NORTHERN OIL AND GAS, INC.
Fitch Ratings has affirmed
Fitch has also affirmed NOG's reserve-based lending (RBL) credit facility rating at 'BB'/'RR1', senior unsecured notes rating at 'B'/'RR4', and assigned a 'B'/'RR4' to the convertible senior notes. The Rating Outlook is Positive.
NOG's ratings reflect Fitch's expectation of continued credit-friendly M&A activity, which should increase its overall size, scale and diversification toward 'B+' category thresholds. The Positive Outlook also considers Fitch's expectation for continued positive FCF generation secured by NOG's strong hedging program, which is expected to be applied to reduce gross debt and lead to improved credit metrics and liquidity over the next 6 months-12 months.
The rating also considers Fitch's expectation that the company will increase borrowings under its RBL facility and expand its base dividend, both of which Fitch believes are mitigated by strong FCF generation and management's track record of debt repayment following acquisitions.
Key Rating Drivers
Credit Conscious, Diversifying Transaction: Fitch views NOG's recently announced Forge joint acquisition with
The company's acquisitions throughout 2022 and early 2023 have been funded through a combination of borrowings under the RBL, issuance of convertible bonds and positive FCF. These acquisitions have increased production from 53.8 thousand barrels of oil equivalent per day (mboepd) in 2021 to 2023 annual guidance range between 91 mboepd and 96 mboepd excluding the recently announced Forge joint acquisition. Fitch believes acquisitions will continue to be a part of the company's future growth strategy and expects management will continue to fund transactions in a credit-neutral manner.
Non-Operator Status: The company acquires leasehold interests comprising of non-operated working interests in producing wells and nearby acreage, but does not control the drill bit or make operational decisions regarding timing and completion of wells. Fitch believes this limits operational and capital flexibility, especially in weak pricing environments, and leaves the company exposed to the decisions of its operating partners.
Favorable Capital Deployment Flexibility: Fitch believes NOG's flexibility with well participation and capex allows for economic-driven decisions and improves overall returns. The company retains the ability to decline participation in uneconomic or lower-return wells, even within a multi-well, multi-reservoir development in some cases, to help optimize returns.
As a non-operator, NOG does not have rig, drilling or midstream contracts and has no personnel at the field level, which limits corporate operational and financial obligations, and brings lower per-unit general and administrative costs. NOG has historically maintained approximately six years of proved, developed and producing (PDP) reserve life, which is expected to increase given the recent acquisitions.
Favorable Liquidity, Capital Management: NOG's close relationship with its operators and the long lead times from initial new well development evaluation, investment decision, and funding provide visibility on future capital needs, and in conjunction with its hedging policy, help reduce overall liquidity risk despite the inability to control well timing and completion.
The company is typically provided budgets and development plans from its operators a year in advance from the start of a new well, providing considerable time to manage capital flows with existing and future production. Fitch views these characteristics favorably and does not forecast material near-term liquidity needs in the base case.
18-Month Rolling Hedge Program: NOG has historically maintained a strong hedge book and expects to hedge approximately 60% of total production on a rolling 18-month basis going forward. The company currently has approximately 60% of oil production hedged at an average price of
Positive FCF; Sub-2.0x Leverage: Fitch forecasts positive FCF of approximately
Increasing Base Dividend: NOG increased the dividend quarter on quarter from
Derivation Summary
NOG is a leading non-operator exploration and production (E&P) company focused in the Permian, Marcellus and Williston Basins with 1Q23 production of approximately 87 mboepd following recent acquisitions.
As a non-operator mineral and royalty interest owner,
NOG's production size is larger than offshore producer
In terms of cost structure at 4Q22, NOG's Fitch-calculated unhedged cash netback of
On an EBITDA leverage basis, Fitch expects NOG to maintain a sub-2.0x leverage profile as it allocates FCF towards repayment of the RBL facility and then towards shareholder returns. This is in line with 'B' category peers that typically see leverage oscillate between 2.0x and 3.0x on a mid-cycle basis.
Key Assumptions
Fitch's Key Assumptions Within the Rating Case for the Issuer Include:
West Texas Intermediate (WTI) prices of
Assumed Forge acquisition closes in
Capex grows to
Prioritization of forecast FCF towards repayment of the RBL facility along with marginal increase in dividends going forward.
RECOVERY ASSUMPTIONS:
The recovery analysis assumes that NOG would be reorganized as a going-concern (GC) in bankruptcy rather than liquidated.
Fitch has assumed a 10% administrative claim.
GC Approach
Fitch assumed a bankruptcy scenario exit EBITDA of
The GC EBITDA assumption reflects Fitch's view of a sustainable, post-reorganization EBITDA level upon which we base the enterprise valuation (EV), which reflects the decline from current pricing levels to stressed levels and then a partial recovery coming out of a troughed pricing environment. Fitch believes a weakened pricing environment will slow production and PDP reserve growth, reduce the borrowing base availability and materially erode the liquidity profile.
An EV multiple of 3.50x EBITDA is applied to the GC EBITDA to calculate a post-reorganization EV:
The historical bankruptcy case study exit multiples for peer companies ranged from 2.8x-7.0x, with an average of 5.2x and a median of 5.4x;
The multiple also reflects NOG's multi-basin, diversified portfolio of non-operated working interests with only a few potential buyers.
Liquidation Approach
The liquidation estimate reflects Fitch's view of the value of the company's E&P assets that can be realized in sale or liquidation processes conducted during a bankruptcy or insolvency proceeding and distributed to creditors. Fitch used NOG's recent transactions and historical third-party, non-operated transaction data for both the Williston and Permian assets on a $/bbl, $/1P, $/2P, $/acre and PDP PV-10 basis to attempt to determine a reasonable sale;
The RBL facility is assumed to be 100% drawn given the likelihood of negative redetermination in a sustained low-price environment;
The allocation of value in the liability waterfall results in recoveries corresponding to 'RR1' for the senior secured RBL and 'RR4' for the senior unsecured notes.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Consistent FCF generation with proceeds used to reduce gross debt that leads to mid-cycle EBITDA leverage sustained below 2.0x; and
Consistent track record of reserve replacement and total production approaching 100 mboepd;
Continued track record of favorable risk management that leads to financial flexibility including adequate reserve maintenance.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Inability to generate FCF and reduce outstanding gross debt that leads to mid-cycle EBITDA leverage sustained above 3.0x;
Total production sustained below 80 mboepd and erosion of the reserve base;
Limited financial flexibility and a decline in reserves that limits future production growth potential.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Adequate Liquidity: Fitch does not see material near-term liquidity needs given the company's operational and liquidity flexibility and believes NOG's forecast FCF generation supports repayment of the RBL facility and notes.
The current borrowing base is
Pro forma the recent senior unsecured note issuance, NOG is expected to have approximately
Clear Maturity Profile: Pro forma the unsecured notes issuance, NOG's maturity schedule remains light with no maturities until the RBL facility matures in
Issuer Profile
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
NOG has an ESG Relevance Score of '4' for energy management that reflects the company's cost competitiveness and financial and operational flexibility due to scale, business mix, and diversification. This factor has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
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