Northern Oil and Gas, Inc. — Q1 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2017, compared with Q1 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 151,672 net acres, approximately 82% developed, and average production of 13,299 Boe per day, approximately 85% oil.
Financial and operating results
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Oil and gas sales | $48.8 million | $28.4 million |
| Total revenue, including derivative gains | $65.8 million | $31.8 million |
| Net income (loss) | $16.9 million | $(126.6) million |
| Net income (loss) per diluted share | $0.27 | $(2.08) |
| Operating cash flow | $29.7 million | $55.2 million |
| Cash capital expenditures | $20.3 million | $20.1 million |
| Cash and equivalents at period end | $5.5 million | $4.4 million |
Production was 1.197 million Boe, down 3% year over year; oil volume fell 8%, partly offset by higher natural gas and NGL volumes. Realized price including cash derivative settlements was $40.73 per Boe, down 7%. GAAP operating income was $33.2 million versus an operating loss of $109.4 million. The Q1 2017 result included a $17.0 million net derivative gain, primarily non-cash mark-to-market; the prior-year quarter included a $104.3 million non-cash property impairment. Excluding specified items, the company reported adjusted EBITDA of $29.6 million versus $36.2 million and adjusted net loss of $69,000 versus adjusted net income of $545,000; these are non-GAAP measures.
Production expenses were $11.7 million ($9.75/Boe), production taxes $4.5 million, G&A $3.6 million, DD&A $12.8 million, and net interest expense $16.3 million. No income tax benefit or expense was recorded; a $334.8 million valuation allowance remained against deferred tax assets.
Liquidity, debt, and balance sheet
At March 31, total debt, net of issuance costs, was $823.5 million: $689.5 million of 8% senior notes due June 2020 and $134.0 million drawn under the revolving credit facility. The revolver borrowing base was $350 million, leaving $216 million available at quarter-end; on May 4, 2017, it was redetermined to $325 million. The revolver matures September 2018. The company reported a $40.4 million working capital deficit and a $470.1 million stockholders’ deficit. Cash declined by $1.0 million during the quarter. Cash operating flows exceeded cash capital spending, and $10 million of revolver borrowings were repaid.
Material changes, outlook, and risks
- Higher commodity prices and a narrower oil differential lifted oil and gas sales, but production declined and cash derivative settlements were much less favorable than in Q1 2016. Q1 2017 NYMEX oil averaged $51.78/barrel versus $33.63; the oil differential was $8.06/barrel versus $9.02.
- Management said operating cash flow and revolver capacity were expected to fund budgeted capital spending and operating needs for at least the next 12 months. It planned selective drilling and acquisitions subject to liquidity and market conditions; the filing gives no specific forward production or earnings guidance.
- Open hedges at March 31 covered 1.895 million barrels in 2017 swaps at a weighted average $52.82/barrel and 813,000 barrels in 2018 swaps at $54.40, plus collars with $50/barrel floors and ceilings near $60. These mitigate downside but limit some upside; derivatives are not designated for hedge accounting and can make reported earnings volatile.
- Management cautioned that sustained low prices could reduce cash flow, reserves, borrowing capacity, capital spending, and covenant headroom; lower drilling could further depress production as existing wells decline. The company was in compliance with revolver covenants at March 31. It also noted that the revolver’s minimum interest-coverage covenant rises to 1.75x for periods ending June 30, 2018 and beyond.
- Contingencies include a North Dakota riverbed mineral-title dispute that could require reversal of approximately $6.8 million of previously accrued revenue, a former CEO’s employment and defamation lawsuit, and a federal securities class action. The company said ordinary-course legal matters were not expected to materially affect its financial position, results, or cash flows, but outcomes are uncertain.
Important facts for investors to verify
- Whether operating cash flow and liquidity remain adequate given the working capital deficit, debt load, covenant tests, and the May 2017 borrowing-base reduction.
- How much of reported earnings and revenue reflects unsettled derivative fair-value changes rather than realized cash receipts.
- Production trends, drilling additions, realized prices after settlements, and the extent to which new wells offset natural declines.
- Future full-cost ceiling-test outcomes and the recoverability of deferred tax assets, which are subject to commodity-price and reserve assumptions.
- Developments in the Missouri River title dispute and the former CEO and securities class-action litigation.