Northern Oil and Gas(NOG) - 2020 Q1 - Quarterly Report

GLOSSARY OF TERMS This section defines specialized terminology used throughout the report, covering crude oil and natural gas quantities, interests in wells and acreage, and reserve classification and valuation methods Quantities of Crude Oil and Natural Gas This section defines key terms used to describe quantities of crude oil and natural gas, such as Bbl (barrel), Boe (barrel of oil equivalent), Mcf (thousand cubic feet), and MMBtu (million British Thermal Units), establishing standard conventions for reporting volumes - Crude oil and natural gas equivalents are determined using a ratio of six Mcf of natural gas to one barrel of crude oil, condensate, or natural gas liquids[7] - Key terms defined include Bbl (42 U.S. gallons liquid volume), Boe (barrel of oil equivalent, 6.0 Mcf gas to 1.0 Bbl oil/NGL), Boepd (Boe per day), Btu, MBbl, MBoe, Mcf, MMBbl, MMBoe, MMBtu, and NGLs[9][10][11][12][13][14][15][16][17] Interests in Wells and Acreage This section provides definitions for terms related to the Company's interests in wells and acreage, covering geological features, drilling activities, and ownership structures like gross/net acres and working interest - Definitions include 'Basin' (natural depression for sediments), 'Completion' (installing equipment for production), 'Development well' (drilled within proved area for extraction), and 'Exploratory well' (drilled in unproved area or to extend known reservoir)[18][21][23] - 'Gross acres' or 'Gross wells' refer to total acres/wells where a working interest is owned, while 'Net acres' or 'Net well' represent the sum of fractional ownership working interests equaling one[26][29][30] - 'Undeveloped acreage' refers to leased acreage without economic production, including net acres held by operations until a productive well is established[35] Reserve Classification and Valuation This section defines terms used to classify and assign present value to the Company's crude oil and natural gas reserves, including various categories of proved, probable, and possible reserves, and the 'Pre-tax PV-10%' valuation metric - 'Proved reserves' are quantities estimated with reasonable certainty to be economically producible under existing conditions, with specific criteria for reservoir area, fluid contacts, and improved recovery techniques[43][46][47][49] - 'Proved developed producing reserves (PDPs)' are recoverable through existing wells and equipment, while 'Proved developed non-producing reserves (PDNPs)' are developed but shut-in or require minor additional work[41][42] - 'Pre-tax PV-10%' (PV-10) is the estimated future net revenue, discounted at 10% per annum, before income taxes, using SEC guidelines[39] PART I – FINANCIAL INFORMATION This section provides the Company's unaudited condensed financial statements, management's discussion and analysis, market risk disclosures, and controls and procedures for the quarter Item 1. Condensed Financial Statements (unaudited) This section presents the Company's unaudited condensed financial statements for the quarter ended March 31, 2020, including balance sheets, statements of operations, cash flows, and stockholders' equity, along with detailed notes explaining significant accounting policies, debt, equity, and derivative instruments Condensed Balance Sheets The condensed balance sheets show a significant increase in total assets, primarily driven by a surge in derivative instruments, and a corresponding increase in total stockholders' equity due to net income and preferred stock issuance | Metric (in thousands) | March 31, 2020 | December 31, 2019 | Change | % Change | | :-------------------- | :------------- | :---------------- | :----- | :------- | | Total Current Assets | $354,847 | $133,037 | $221,810 | 166.7% | | Derivative Instruments (Current) | $245,552 | $5,628 | $239,924 | 4263.6% | | Total Assets | $2,237,386 | $1,905,465 | $331,921 | 17.4% | | Total Current Liabilities | $235,078 | $203,477 | $31,601 | 15.5% | | Current Portion of Long-term Debt | $65,000 | $0 | $65,000 | - | | Total Liabilities | $1,228,379 | $1,346,822 | $(118,443)| (8.8)% | | Total Stockholders' Equity | $1,009,007 | $558,643 | $450,364 | 80.6% | - Cash and Cash Equivalents decreased from $16,068 thousand at December 31, 2019, to $8,512 thousand at March 31, 2020[56] Condensed Statements of Operations The condensed statements of operations show a significant turnaround from a net loss in Q1 2019 to a substantial net income in Q1 2020, primarily driven by a large gain on commodity derivatives | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change | % Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Oil and Gas Sales | $130,196 | $132,684 | $(2,488)| (1.9)% | | Gain (Loss) on Commodity Derivatives, Net | $376,581 | $(139,623) | $516,204 | - | | Total Revenues | $506,785 | $(6,934) | $513,719 | - | | Total Operating Expenses | $115,911 | $88,371 | $27,540 | 31.2% | | Income (Loss) From Operations | $390,875 | $(95,305) | $486,180 | - | | Net Income (Loss) | $368,286 | $(107,162) | $475,448 | - | | Net Income (Loss) Per Common Share – Basic | $0.90 | $(0.29) | $1.19 | - | | Net Income (Loss) Per Common Share – Diluted | $0.74 | $(0.29) | $1.03 | - | - The significant increase in total revenues and net income was primarily due to a $376.6 million gain on commodity derivatives in Q1 2020, compared to a $139.6 million loss in Q1 2019[61] Condensed Statements of Cash Flows The condensed statements of cash flows indicate a slight increase in cash provided by operating activities, a significant increase in cash used for investing activities, and a decrease in cash used for financing activities, resulting in a net decrease in cash and cash equivalents for Q1 2020 | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Change | % Change | | :-------------------- | :-------------------------------- | :-------------------------------- | :----- | :------- | | Net Cash Provided by Operating Activities | $100,654 | $98,908 | $1,746 | 1.8% | | Net Cash Used for Investing Activities | $(104,500) | $(77,913) | $(26,587)| 34.1% | | Net Cash Used for Financing Activities | $(3,710) | $(19,409) | $15,699 | (80.9)% | | Net Increase (Decrease) in Cash and Cash Equivalents | $(7,555) | $1,586 | $(9,141) | - | | Cash and Cash Equivalents – End of Period | $8,512 | $3,944 | $4,568 | 115.8% | - Investing activities saw a substantial increase in cash usage, primarily due to higher drilling and development capital expenditures ($78.9 million vs. $69.8 million) and acquisition of oil and natural gas properties ($25.5 million vs. $8.1 million)[63] - Financing activities decreased cash usage, mainly due to lower net repayments on the revolving credit facility and reduced repurchases of Second Lien Notes compared to common stock repurchases in the prior year[63] Condensed Statements of Stockholders' Equity The condensed statements of stockholders' equity show a significant increase in total equity, driven by net income and the issuance of preferred stock, despite a slight decrease in common shares outstanding due to tax obligations | Metric (in thousands) | March 31, 2020 | December 31, 2019 | Change | % Change | | :-------------------- | :------------- | :---------------- | :----- | :------- | | Total Stockholders' Equity | $1,009,007 | $558,643 | $450,364 | 80.6% | | Retained Deficit | $(504,917) | $(873,203) | $368,286 | (42.2)% | | Additional Paid-In Capital | $1,513,516 | $1,431,438 | $82,078 | 5.7% | | Preferred Stock (Shares) | 2,294,702 | 1,500,000 | 794,702 | 53.0% | | Common Stock (Shares) | 405,803,181 | 406,085,183 | (282,002)| (0.1)% | - The increase in Additional Paid-In Capital is primarily due to the issuance of preferred stock, net of issuance costs, totaling $81.2 million[65] - Net Income of $368.3 million significantly reduced the retained deficit[65] Notes to Condensed Financial Statements The notes provide essential context and detail for the condensed financial statements, covering the Company's business, accounting policies, significant estimates, recent accounting pronouncements, revenue recognition, market risks, debt structure, equity changes, stock-based compensation, related party transactions, commitments, contingencies, income taxes, fair value measurements, and derivative instruments NOTE 1 ORGANIZATION AND NATURE OF BUSINESS Northern Oil and Gas, Inc. is a Delaware corporation engaged in the acquisition, exploration, development, and production of crude oil and natural gas properties, primarily targeting the Bakken and Three Forks formations in the Williston Basin. Crude oil accounted for 79% of total production and 89% of oil and gas sales for the three months ended March 31, 2020 - The Company's principal business is crude oil and natural gas exploration, development, and production, primarily in the Williston Basin (Bakken and Three Forks formations)[69] - For Q1 2020, crude oil represented 79% of total production and 89% of oil and gas sales[69] NOTE 2 BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES This note outlines the basis of presentation for the unaudited interim financial statements, emphasizing the use of management estimates and assumptions, and details recently adopted and issued accounting pronouncements. It also covers revenue recognition policies, disaggregated revenue, and concentrations of market, credit, and other risks, including the impact of COVID-19 and reliance on third-party operators - The financial information is unaudited and includes normal recurring adjustments; interim results are not indicative of a full year. The COVID-19 pandemic's broader implications on results remain uncertain[70][72] - Significant estimates include proved reserves, fair value of derivatives, impairment of oil and gas properties, and deferred income taxes[74] - The Company adopted ASU 2016-13 (Credit Losses) and ASU 2018-13 (Fair Value Measurement Disclosures) on January 1, 2020, with no significant impact. ASU 2019-12 (Income Taxes) and ASU 2020-04 (Reference Rate Reform) are being evaluated[75][76][77][78][79] Revenue by Source | Revenue Source (in millions) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--------------------------- | :-------------------------------- | :-------------------------------- | | Oil Sales | $116.3 | $123.6 | | Natural Gas and NGL Sales | $13.9 | $9.1 | - The Company faces concentration risks due to all properties being in the Williston Basin and high dependence on third-party operators (top four operators accounted for 53% of sales in Q1 2020, down from 59% in Q1 2019)[85][86][87] NOTE 3 CRUDE OIL AND NATURAL GAS PROPERTIES This note details the Company's accounting for crude oil and natural gas properties using the full cost method, including capitalization policies, quarterly ceiling tests, and the impact of recent acquisitions. It highlights the expectation of a material non-cash impairment charge in 2020 due to significantly lower forecasted commodity prices - The Company uses the full cost method, capitalizing all exploration and development costs into a single cost center[92] - No ceiling test impairment was recognized for Q1 2020 or Q1 2019, but a material non-cash impairment is expected in 2020 due to current and forecasted low oil and natural gas prices[93][94] Oil and Natural Gas Property Acquisitions | Acquisition Type (in millions) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :----------------------------- | :-------------------------------- | :-------------------------------- | | Oil and Natural Gas Properties | $25.5 | $8.4 | - The VEN Bakken Acquisition (July 1, 2019) involved $315.3 million in consideration, including cash, common stock, and an unsecured promissory note, acquiring 90.1 net producing wells and 18,000 net acres[98][99] - Unproved properties of $1.7 million and $0.7 million were impaired for Q1 2020 and Q1 2019, respectively[105] NOTE 4 LONG-TERM DEBT This note details the Company's long-term debt, including the Revolving Credit Facility, Second Lien Notes, and Unsecured VEN Bakken Note. It highlights the borrowing base, interest rates, financial covenants, and recent debt repurchases and exchanges Long-Term Debt Summary | Debt Component (in thousands) | March 31, 2020 | December 31, 2019 | | :---------------------------- | :------------- | :---------------- | | Revolving Credit Facility | $590,000 | $580,000 | | Second Lien Notes due 2023 | $327,489 | $417,733 | | Unsecured VEN Bakken Note | $130,000 | $130,000 | | Total Principal | $1,047,489 | $1,127,733 | | Total Debt | $1,040,282 | $1,118,161 | | Current Portion of Long-term Debt | $65,000 | $0 | - The Revolving Credit Facility has an $800.0 million borrowing base as of March 31, 2020, with semiannual redeterminations. The Company was in compliance with financial covenants (total net debt to EBITDAX and current ratio) as of March 31, 2020[108][110] - During Q1 2020, the Company repurchased and retired $76.7 million of Second Lien Notes in exchange for Series A Preferred Stock and cash, and an additional $13.5 million in open market transactions[114] - The Unsecured VEN Bakken Note, issued July 1, 2019, has a principal amount of $130.0 million, with 50% due by January 1, 2021, and the remainder by July 1, 2022, bearing 6.0% annual interest[121] NOTE 5 COMMON AND PREFERRED STOCK This note details the Company's common and preferred stock, including authorized and outstanding shares, the terms of the Series A Preferred Stock, and recent equity activities such as preferred stock issuance and common stock repurchases - As of March 31, 2020, there were 405.8 million common shares outstanding and 2.3 million shares of 6.500% Series A Perpetual Cumulative Convertible Preferred Stock outstanding[123][124] - The Series A Preferred Stock ranks senior to common stock for dividends and liquidation, with cumulative dividends at 6.500% per annum and convertibility into common stock at a rate of 43.63 shares per preferred share (conversion price ~$2.292)[125][126] - During Q1 2020, 794,702 shares of Series A Preferred Stock were issued to retire $76.7 million of Second Lien Notes[129] - No common stock repurchases occurred in Q1 2020 under the $150.0 million stock repurchase program, which had $68.1 million remaining as of March 31, 2020[130][272][273] NOTE 6 STOCK-BASED COMPENSATION This note describes the Company's stock-based compensation plans, primarily the 2018 Equity Incentive Plan, and the accounting treatment for Restricted Stock Awards (RSAs) with service, performance, and market-based vesting conditions - The 2018 Equity Incentive Plan authorized 15 million shares for grants, with 12.6 million shares available as of March 31, 2020[132] - Stock-based compensation expense is recognized over the vesting period, with a portion capitalized for employees involved in oil and natural gas property acquisition[133] - RSAs are granted with service, performance, and/or market conditions. Market-conditioned awards are valued using a Monte Carlo model, and expense is recognized regardless of vesting outcome[134][135][136] - As of March 31, 2020, there was $2.3 million of unrecognized compensation expense related to unvested RSAs, expected to be recognized over a weighted average period of 0.7 years[137] NOTE 7 RELATED PARTY TRANSACTIONS This note details related party transactions, including TRT Parties' participation in debt exchange and subscription offers, and a common stock repurchase from W Energy Partners LLC, all approved by the Audit Committee - TRT Holdings, Inc. affiliates participated in the Tender Offer, Exchange Offer, and Subscription Offer for Second Lien Notes and Series A Preferred Stock in November 2019, exchanging $1.0 million of notes for 10,947 Series A shares and acquiring 10,947 additional shares for $1.1 million[138] - An Exchange Agreement in February 2020 allowed TRT Parties to exchange Series A Preferred Stock for common stock despite exceeding a 9.99% beneficial ownership Conversion Cap[138] - In January 2019, the Company repurchased 3.7 million common shares from W Energy Partners LLC for $11.1 million[139] - All related party transactions are approved by the Company's Audit Committee[140] NOTE 8 COMMITMENTS & CONTINGENCIES This note addresses the Company's legal proceedings and contingencies, specifically an ongoing dispute over mineral ownership in the Williston Basin that could require a $4.6 million revenue reversal if resolved adversely - The Company is involved in various legal proceedings, but management believes the outcomes will not materially impact financial position, results of operations, or cash flows[141] - An ongoing dispute over mineral ownership in the Missouri River bed within the Fort Berthold Reservation could require the Company to reverse approximately $4.6 million in accrued revenue (net of taxes) if the judgment is adverse[142] NOTE 9 INCOME TAXES This note explains the Company's income tax provision, highlighting the recognition of a full valuation allowance on net deferred tax assets due to uncertainty regarding their realization, and the immaterial impact of the CARES Act - No income tax expense (benefit) was recorded in Q1 2020 or Q1 2019 due to a full valuation allowance on net deferred tax assets[143][144] - The Company maintains a full valuation allowance due to uncertainty about realizing deferred tax assets, considering earnings history, NOL carry-forwards, projected future income, and tax planning strategies[144][217] - The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed in March 2020, did not have a material impact on the Company's income tax provision[145] NOTE 10 FAIR VALUE This note defines fair value and outlines the Company's use of a three-level hierarchy for financial assets and liabilities measured at fair value on a recurring basis. It details the valuation of commodity and interest rate derivatives, and other financial instruments - Fair value is defined as the exchange price in an orderly transaction, using a three-level hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[147][148] Fair Value Measurements | Financial Instrument (in thousands) | March 31, 2020 (Level 2) | December 31, 2019 (Level 2) | | :-------------------------------- | :----------------------- | :-------------------------- | | Commodity Derivatives – Current Asset | $245,552 | $5,628 | | Commodity Derivatives – Noncurrent Asset | $94,329 | $8,554 | | Interest Rate Derivatives – Current Liabilities | $(130) | — | | Interest Rate Derivatives – Noncurrent Liabilities | $(547) | — | | Total Fair Value (Level 2) | $339,204 | $(5,195) | - Fair values of commodity and interest rate derivatives are determined using future prices, volatility, time to maturity, and LIBOR yield curves, corroborated by counterparty statements and evaluated for nonperformance risk (Level 2 inputs)[152][153] - The fair value of Second Lien Notes is $194.9 million (March 31, 2020) based on active market quotes (Level 1 inputs), while the Revolving Credit Facility and Unsecured VEN Bakken Note approximate fair value due to floating rates and secured interest (Level 2 inputs)[155][156] NOTE 11 DERIVATIVE INSTRUMENTS AND PRICE RISK MANAGEMENT This note details the Company's use of commodity and interest rate derivative instruments to manage price and interest rate risks, outlining their accounting treatment (mark-to-market), settlement impacts, and outstanding contract volumes and prices - The Company uses commodity price swaps, basis swaps, swaptions, and collars to reduce price volatility and ensure cash flow, and interest rate swaps to mitigate variable-rate debt exposure[159] - All derivatives are recorded at fair value on the balance sheet; changes in fair value are recognized in the condensed statements of operations as gain or loss on derivative instruments, as they are not designated as hedges[160] Gain (Loss) on Commodity Derivatives | Metric (in thousands) | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Gain (Loss) on Settled Commodity Derivatives | $31,506 | $12,546 | | Gain (Loss) on Unsettled Commodity Derivatives | $345,075 | $(152,169) | | Gain (Loss) on Commodity Derivatives, Net | $376,581 | $(139,623) | Outstanding Commodity Derivative Contracts | Year | Volumes (Bbl) | Weighted Average Price ($) | | :--- | :------------ | :------------------------- | | 2020 | 7,441,988 | $58.05 | | 2021 | 6,333,674 | $55.41 | | 2022 | 1,372,866 | $52.57 | - As of March 31, 2020, the Company had interest rate swaps with a total notional amount of $200.0 million[165] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the Company's financial performance, condition, and future outlook, particularly in light of the COVID-19 pandemic and volatile commodity prices. It covers revenue sources, cost structure, factors affecting operating results, market conditions, detailed results of operations, non-GAAP financial measures, and liquidity and capital resources Cautionary Statement Concerning Forward-Looking Statements This section advises readers that the report contains forward-looking statements subject to inherent risks and uncertainties, including the impact of COVID-19, commodity price changes, and operational factors, and disclaims any obligation to update these statements - Forward-looking statements are identified by terms like 'estimate,' 'expect,' 'anticipate,' and 'will,' and are based on current expectations and assumptions[171][173] - Key risks include the effects of the COVID-19 pandemic, changes in crude oil and natural gas prices, drilling activity pace, ability to acquire opportunities, and general economic conditions[172] Overview Northern Oil and Gas, Inc. is an independent energy company focused on non-operated oil and natural gas exploration and production in the Williston Basin. The Company reported increased production and net wells in Q1 2020, with oil comprising a significant portion of its output - The Company operates primarily in the Bakken and Three Forks formations within the Williston Basin, focusing on non-operated working interests[175] - As of March 31, 2020, the Company participated in 6,251 gross (464.8 net) producing wells[175] Operational Metrics | Metric | Q1 2020 | Q1 2019 | Change | % Change | | :----- | :------ | :------ | :----- | :------- | | Average Daily Production (Boe/day) | 43,735 | - | - | 28% | | Oil Production (% of total) | 79% | - | - | - | | Net Wells Added in Q1 2020 | 7.3 | - | - | - | | Net Acres Leased (as of 3/31/2020) | 183,245 | - | - | - | | Developed Acreage (% of net acres) | 89% | - | - | - | Outlook Given COVID-19 Pandemic and Current Economic Environment The Company anticipates significant impacts from the COVID-19 pandemic and low commodity prices, including reduced capital expenditures and production. Despite these challenges, strong crude oil derivative positions are expected to generate significant cash flow, enabling debt reduction and meeting liquidity needs - The COVID-19 pandemic and crude oil oversupply have led to historically low oil prices, causing operators to decrease drilling/completion activity and curtail production[177][178] - Developmental capital spending forecast for 2020 reduced to $175.0 – $200.0 million, a 53% – 59% reduction from 2019[179] - Expected significant cash flow in 2020, despite market conditions, due to crude oil derivative positions (27,000 barrels/day hedged at $58.05/barrel for the last nine months of 2020)[180] - A non-cash full-cost ceiling impairment charge on oil and natural gas properties is expected in Q2 2020 due to lower forecasted prices, with a pro forma estimate of over $600.0 million impairment if prices were $45.87/Bbl and $2.07/MMBtu[182][183] Source of Our Revenues The Company's revenues are primarily derived from the sale of oil, natural gas, and NGLs, with derivative instruments used to hedge future sales prices and mitigate exposure to price fluctuations, aiming for more predictable cash flows - Revenues are a function of production volume, market price, oil quality, Btu content, and transportation costs[185] - Derivative instruments are used to hedge a substantial portion of oil production, providing predictable cash flows and reducing exposure to downward price fluctuations, though potentially limiting benefits from upward movements[185] Principal Components of Our Cost Structure The Company's cost structure includes oil price differentials, gains/losses on commodity derivatives, production expenses, production taxes, depletion, depreciation, amortization and impairment (DD&A), general and administrative expenses, interest expense, and income tax expense - Key cost components include oil price differentials (transportation costs from Williston Basin), net gains/losses on commodity derivatives (cash settlements and non-cash mark-to-market), and production expenses (daily costs to bring hydrocarbons to market)[187] - Other significant costs are production taxes (percentage of revenues), DD&A (systematic expensing of capitalized costs), general and administrative expenses (overhead, payroll, professional fees), interest expense (borrowing costs), and income tax expense (federal and state taxes with deferred tax assets/liabilities)[187] Selected Factors That Affect Our Operating Results Operating results are influenced by drilling success, commodity prices, production volumes, derivative fair value changes, acquisition opportunities, and operating expenses. Regional factors like weather, infrastructure, and transportation costs in the Williston Basin also play a significant role, impacting oil price differentials and drilling costs - Operating results are affected by drilling success, commodity prices, production volumes, derivative fair value changes, acquisition ability, and operating expenses[189] - Williston Basin-specific factors include weather, infrastructure limitations, and transportation capacity, which influence oil price differentials[189][190] - The oil price differential to NYMEX WTI was $8.50 per barrel in Q1 2020, higher than $6.19 per barrel in Q1 2019, due to takeaway capacity and seasonal refinery maintenance[191] - Weighted average AFE cost for wells participated in was $7.6 million in Q1 2020, down from $8.0 million in 2019, reflecting lower drilling costs[192] Market Conditions Market conditions for oil and natural gas experienced extreme volatility in Q1 2020, with oil prices plummeting due to the COVID-19 pandemic and an oversupply from OPEC+ disputes. This outlook remains highly uncertain, with anticipated low prices for the remainder of 2020 - Oil prices declined significantly in Q1 2020, from $63/Bbl in January to just above $20/Bbl in March, due to decreased global demand from COVID-19 and increased supply from Saudi Arabia/OPEC+ disputes[194] - The NYMEX WTI oil futures contract settled at $15.06/Bbl on April 29, 2020, indicating continued low prices[194] Average NYMEX Prices | Average NYMEX Prices | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :------------------- | :-------------------------------- | :-------------------------------- | | Natural Gas (per Mcf) | $1.91 | $2.93 | | Oil (per Bbl) | $45.57 | $54.87 | - Realized oil price after settled derivatives was 12% lower in Q1 2020 than Q1 2019, due to lower NYMEX prices and a higher oil price differential[197] Results of Operations for the Three Months Ended March 31, 2020 and March 31, 2019 This section provides a detailed comparison of the Company's operating results for Q1 2020 versus Q1 2019, highlighting changes in production, sales, derivative impacts, and various expense categories Key Operating Results | Metric | Q1 2020 | Q1 2019 | % Change | | :----- | :------ | :------ | :------- | | Net Production (Boe) | 3,979,900 | 3,113,863 | 28% | | Total Revenues | $506,785k | $(6,934)k | - | | Realized Price on a Boe Basis Including Settled Commodity Derivatives | $40.63 | $46.64 | (13)% | | Net Producing Wells at Period End | 464.8 | 332.5 | 40% | Oil and Natural Gas Sales Oil, natural gas, and NGL sales decreased by 2% in Q1 2020 compared to Q1 2019, primarily due to a 23% decrease in realized prices, partially offset by a 28% increase in production volumes driven by acquisitions and development activity - Oil, natural gas, and NGL sales (excluding settled derivatives) decreased 2% in Q1 2020, driven by a 23% decrease in realized prices, partially offset by a 28% increase in production[202] - The oil price differential increased to $8.50 per barrel in Q1 2020 from $6.19 per barrel in Q1 2019[202] - Production increases from acquisitions and development were partially offset by curtailments, shut-ins, and completion delays due to infrastructure constraints and global oil market uncertainty[203] Commodity Derivative Instruments The Company reported a significant net gain of $376.6 million on commodity derivatives in Q1 2020, a substantial increase from a $139.6 million loss in Q1 2019, primarily due to a large non-cash mark-to-market gain from changes in forward oil prices - Net gain on commodity derivatives was $376.6 million in Q1 2020, compared to a $139.6 million loss in Q1 2019[204] - Settled commodity derivatives generated a $31.5 million gain in Q1 2020 (2.7 million barrels at $57.93/barrel), up from $12.5 million in Q1 2019 (1.8 million barrels at $62.89/barrel), due to lower average NYMEX oil prices[205] - Unsettled commodity derivatives resulted in a $345.1 million gain in Q1 2020, reversing a $152.2 million loss in Q1 2019, driven by changes in forward oil prices relative to open contracts[206] Production Expenses Production expenses increased by 51% to $37.3 million in Q1 2020, or 18% on a per-Boe basis, primarily due to a 28% increase in production and a 40% increase in net producing wells, exacerbated by production curtailments Production Expenses Summary | Metric | Q1 2020 | Q1 2019 | % Change | | :----- | :------ | :------ | :------- | | Production Expenses (in thousands) | $37,335 | $24,666 | 51% | | Production Expenses (per Boe) | $9.38 | $7.92 | 18% | - The increase was driven by a 28% increase in production and a 40% increase in net producing wells, with per-unit costs rising due to production curtailments and shut-ins[207] Production Taxes Production taxes decreased by 5% to $11.9 million in Q1 2020, or 26% on a per-Boe basis, primarily due to lower realized oil and natural gas sales prices, despite higher production volumes Production Taxes Summary | Metric | Q1 2020 | Q1 2019 | % Change | | :----- | :------ | :------ | :------- | | Production Taxes (in thousands) | $11,896 | $12,520 | (5)% | | Production Taxes (per Boe) | $2.99 | $4.02 | (26)% | | Production Taxes (% of sales) | 9.1% | 9.4% | - | - The decrease was due to lower realized prices, partially offset by higher production levels, and a lower mix of oil sales as a percentage of total sales[208] General and Administrative Expenses General and administrative expenses decreased by 19% to $4.9 million in Q1 2020, or 37% on a per-Boe basis, mainly due to a reduction in non-cash compensation expense General and Administrative Expenses Summary | Metric | Q1 2020 | Q1 2019 | % Change | | :----- | :------ | :------ | :------- | | General and Administrative Expenses (in thousands) | $4,871 | $6,051 | (19)% | | General and Administrative Expenses (per Boe) | $1.22 | $1.94 | (37)% | - The decrease was primarily driven by a $1.5 million decrease in non-cash compensation expense, partially offset by a $0.3 million increase in professional fees[209][210] Depletion, Depreciation, Amortization and Accretion Depletion, depreciation, amortization, and accretion (DD&A) increased by 37% to $61.8 million in Q1 2020, or 7% on a per-Boe basis, primarily due to higher production levels and the impact of recent acquisitions on the depletion rate DD&A Summary | Metric | Q1 2020 | Q1 2019 | % Change | | :----- | :------ | :------ | :------- | | DD&A (in thousands) | $61,809 | $45,134 | 37% | | DD&A (per Boe) | $15.53 | $14.49 | 7% | | Depletion (per Boe) | $15.44 | $14.42 | 7% | - The increase was driven by a 28% increase in production levels and a 7% increase in the depletion rate per Boe, mainly due to recent acquisitions[211] Interest Expense Interest expense, net of capitalization, decreased by 15% to $16.6 million in Q1 2020 compared to Q1 2019, primarily due to lower interest rates on outstanding debt Interest Expense Summary | Metric | Q1 2020 | Q1 2019 | % Change | | :----- | :------ | :------ | :------- | | Interest Expense, Net of Capitalization (in thousands) | $16,551 | $19,548 | (15)% | - The decrease was primarily attributable to lower interest rates on the Company's outstanding debt[212] Loss on Extinguishment of Debt The Company recorded a $5.5 million loss on extinguishment of debt in Q1 2020 due to repurchases and exchanges of Second Lien Notes, with no comparable loss in Q1 2019 - A $5.5 million loss on extinguishment of debt was recorded in Q1 2020, resulting from Second Lien Notes repurchases and exchanges[213] - No loss on extinguishment of debt was recorded in Q1 2019[213] Debt Exchange Derivative Gain (Loss) The Company reported no debt exchange derivative gain or loss in Q1 2020, compared to a $6.3 million gain in Q1 2019, as all related liabilities were settled - No debt exchange derivative gain or loss was recorded in Q1 2020, compared to a $6.3 million gain in Q1 2019[214] - As of March 31, 2020, there were no remaining debt exchange derivative liabilities[214] Contingent Consideration Gain (Loss) The Company recorded no contingent consideration gain or loss in Q1 2020, compared to a $1.4 million gain in Q1 2019, as all related liabilities were settled - No contingent consideration gain or loss was recorded in Q1 2020, compared to a $1.4 million gain in Q1 2019 due to a change in fair value[215] - As of March 31, 2020, there were no remaining contingent consideration liabilities[215] Income Tax No income tax expense or benefit was recorded in Q1 2020 or Q1 2019 due to a full valuation allowance on net deferred tax assets, reflecting uncertainty about their realization - No income tax expense (benefit) was recorded in Q1 2020 or Q1 2019 due to a full valuation allowance on net deferred tax assets[216] - The Company intends to maintain the full valuation allowance until sufficient evidence supports its reversal[217] Non-GAAP Financial Measures This section presents non-GAAP financial measures, Adjusted Net Income and Adjusted EBITDA, which management uses to evaluate core operating results and provide investors with comparable performance metrics, along with their reconciliations to GAAP - Adjusted Net Income excludes (gain) loss on unsettled commodity derivatives, loss on extinguishment of debt, debt exchange derivative gain, and contingent consideration gain, all net of tax[218] - Adjusted EBITDA excludes interest expense, income taxes, DD&A, non-cash stock-based compensation, loss on extinguishment of debt, debt exchange derivative gain, contingent consideration gain, and (gain) loss on unsettled commodity derivatives[219] - Management believes these non-GAAP measures provide useful information by excluding items not indicative of core operating results and aid in budgeting, forecasting, and comparison with competitors[220] Reconciliation of Adjusted Net Income Adjusted Net Income decreased to $21.7 million in Q1 2020 from $27.8 million in Q1 2019, primarily due to lower realized commodity prices and increased per-unit production expenses, partially offset by higher production volumes Adjusted Net Income Reconciliation | Metric (in thousands, except per share) | Q1 2020 | Q1 2019 | | :-------------------------------------- | :------ | :------ | | Net Income (Loss) | $368,286| $(107,162)| | Selected Items, Net of Income Taxes | $(346,590)| $134,984| | Adjusted Net Income | $21,696 | $27,822 | | Adjusted Net Income Per Common Share – Diluted | $0.04 | $0.07 | - The decrease in Adjusted Net Income was primarily due to lower realized commodity prices (after settled derivatives) and increased per-unit production expenses, partially offset by higher production volumes[218] Reconciliation of Adjusted EBITDA Adjusted EBITDA increased to $108.0 million in Q1 2020 from $104.8 million in Q1 2019, mainly driven by significantly higher production volumes from acquisitions and organic growth, despite lower realized commodity prices and increased per-unit production expenses Adjusted EBITDA Reconciliation | Metric (in thousands) | Q1 2020 | Q1 2019 | | :-------------------- | :------ | :------ | | Net Income (Loss) | $368,286| $(107,162)| | Adjusted EBITDA | $108,010| $104,761| - The increase in Adjusted EBITDA was primarily due to significantly higher production volumes from acquisitions and organic growth, partially offset by lower realized commodity prices (after settled derivatives) and increased per-unit production expenses[219] Liquidity and Capital Resources This section discusses the Company's liquidity and capital resources, including cash flow sources, debt structure, working capital fluctuations, and the impact of commodity price volatility and hedging strategies. It also addresses the outlook given the COVID-19 pandemic Overview The Company's liquidity primarily comes from operations, equity/debt financings, and derivative settlements. In Q1 2020, the balance sheet was strengthened by repurchasing Second Lien Notes with cash and Series A Preferred Stock. As of March 31, 2020, total liquidity was $218.5 million - Main liquidity sources are internally generated cash flow, equity/debt financings, credit facility borrowings, and commodity derivative settlements[227] - In January 2020, the Company repurchased $76.7 million of Second Lien Notes using $2.5 million cash and 794,702 shares of Series A Preferred Stock ($79.5 million liquidation preference)[228] Liquidity and Debt Summary | Metric (in millions) | March 31, 2020 | | :------------------- | :------------- | | Outstanding Debt | $1,047.5 | | Revolving Credit Facility Borrowings | $590.0 | | Second Lien Notes | $327.5 | | Unsecured VEN Bakken Note | $130.0 | | Total Liquidity | $218.5 | | Borrowing Base Availability | $210.0 | | Cash on Hand | $8.5 | - Oil production accounted for 79% of total production in Q1 2020, making cash flows sensitive to oil price fluctuations. The Company hedged approximately 85% of crude oil production in Q1 2020[230] Working Capital Working capital shifted from a $70.4 million deficit at December 31, 2019, to a $119.8 million surplus at March 31, 2020, primarily driven by a $239.9 million increase in derivative instruments due to commodity price changes Working Capital Summary | Metric (in millions) | March 31, 2020 | December 31, 2019 | | :------------------- | :------------- | :---------------- | | Working Capital | $119.8 | $(70.4) | | Current Assets | $354.8 | $133.0 | | Current Liabilities | $235.1 | $203.5 | - The increase in current assets was mainly due to a $239.9 million increase in derivative instruments, partially offset by a $10.7 million reduction in accounts receivable[233] - The change in current liabilities was due to a $65.0 million increase in the current portion of long-term debt (Unsecured VEN Bakken Note), partially offset by a $20.0 million decrease in accounts payable and accrued liabilities[233] Cash Flows Net cash provided by operating activities slightly increased in Q1 2020, while cash used for investing activities significantly rose due to higher development and acquisition spending. Cash used for financing activities decreased due to lower debt repayments and common stock repurchases Cash Flow Summary | Cash Flow Category (in thousands) | Q1 2020 | Q1 2019 | | :-------------------------------- | :------ | :------ | | Net Cash Provided by Operating Activities | $100,654| $98,908 | | Net Cash Used for Investing Activities | $(104,500)| $(77,913)| | Net Cash Used for Financing Activities | $(3,710)| $(19,409)| | Net Change in Cash | $(7,555)| $1,586 | - Operating cash flow increased due to higher production and lower interest costs, partially offset by lower realized prices and higher production expenses[236] - Investing cash flow increased due to higher drilling and development capital expenditures ($78.6 million vs. $69.6 million) and acquisitions ($25.5 million vs. $8.1 million)[237][239] - Financing cash flow decreased due to lower Second Lien Notes repurchases and reduced contingent consideration/debt exchange derivative settlements, partially offset by net borrowings under the Revolving Credit Facility[240] Revolving Credit Facility As of March 31, 2020, the Revolving Credit Facility had an $800.0 million borrowing base with $590.0 million outstanding, leaving $210.0 million in available borrowing capacity - The Revolving Credit Facility had an $800.0 million borrowing base and $590.0 million outstanding as of March 31, 2020, with $210.0 million available capacity[243] Second Lien Notes due 2023 As of March 31, 2020, the Company had $327.5 million in outstanding principal amount of its 8.500% senior secured second lien notes due 2023 - Outstanding principal amount of 8.500% senior secured second lien notes due 2023 was $327.5 million as of March 31, 2020[244] Unsecured VEN Bakken Note As of March 31, 2020, the Company had $130.0 million in outstanding principal amount under the Unsecured VEN Bakken Note - Outstanding principal amount under the Unsecured VEN Bakken Note was $130.0 million as of March 31, 2020[245] Series A Preferred Stock As of March 31, 2020, the Company had 2,294,702 outstanding shares of 6.500% Series A Perpetual Cumulative Convertible Preferred Stock, with an aggregate liquidation preference of $229.5 million - Outstanding shares of 6.500% Series A Perpetual Cumulative Convertible Preferred Stock totaled 2,294,702, with an aggregate liquidation preference of $229.5 million as of March 31, 2020[246] Effects of Inflation and Pricing The cyclical nature of the oil and natural gas industry means that commodity price changes significantly impact revenues, reserves, borrowing bases, and impairment assessments. While current business costs are not expected to materially increase, higher prices could lead to increased costs for materials, services, and personnel - Oil and natural gas prices significantly impact revenues, future reserves, borrowing base calculations, impairment assessments, and property values[247] - Higher commodity prices typically lead to increased associated costs (materials, services, personnel), while cost declines may lag during price downturns[247] Contractual Obligations and Commitments Information on contractual obligations and commitments as of December 31, 2019, is referenced from the Company's Annual Report on Form 10-K - Disclosure of contractual obligations and commitments as of December 31, 2019, is available in the Company's Annual Report on Form 10-K[248] Significant Accounting Policies The Company's critical accounting policies, including impairment testing, asset retirement obligations, revenue recognition, derivative instruments, and income taxes, remain consistent with those reported in the 2019 Annual Report on Form 10-K - Critical accounting policies include impairment testing of oil and natural gas properties, asset retirement obligations, revenue recognition, derivative instruments and hedging, and income taxes[249] - No material changes to critical accounting policies were reported from the Annual Report on Form 10-K for the fiscal year ended December 31, 2019[249] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section details the Company's exposure to market risks, specifically commodity price risk and interest rate risk, and how it uses derivative instruments to manage these exposures Commodity Price Risk The Company's revenue and profitability are highly sensitive to volatile oil and natural gas prices. It uses derivative contracts (swaps, swaptions) to hedge a significant portion of future production, aiming for predictable cash flows and reduced exposure to price volatility - Oil and natural gas prices are volatile and heavily influence the Company's revenue, profitability, and growth[252] - Derivative contracts are used to economically hedge a significant portion of anticipated future production, with all positions carried at fair value and mark-to-market gains/losses recorded in operations[253][254] Crude Oil Swaps by Settlement Period | Settlement Period | Oil (Barrels) | Weighted Average Price ($) | | :---------------- | :------------ | :------------------------- | | Swaps-Crude Oil | | | | 2020 Q2 | 2,568,278 | $57.67 | | 2020 Q3 | 2,501,348 | $58.47 | | 2020 Q4 | 2,372,362 | $58.03 | | 2021 Q1 | 1,757,550 | $56.39 | | 2021 Q2 | 1,656,208 | $56.85 | | 2021 Q3 | 1,464,410 | $54.00 | | 2021 Q4 | 1,455,506 | $54.01 | | 2022 Q1 | 453,780 | $53.07 | | 2022 Q2 | 312,280 | $52.30 | | 2022 Q3 | 306,576 | $52.33 | | 2022 Q4 | 300,230 | $52.35 | - Options exist for counterparties to extend certain crude oil derivative contracts, potentially increasing notional volumes for 2021 (0.3 million barrels at $57.84/barrel) and 2022 (2.6 million barrels at $54.39/barrel average)[256][257] Interest Rate Risk The Company manages interest rate risk on its long-term debt, which includes both fixed and floating rates. Interest rate swaps are used to convert a portion of variable-rate indebtedness to fixed rates, with a 1% increase in short-term rates estimated to cost $3.9 million in additional annual interest - Long-term debt includes fixed-rate (Second Lien Notes, Unsecured VEN Bakken Note) and floating-rate (Revolving Credit Facility) components[258] - The Revolving Credit Facility's floating rate is based on the base rate or LIBOR plus an applicable margin[258] - As of March 31, 2020, the Company had $200.0 million in interest rate swaps to convert variable-rate debt to fixed rates[259] - A 1% increase in short-term interest rates on floating-rate debt would result in approximately $3.9 million in additional annual interest expense[259] Item 4. Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures as of March 31, 2020, and reports no material changes in internal control over financial reporting during the quarter Evaluation of Disclosure Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of March 31, 2020, ensuring timely and accurate reporting of required information - Management evaluated the effectiveness of disclosure controls and procedures as of March 31, 2020[261] - The principal executive officer and principal financial officer concluded that disclosure controls and procedures were effective, ensuring information is recorded, processed, summarized, and reported timely[261] Changes in Internal Control over Financial Reporting There were no material changes in the Company's internal control over financial reporting during the quarter ended March 31, 2020 - No material changes in internal control over financial reporting occurred during the quarter ended March 31, 2020[262] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered sales of equity securities, and a list of exhibits filed with the quarterly report Item 1. Legal Proceedings The Company is involved in various legal proceedings incidental to its business, but management believes the outcomes will not materially impact its financial position, results of operations, or cash flows - The Company is subject to litigation claims and governmental/regulatory proceedings in the ordinary course of business[263] - Management believes the outcome of these legal actions will not have a material impact on the Company's financial position, results of operations, or cash flows[141] Item 1A. Risk Factors This section highlights new and heightened risks due to the global COVID-19 pandemic and recent oil market developments, which have severely impacted demand and supply, leading to historically low oil prices and potential adverse effects on the Company's business, financial condition, liquidity, and ability to comply with debt covenants - The global COVID-19 pandemic and recent oil market developments have negatively impacted the Company, leading to materially reduced global demand for crude oil[265] - Disputes between OPEC and Russia in Q1 2020 led to increased oil supply and a substantial decline in oil prices, resulting in spot and future prices at or near historic lows[266] - Operators are significantly decreasing drilling/completion activity and curtailing production, which is expected to reduce the Company's anticipated production volumes[266] - These factors heighten risks related to indebtedness, access to capital, liquidity, potential reductions in the revolving credit facility borrowing base, and compliance with debt covenants[267] - Specific adverse impacts include significantly reduced oil prices, further demand decreases from travel restrictions, reduced development activity, increased production curtailments/shut-ins, storage/transportation difficulties, potential loss of leasehold value, and increased third-party credit risk[268] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports on the Company's purchases of equity securities, specifically shares surrendered by employees to cover tax obligations related to restricted stock awards, under its existing stock repurchase program Common Stock Purchases | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs | | :----- | :------------------------------- | :--------------------------- | :----------------------------------------------------------------------------------- | | Month 1 (Jan 2020) | 114,179 | $1.66 | $68.1 million | | Month 2 (Feb 2020) | — | — | $68.1 million | | Month 3 (Mar 2020) | 217,823 | $0.95 | $68.1 million | | Total | 332,002 | $1.19 | $68.1 million | - The purchased shares represent common stock surrendered by employees to satisfy tax withholding obligations upon vesting of restricted stock awards[273] - The Company's stock repurchase program, approved in May 2011, allows for repurchases of up to $150.0 million of outstanding common stock, with $68.1 million remaining as of March 31, 2020[272] Item 6. Exhibits This section lists all exhibits filed with the Quarterly Report on Form 10-Q, including corporate organizational documents, debt indentures, employment agreements, and certifications, with references to their original SEC filings - Exhibits include Restated Certificate of Incorporation, By-Laws, Certificates of Designations for Preferred Stock, Indentures for Second Lien Notes, employment agreements, and certifications (e.g., Rule 13a-14(a), 18 U.S.C. Section 1350)[276][277] - Many exhibits are incorporated by reference to previous SEC filings (Form 8-K)[276][277]