by operating activities for the first half was $58.5 million, versus $111.7 million a year earlier. Cash used for investing was $38.4 million, versus $188.2 million; cash capital spending was principally drilling and completion costs.
- At June 30, cash was $3.7 million, total debt was $819.0 million, and stockholders’ deficit was $429.8 million. Current assets of $59.6 million and current liabilities of $70.3 million represented a $10.8 million working-capital deficit.
- The May borrowing-base redetermination reduced the base 36% to $350 million. The company had $132 million drawn and $218 million available under its revolving facility. The $700 million principal amount of 8% senior notes is due in 2020; the facility matures in 2018.
Material changes and management commentary
- Revenue declined 22% in Q2 and 45% in the first half. Management attributed the declines mainly to lower realized commodity prices and reduced production. The 2016 average NYMEX oil price was $45.64 per barrel in Q2 and $39.78 for the first half, compared with $57.95 and $53.34, respectively, in 2015.
- Lower drilling activity and operator production curtailments contributed to falling output. The company participated in 75 gross (3.8 net) wells completed and brought online during the first half. It reduced its 2016 capital budget to better align spending with discretionary cash flow; the filing gives no clear dollar amount for the full-year budget.
- Production expenses declined in total, while Q2 expense per Boe was $8.74. First-half production expense per Boe was $9.21. Lower depletion expense reflected prior impairments and lower production.
- Derivatives generated a net accounting loss of $10.5 million in Q2 and $7.1 million in the first half, including non-cash mark-to-market losses. Settled derivative gains were $20.0 million and $45.4 million, respectively. Open swaps covered 900,000 barrels for the second half of 2016 at a weighted-average $65 per barrel and 720,000 barrels for the first half of 2017 at $50.
- The company expects further property write-downs if low commodity prices persist, subject to commodity prices, production, reserves, development costs, and other ceiling-test factors. It said it expected operating cash flow and available facility capacity to fund budgeted expenditures and operating costs for at least 12 months, while cautioning that additional capital might be needed for major acquisitions or increased drilling.
- Management reported compliance with credit-facility financial covenants at June 30, but warned that lower prices and production could pressure future covenant compliance and borrowing capacity. The facility amendment increased borrowing rates by 50 basis points and restricted excess cash liquidity. A 1% increase in short-term rates was estimated to add about $1.3 million in annual interest expense.
- A $318.5 million valuation allowance was recorded against net deferred tax assets; accordingly, no income-tax benefit was recognized on the 2016 losses. The company reported no material change to previously disclosed risk factors and stated disclosure controls were effective.
Risks, contingencies, and other notable items
- An ongoing dispute between North Dakota and affiliated tribes concerns mineral ownership beneath the Missouri River within the Fort Berthold Reservation. An adverse final judgment could require reversal of approximately $6.8 million in accrued revenue, net of taxes; Northern maintains the validity of its interests.
- Northern incurred legal and professional costs responding to SEC requests concerning an investigation of 2012 trading patterns in Dakota Plains Holdings securities. The CEO had been an initial investor in Dakota Plains; Northern said it had never owned an interest in the company and did not believe Northern or its conduct was the focus of a governmental investigation.
- Shareholders increased authorized common shares from 95 million to 142.5 million in May. Northern issued approximately 1.83 million restricted shares during the first half.
Important facts for investors to verify
- Whether the next borrowing-base redetermination, commodity prices, and production trends preserve adequate liquidity and covenant headroom.
- The pace of drilling and completions, operator curtailments, production declines, and the amount and timing of future capital spending.
- Potential additional ceiling-test impairments and the assumptions used for reserve values and deferred-tax-asset realizability.
- Hedge volumes, prices, settlement cash flows, and the distinction between derivative cash settlements and non-cash mark-to-market results.
- Developments in the Missouri River mineral-title dispute and the SEC matter, including any material change in exposure or cost.
- Potential dilution from the expanded authorized share count and outstanding equity awards. Adjusted EBITDA and adjusted net income are non-GAAP measures and should be assessed alongside GAAP results.