Rating Action: Moody's changes Northern Oil and Gas' rating outlook to stable
Global Credit Research - 22 Jul 2020
New York, July 22, 2020 -- Moody's Investors Service (Moody's) changed Northern Oil and Gas, Inc.'s (NOG) rating outlook to stable from positive. Concurrently, Moody's affirmed NOG's B3 Corporate Family Rating (CFR), B3-PD Probability of Default Rating (PDR) and Caa1 second lien secured notes rating. NOG's Speculative Grade Liquidity (SGL) rating remains SGL-3.
"The stable outlook reflects Northern Oil & Gas' reduced debt balances and its commodity hedges that should help endure low oil prices following the coronavirus outbreak and deteriorating global economic outlook," said Amol Joshi, Moody's Vice President and Senior Credit Officer. "Capital spending flexibility and spending restraint should provide free cash flow in 2020-21, supporting its liquidity."
..Issuer: Northern Oil and Gas, Inc.
.... Probability of Default Rating, Affirmed B3-PD
.... Corporate Family Rating, Affirmed B3
....Senior Secured 2nd Lien Notes, Affirmed Caa1 (LGD5) from (LGD4)
..Issuer: Northern Oil and Gas, Inc.
....Outlook, Changed To Stable From Positive
NOG's commodity hedges and significantly lower capital spending than 2019 should help protect its 2020 credit metrics in a low oil price environment following the coronavirus outbreak and deteriorating global economic outlook. The stable outlook reflects this as well as the company's ability to generate free cash flow and its resilience if the oil price downturn extends into 2021.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on NOG of the deterioration in credit quality it has triggered, given its exposure to a period of low oil prices and lower production volumes, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
NOG's B3 CFR is supported by the company's moderate leverage and high oil-weighted production mix benefitting its unleveraged cash margins and cash flow. Significant reinvestment of capital and acquisition of producing assets in the Williston Basin has allowed NOG to deliver growth in production volumes that have more than doubled from 2017 levels, although 2020 production is expected to fall materially because of production shut-ins and lower drilling of new wells. The company also hedges a meaningful portion of its oil production about two years into the future, which should reduce volatility in its revenue and cash flow. Moody's expects NOG's retained cash flow (RCF) to debt ratio to remain robust relative to its rated peers into 2021, and the company should generate positive free cash flow in 2020, which may be used to modestly reduce high borrowings under the revolver. NOG's credit profile is challenged by its relatively modest scale and high geographic concentration in a single basin. While the company manages a well-diversified portfolio of non-operated working interests in numerous producing assets, it relies on the operating performance of its partners. NOG growth strategy is focused on participating in operator-initiated wells and executing bolt-on acquisitions, requiring a high degree of financial flexibility. Its sizeable 2019 acquisition had constrained the company's financial flexibility, but issuing preferred shares and reducing its debt balances has supported NOG's flexibility. Free cash flow generation should support liquidity in the near-term, despite NOG's borrowing base being cut to $660 million in July from $800 million previously.
The company's debt is comprised of borrowings under its first lien secured revolving credit facility, about $297 million of second lien notes pro forma for modest debt for common equity exchanges completed in the second quarter, and a $130 million senior unsecured promissory note (unrated). NOG's second lien secured notes are rated Caa1, one notch below the company's B3 CFR because of the priority claim of the first lien revolver on its assets. Moody's views the Caa1 rating for the second lien notes as more appropriate than the rating suggested by Moody's Loss Given Default for Speculative-Grade Companies Methodology because of sound asset coverage and modest expected decline in debt balances.
The SGL-3 Speculative Grade Liquidity Rating reflects adequate liquidity supported by NOG's ability to generate positive free cash flow in 2020. At March 31, NOG had $8.5 million of cash and $590 million of revolver borrowings, while revolver borrowings were reduced to $568 million at June 30. The company's revolver borrowing base was cut to $660 million in July, significantly reducing availability under the revolver. NOG's secured revolver is due in November 2024, but would mature 91 days prior to the scheduled maturity date of the earlier of the second lien notes or the unsecured promissory note, if such notes remain outstanding at that time. The revolver's financial covenants include a maximum net debt to EBITDAX ratio of 3.5x (with cash netting limited to $50 million), and a minimum current ratio of 1x. NOG was in compliance with its financial covenants as of March 31. The current ratio calculation allows certain adjustments and the inclusion of unused amounts of the total bank commitments. The company's next debt maturity is on January 1, 2021 when $65 million of the senior unsecured promissory note is due which can be repaid through available liquidity. Substantially all of the company's assets are pledged as security under the credit facility, which limits the extent to which asset sales can provide a source of additional liquidity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be downgraded if production volumes materially decline, RCF/debt falls below 20% or liquidity deteriorates. The ratings could be upgraded if NOG continues grows its production to approach 50 thousand barrels of oil equivalent per day in an improving commodity price environment, its RCF/debt is sustained over 30% and the company's liquidity is adequate or better.
Northern Oil and Gas, Inc., headquartered in Minnetonka, Minnesota, owns non-operated working interests in oil and gas wells and acreage primarily in the Bakken and Three Forks formations within the Williston Basin in North Dakota and Montana.
The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1056808. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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Amol Joshi, CFA VP-Sr Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Steven Wood MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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