Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
FORM
10-K
(Mark
One)
T ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2009
or
£ TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from __________________ to __________________
Commission
File No. - 000-33999
__________________
NORTHERN
OIL AND GAS, INC.
(Exact Name of Registrant as
Specified in Its Charter)
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Nevada
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95-3848122
|
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer
Identification No.)
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315
Manitoba Avenue – Suite 200, Wayzata, Minnesota 55391
(Address of Principal Executive
Offices) (Zip Code)
952-476-9800
(Registrant’s Telephone Number,
Including Area Code)
Securities
registered pursuant to Section 12(b) of the Act:
|
Title
of Each Class
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Name
of Each Exchange On Which Registered
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|
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Common
Stock, $0.001 par value
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NYSE
Amex Equities Market
|
|
Securities
registered pursuant to Section 12(g) of the Act:
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None
|
|
(Title of
Class)
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.Yes £ No T
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.Yes £ No T
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes T No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files. Yes £No £
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. T
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a small reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
Accelerated Filer £ Accelerated
Filer T
Non-Accelerated
Filer £ Smaller
Reporting Company £
(Do
not check if a smaller reporting company)
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes £ No T
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the common equity was
last sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant’s most recently completed second fiscal
quarter.
The
aggregate market value of the registrant’s voting and non-voting common equity
held by non-affiliates of the registrant on the last business day of the
registrant’s most recently completed second fiscal quarter (based on the closing
sale price as reported by the NYSE Amex Equities Market) was approximately
$192,730,733.
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date.
As of
March 1, 2010, the registrant had 43,911,044 shares of common stock issued and
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the proxy statement related to the registrant’s 2010 Annual Meeting of
Stockholders are incorporated by reference into Part III of this
report.
CAUTIONARY
STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
We are
including the following discussion to inform our existing and potential security
holders generally of some of the risks and uncertainties that can affect our
company and to take advantage of the “safe harbor” protection for
forward-looking statements that applicable federal securities law
affords.
From time
to time, our management or persons acting on our behalf may make forward-looking
statements to inform existing and potential security holders about our
company. All statements other than statements of historical facts
included in this report regarding our financial position, business strategy,
plans and objectives of management for future operations, industry conditions,
and indebtedness covenant compliance are forward-looking
statements. When
used in this report, forward-looking statements are generally accompanied by
terms or phrases such as “estimate,” “project,” “predict,” “believe,” “expect,”
“anticipate,” “target,” “plan,” “intend,” “seek,” “goal,” “will,” “should,”
“may” or other words and similar expressions that convey the uncertainty of
future events or outcomes. Items contemplating or making assumptions
about, actual or potential future sales, market size, collaborations, and trends
or operating results also constitute such forward-looking
statements.
Forward-looking
statements involve inherent risks and uncertainties, and important factors (many
of which are beyond our company’s control) that could cause actual results to
differ materially from those set forth in the forward-looking statements,
including the following: general economic or industry conditions,
nationally and/or in the communities in which our company conducts business,
changes in the interest rate environment, legislation or regulatory
requirements, conditions of the securities markets, our ability to raise
capital, changes in accounting principles, policies or guidelines, financial or
political instability, acts of war or terrorism, other economic, competitive,
governmental, regulatory and technical factors affecting our company’s
operations, products, services and prices.
We have
based these forward-looking statements on our current expectations and
assumptions about future events. While our management considers these
expectations and assumptions to be reasonable, they are inherently subject to
significant business, economic, competitive, regulatory and other risks,
contingencies and uncertainties, most of which are difficult to predict and many
of which are beyond our control. Accordingly, results actually
achieved may differ materially from expected results in these
statements. Forward-looking statements speak only as of the date they
are made. You should consider carefully the statements in “Item
1A. Risk Factors” and other sections of this report, which describe
factors that could cause our actual results to differ from those set forth in
the forward-looking statements. Our company does not undertake, and
specifically disclaims, any obligation to update any forward-looking statements
to reflect events or circumstances occurring after the date of such
statements.
Readers
are urged not to place undue reliance on these forward-looking statements, which
speak only as of the date of this report. We assume no obligation to
update any forward-looking statements in order to reflect any event or
circumstance that may arise after the date of this report, other than as may be
required by applicable law or regulation. Readers are urged to
carefully review and consider the various disclosures made by us in our reports
filed with the United States Securities and Exchange Commission (the “SEC”)
which attempt to advise interested parties of the risks and factors that may
affect our business, financial condition, results of operation and cash
flows. If one or more of these risks or uncertainties materialize, or
if the underlying assumptions prove incorrect, our actual results may vary
materially from those expected or projected.
NORTHERN
OIL AND GAS, INC.
TABLE
OF CONTENTS
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Page
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Part
I
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Item 1.
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Business
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2
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Item
1A.
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Risk
Factors
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8
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Item
1B.
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Unresolved
Staff Comments
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17
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Item 2.
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Properties
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17
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Item 3.
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Legal
Proceedings
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21
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Item
4.
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Reserved
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21
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Part
II
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||
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Item 5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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21
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Item 6.
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Selected
Financial Data
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23
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Item 7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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25
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Item 7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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31
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Item 8.
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Financial
Statements and Supplementary Data
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32
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Item
9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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32
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Item 9A.
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Controls
and Procedures
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32
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Item 9B.
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Other
Information
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34
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Part
III
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||
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Item 10.
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Directors,
Executive Officers and Corporate Governance
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35
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Item 11.
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Executive
Compensation
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35
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Item 12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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36
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Item 13.
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Certain
Relationships and Related Transactions, and Director
Independence
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36
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Item 14.
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Principal
Accountant Fees and Services
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36
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Part
IV
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Item 15.
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Exhibits
and Financial Statement Schedules
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37
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Signatures
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40 | |
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Index
to Financial Statements
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F-1 | |
NORTHERN
OIL AND GAS, INC.
2009
ANNUAL REPORT ON FORM 10-K
PART
I
Item
1. Business
Overview
Our
company took its present form on March 20, 2007, when Northern Oil and Gas, Inc.
(“Northern”), a Nevada corporation engaged in our company’s current business,
merged with and into our subsidiary, with Northern remaining as the surviving
corporation (the “Merger”). Northern then merged into us, and we were
the surviving corporation. We then changed our name to Northern Oil
and Gas, Inc. As a result of the Merger, Northern was deemed to be
the acquiring company for financial reporting purposes and the transaction has
been accounted for as a reverse merger. The financial statements
presented in our company’s December 31, 2006, Form 10-KSB report were the
historical financial statements of Kentex Petroleum, Inc., the predecessor
company. Additional material terms of the Merger are detailed in our
company’s Current Report on Form 8-K filed with the SEC on December 19,
2006. Following the Merger, our main business focus has been directed
to oil and gas exploration and development. Unless specifically
stated otherwise, our primary operations are now those formerly operated by
Northern as well as other business activities since March 2007.
On March
17, 2008 our company received an approval letter to begin trading on the
American Stock Exchange (the “AMEX”). Our common stock commenced
trading on the AMEX on March 26, 2008 under the symbol “NOG.” Our
common stock commenced trading on the floor of the NYSE on the NYSE Amex
Equities Market platform upon completion of NYSE Euronext’s acquisition of the
American Stock Exchange.
Business
We are a
growth-oriented independent energy company engaged in the acquisition,
exploration, exploitation and development of oil and natural gas properties, and
have focused our activities primarily on projects based in the Rocky Mountain
Region of the United States, specifically the Bakken and Three Forks/Sanish
formations within the Williston Basin. We believe that we are able to
create value via strategic acreage acquisitions and convert that value or
portion thereof into production by utilizing experienced industry partners
specializing in the specific areas of interest. We have targeted
specific prospects and began drilling for oil in the Williston Basin region in
the fourth fiscal quarter of 2007. As of March 1, 2010, we owned
working interests in 188 successful discoveries, consisting of 185 targeting the
Bakken/Three Forks formation and three targeting a Red River
structure.
As an
exploration company, our business strategy is to identify and exploit repeatable
and scalable resource plays that can be quickly developed and at low
costs. We also intend to take advantage of our expertise in
aggressive land acquisition to pursue exploration and development projects as a
non-operating working interest partner, participating in drilling activities
primarily on a heads-up basis proportionate to our working
interest. Our business does not depend upon any intellectual
property, licenses or other proprietary property unique to our company, but
instead revolves around our ability to acquire mineral rights and participate in
drilling activities by virtue of our ownership of such rights and through the
relationships we have developed with our operating partners. We
believe our competitive advantage lies in our ability to acquire property,
specifically in the Williston Basin, in a nimble and efficient
fashion.
We are
focused on maintaining a low overhead structure. We believe we
are in a position to most efficiently exploit and identify high production oil
and gas properties due to our unique non-operator model through which we are
able to diversify our risk and participate in the evolution of technology by the
collective expertise of those operators with which we partner. We
intend to continue to carefully pursue the acquisition of properties that fit
our profile.
2
Reserves
We
completed our initial reservoir engineering calculations in the first fiscal
quarter of 2008 and recently completed our most current reservoir engineering
calculation as of December 31, 2009. At year-end, we had completed
drilling on approximately 10% of our Bakken prospective acreage inventory
assuming 640-acre spacing units. The value of our reserves is
calculated by determining the present value of estimated future revenues to be
generated from the production of our proved reserves, net of estimated lease
operating expenses, production taxes and future development
costs. All of our proved reserves are located in North Dakota and
Montana.
The
tables below summarize our estimated proved reserves as of December 31, 2009
based upon reports prepared by Ryder Scott Company, LP (“Ryder Scott”), an
independent reservoir engineering firm. Ryder Scott is one of the
largest reservoir-evaluation consulting firms and evaluates oil and gas
properties and independently certifies petroleum reserves quantities for various
clients throughout the United States and internationally.
Ryder
Scott prepared two separate reserve reports valuing our proved reserves at
December 31, 2009. The reports value only our proved reserves and do
not value our probable reserves or our possible reserves. Both tables
account for straight-line pricing of crude oil and natural gas at constant
prices over the expected life of our wells. Our “SEC Pricing Proved
Reserves” were calculated using oil and gas price parameters established by
current SEC guidelines and Financial Accounting Standard Board
guidance. Our “Sensitivity Case Proved Reserves” were calculated
using higher assumed values for crude oil and natural gas selected at our
discretion to better reflect our current expectations because the SEC pricing
parameters are significantly lower than current market prices and our average
realized price per barrel at December 31, 2009.
SEC Pricing Proved
Reserves(1)
|
Crude
Oil
(barrels)
|
Natural
Gas
(cubic
feet)
|
Total
(barrels of
oil equivalent)(2)
|
Pre-Tax
PV10% Value(3)
|
|||||||||||||
|
PDP
Properties(4)
|
1,647,031 | 513,112 | 1,732,550 | $ | 37,784,555 | |||||||||||
|
PDNP
Properties(5)
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600,687 | 214,125 | 636,375 | $ | 12,795,237 | |||||||||||
|
PUD
Properties(6)
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3,567,861 | 1,033,686 | 3,740,141 | $ | 37,232,700 | |||||||||||
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Total
Proved Properties:
|
5,815,579 | 1,760,923 | 6,109,066 | $ | 87,812,492 | |||||||||||
Sensitivity Case Proved
Reserves(1)
|
Crude
Oil
(barrels)
|
Natural
Gas
(cubic
feet)
|
Total
(barrels of
oil equivalent)(2)
|
Pre-Tax
PV10% Value(3)
|
|||||||||||||
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PDP
Properties(4)
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1,730,728 | 529,657 | 1,819,004 | $ | 54,303,781 | |||||||||||
|
PDNP
Properties(5)
|
630,542 | 224,383 | 667,939 | $ | 19,378,670 | |||||||||||
|
PUD
Properties(6)
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7,447,783 | 3,508,210 | 8,032,485 | $ | 93,901,002 | |||||||||||
|
Total
Proved Properties:
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9,809,053 | 4,262,250 | 10,519,428 | $ | 167,583,453 | |||||||||||
______________
|
(1)
|
The
SEC Pricing Proved Reserves table above values oil and gas reserve
quantities and related discounted future net cash flows as of December 31,
2009 assuming a constant realized price of $53.00 per barrel of crude oil
and a constant realized price of $3.93 per 1,000 cubic feet (Mcf) of
natural gas.
The
Sensitivity Case Proved Reserves table above values oil and gas reserve
quantities and related discounted future net cash flows as of December 31,
2009 assuming a constant realized price of $71.82 per barrel of crude oil
and a constant realized price of $5.07 per 1,000 cubic feet (Mcf) of
natural gas, which prices are consistent with prior SEC pricing
methodology.
The
Sensitivity Case Proved Reserves table is intended to illustrate reserve
sensitivities to the commodity prices. These sensitivity prices were
selected because they are consistent with the prior SEC methodology
utilizing year-end pricing. The “Sensitivity Case Proved Reserves”
should not be confused with “SEC Pricing Proved Reserves” as outlined
above and does not comply with SEC pricing assumptions, but does comply
with all other definitions.
The
values presented in both tables above were calculated by Ryder
Scott.
|
|
(2)
|
Barrels
of oil equivalent (“BOE”) are computed based on a conversion ratio of one
BOE for each barrel of crude oil and one BOE for every 6,000 cubic feet
(i.e., 6 Mcf) of natural gas.
|
|
(3)
|
Pre-tax
PV10% may be considered a non-GAAP financial measure as defined by the SEC
and is derived from the standardized measure of discounted future net cash
flows, which is the most directly comparable standardized financial
measure. Pre-tax PV10% is computed on the same basis as the
standardized measure of discounted future net cash flows but without
deducting future income taxes. We believe Pre-tax PV10% is a
useful measure for investors for evaluating the relative monetary
significance of our oil and natural gas properties. We further
believe investors may utilize our Pre-tax PV10% as a basis for comparison
of the relative size and value of our reserves to other companies because
many factors that are unique to each individual company impact the amount
of future income taxes to be paid. Our management uses this
measure when assessing the potential return on investment related to our
oil and gas properties and acquisitions. However, Pre-tax PV10%
is not a substitute for the standardized measure of discounted future net
cash flows. Our Pre-tax PV10% and the standardized measure of
discounted future net cash flows do not purport to present the fair value
of our oil and natural gas reserves.
|
|
(4)
|
“PDP”
consists of our proved developed producing reserves.
|
|
(5)
|
“PDNP”
consists of our proved developed nonproducing reserves, awaiting
completion.
|
|
(6)
|
“PUD”
consists of our proved undeveloped reserves present valued net of
development cost.
|
|
|
3
Our
December 31, 2009 reserve report includes an assessment of proven undeveloped
locations, which includes approximately 93% of our undeveloped acreage.
Our current North Dakota and Montana acreage position will allow us to drill
approximately 162 net wells based on 640-acre spacing units with production from
a single prospect. With 320-acre spacing units we have the ability to
drill a total of approximately 578 net wells, including 255 net wells targeting
the Bakken formation, 255 net wells targeting the Three Forks formation and 68
net wells targeting the Red River formation.
The
tables above assume prices and costs discounted using an annual discount rate of
10% without future escalation, without giving effect to non-property related
expenses such as general and administrative expenses, debt service and
depreciation, depletion and amortization, or federal income
taxes. The “Pre-tax PV10%” values of our proved reserves presented in
the foregoing tables may be considered a non-GAAP financial measure as defined
by the SEC.
The following table reconciles the
Pre-tax PV10% value of our SEC Pricing Proved Reserves to the standardized
measure of discounted future net cash flows.
|
SEC
Pricing Proved Reserves
Standardized Measure
Reconciliation
|
||||
|
Pre-tax
Present Value of estimated future net revenues (Pre-tax
PV10%)
|
$ | 87,812,492 | ||
|
Future
income taxes, discounted at 10%
|
(20,005,931 | ) | ||
|
Standardized
measure of discounted future net cash flows
|
$ | 67,806,561 | ||
The following table reconciles the Pre-tax PV10% value of our Sensitivity
Case Proved Reserves to the standardized measure of discounted future net cash
flows.
|
Sensitivity
Case Proved Reserves
Standardized Measure
Reconciliation
|
||||
|
Pre-tax
Present Value of estimated future net revenues (Pre-tax
PV10%)
|
$ | 167,583,453 | ||
|
Future
income taxes, discounted at 10%
|
(50,995,503 | ) | ||
|
Standardized
measure of discounted future net cash flows
|
$ | 116,587,950 | ||
Uncertainties
are inherent in estimating quantities of proved reserves, including many risk
factors beyond our control. Reserve engineering is a subjective
process of estimating subsurface accumulations of oil and natural gas that
cannot be measured in an exact manner. As a result, estimates of
proved reserves may vary depending upon the engineer valuing the
reserves. Further, our actual realized price for our crude oil and
natural gas is not likely to average the pricing parameters used to calculate
our proved reserves. As such, the oil and natural gas quantities and
the value of those commodities ultimately recovered from our properties will
vary from reserve estimates.
Additional
discussion of our proved reserves is set forth under the heading “Supplemental
Oil and Gas Information” to our financial statements included later in this
report.
Recent
Developments
During
2009, we continued to focus our operations on acquiring leaseholds and drilling
exploratory and developmental wells in the Rocky Mountain Region of the United
States, specifically the Williston Basin. We acquired an aggregate of
20,316 additional net mineral acres during 2009, primarily in Mountrail and Dunn
Counties of North Dakota but also in Burke, Divide, McKenzie, Williams and other
counties of North Dakota. As of December 31, 2009, we had
participated in the completion of 179 gross wells with a 100% success rate in
the Bakken and Three Forks formations. As of December 31, 2009, our
principal assets included approximately 104,000 net acres located in the
Williston Basin region of the northern United States and approximately 10,000
net acres located in Yates County, New York, as more fully described under the
heading “Properties – Leasehold Properties” in Item 2 of this
report.
During 2009, we continued to acquire interests in oil, gas and
mineral leases with the intention of increasing our acreage positions in desired
prospects. A complete discussion of our significant acquisitions during
the past fiscal year is included under the heading "Properties – Recent
Acreage Acquisitions" in Item 2 of this report.
Production
Methods
We primarily engage in oil and gas
exploration and production by participating on a “heads-up” basis alongside
third-party interests in wells drilled and completed in spacing units that
include our acreage. We typically depend on drilling partners to
propose, permit and initiate the drilling of wells. Prior to
commencing drilling, our partners are required to provide all owners of oil, gas
and mineral interests within the designated spacing unit the opportunity to
participate in the drilling costs and revenues of the well to the extent of
their pro-rata share of such interest within the spacing unit. In
2009, we participated in the drilling of all new wells that included any of our
acreage. We will assess each drilling opportunity on a case-by-case
basis going forward and participate in wells that we expect to meet our return
thresholds based upon our estimates of ultimate recoverable oil and gas,
expertise of the operator and completed well cost from each project, as well as
other factors. At the present time we expect to participate pursuant
to our working interest in substantially all, if not all, of the wells proposed
to us.
We do not manage our commodities
marketing activities internally, but our operating partners generally market and
sell oil and natural gas produced from wells in which we have an
interest. Our operating partners coordinate the transportation of our
oil production from our wells to appropriate pipelines pursuant to arrangements
that such partners negotiate and maintain with various parties purchasing the
production. We understand that our partners generally sell our
production to a variety of purchasers at prevailing market prices under
separately
4
negotiated short-term
contracts. The price at which production is sold generally is tied to
the spot market for crude oil. Williston Basin Light Sweet Crude from
the Bakken source rock is generally 41-42 API oil and is readily accepted into
the pipeline infrastructure. The weighted average differential
reported to us by our producers during the second half of 2009 was $8.57 per
barrel below New York Mercantile Exchange (NYMEX) pricing. This
differential represents the imbedded transportation costs in moving the oil from
wellhead to refinery.
Competition
The oil
and natural gas industry is intensely competitive, and we compete with numerous
other oil and gas exploration and production companies. Some of these
companies have substantially greater resources than we have. Not only
do they explore for and produce oil and natural gas, but also many carry on
midstream and refining operations and market petroleum and other products on a
regional, national or worldwide basis. The operations of other
companies may be able to pay more for exploratory prospects and productive oil
and natural gas properties. They may also have more resources to
define, evaluate, bid for and purchase a greater number of properties and
prospects than our financial or human resources permit.
Our
larger or integrated competitors may have the resources to be better able to
absorb the burden of existing, and any changes to federal, state, and local laws
and regulations more easily than we can, which would adversely affect our
competitive position. Our ability to discover reserves and acquire
additional properties in the future will be dependent upon our ability and
resources to evaluate and select suitable properties and to consummate
transactions in this highly competitive environment. In addition, we
may be at a disadvantage in producing oil and natural gas properties and bidding
for exploratory prospects, because we have fewer financial and human resources
than other companies in our industry. Should a larger and better
financed company decide to directly compete with us, and be successful in its
efforts, our business could be adversely affected.
Marketing
and Customers
The
market for oil and natural gas that we will produce depends on factors beyond
our control, including the extent of domestic production and imports of oil and
natural gas, the proximity and capacity of natural gas pipelines and other
transportation facilities, demand for oil and natural gas, the marketing of
competitive fuels and the effects of state and federal
regulation. The oil and gas industry also competes with other
industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers.
Our oil
production is expected to be sold at prices tied to the spot oil
markets. Our natural gas production is expected to be sold under
short-term contracts and priced based on first of the month index prices or on
daily spot market prices. We rely on our operating partners to market
and sell our production. Our operating partners involve a variety of
exploration and production companies, from large publicly-traded companies to
small, privately-owned companies. We do not believe the loss of any
single operator would have a material adverse effect on our company as a
whole.
We do not own any physical real estate,
but, instead, our acreage is comprised of leasehold interests subject to the
terms and provisions of lease agreements that provide our company the right to
drill and maintain wells in specific geographic areas. All lease
arrangements that comprise our acreage positions are established using
industry-standard terms that have been established and used in the oil and gas
industry for many years. Some of our leases may be acquired from
other parties that obtained the original leasehold interest prior to our
acquisition of the leasehold interest.
In
general, our lease agreements stipulate five year terms. Bonuses and
royalty rates are negotiated on a case-by-case basis consistent with industry
standard pricing. Once a well is drilled and production established,
the well is considered “held by production,” meaning the lease continues as long
as oil is being produced. Other locations within the drilling unit
created for a well may also be drilled at any time with no time limit as long as
the lease is held by production. Given the current pace of drilling
in the Bakken play at this time, we do not believe lease expiration issues will
materially affect our North Dakota position.
5
Governmental
Regulation and Environmental Matters
Our operations are subject to various
rules, regulations and limitations impacting the oil and natural gas exploration
and production industry as whole.
Our oil
and natural gas exploration, production and related operations, when developed,
are subject to extensive rules and regulations promulgated by federal, state,
tribal and local authorities and agencies. For example, North Dakota
and Montana require permits for drilling operations, drilling bonds and reports
concerning operations and impose other requirements relating to the exploration
and production of oil and natural gas. Such states may also have
statutes or regulations addressing conservation matters, including provisions
for the unitization or pooling of oil and natural gas properties, the
establishment of maximum rates of production from wells, and the regulation of
spacing, plugging and abandonment of such wells. Failure to comply
with any such rules and regulations can result in substantial
penalties. The regulatory burden on the oil and gas industry will
most likely increase our cost of doing business and may affect our
profitability. Although we believe we are currently in substantial
compliance with all applicable laws and regulations, because such rules and
regulations are frequently amended or reinterpreted, we are unable to predict
the future cost or impact of complying with such laws. Significant
expenditures may be required to comply with governmental laws and regulations
and may have a material adverse effect on our financial condition and results of
operations.
Environmental
Matters
Our
operations and properties are subject to extensive and changing federal, state
and local laws and regulations relating to environmental protection, including
the generation, storage, handling, emission, transportation and discharge of
materials into the environment, and relating to safety and
health. The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely
continue. These laws and regulations may:
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require
the acquisition of a permit or other authorization before construction or
drilling commences and for certain other
activities;
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limit
or prohibit construction, drilling and other activities on certain lands
lying within wilderness and other protected areas;
and
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impose
substantial liabilities for pollution resulting from its
operations.
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The
permits required for our operations may be subject to revocation, modification
and renewal by issuing authorities. Governmental authorities have the
power to enforce their regulations, and violations are subject to fines or
injunctions, or both. In the opinion of management, we are in
substantial compliance with current applicable environmental laws and
regulations, and have no material commitments for capital expenditures to comply
with existing environmental requirements. Nevertheless, changes in
existing environmental laws and regulations or in interpretations thereof could
have a significant impact on our company, as well as the oil and natural gas
industry in general.
The
Comprehensive Environmental, Response, Compensation, and Liability Act
(“CERCLA”) and comparable state statutes impose strict, joint and several
liability on owners and operators of sites and on persons who disposed of or
arranged for the disposal of “hazardous substances” found at such
sites. It is not uncommon for the neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly
caused by the hazardous substances released into the environment. The
Federal Resource Conservation and Recovery Act (“RCRA”) and comparable state
statutes govern the disposal of “solid waste” and “hazardous waste” and
authorize the imposition of substantial fines and penalties for
noncompliance. Although CERCLA currently excludes petroleum from its
definition of “hazardous substance,” state laws affecting our operations may
impose clean-up liability relating to petroleum and petroleum related
products. In addition, although RCRA classifies certain oil field
wastes as “non-hazardous,” such exploration and production wastes could be
reclassified as hazardous wastes thereby making such wastes subject to more
stringent handling and disposal requirements.
6
The
Endangered Species Act (“ESA”) seeks to ensure that activities do not jeopardize
endangered or threatened animal, fish and plant species, nor destroy or modify
the critical habitat of such species. Under ESA, exploration and
production operations, as well as actions by federal agencies, may not
significantly impair or jeopardize the species or its habitat. ESA
provides for criminal penalties for willful violations of the
Act. Other statutes that provide protection to animal and plant
species and that may apply to our operations include, but are not necessarily
limited to, the Fish and Wildlife Coordination Act, the Fishery Conservation and
Management Act, the Migratory Bird Treaty Act and the National Historic
Preservation Act. Although we believe that our operations will be in
substantial compliance with such statutes, any change in these statutes or any
reclassification of a species as endangered could subject our company to
significant expenses to modify our operations or could force our company to
discontinue certain operations altogether.
Climate
Change
Significant
studies and research have been devoted to climate change and global warming, and
climate change has developed into a major political issue in the United States
and globally. Certain research suggests that greenhouse gas emissions
contribute to climate change and pose a threat to the
environment. Recent scientific research and political debate has
focused in part on carbon dioxide and methane incidental to oil and natural gas
exploration and production. Many states and the federal government
have enacted legislation directed at controlling greenhouse gas emissions, and
future legislation and regulation could impose additional restrictions or
requirements in connection with our drilling and production activities and favor
use of alternative energy sources, which could increase operating costs and
demand for oil products. As such, our business could be materially
adversely affected by domestic and international legislation targeted at
controlling climate change.
Employees
We
currently have eight full time employees. Our Chief Executive
Officer—Michael Reger—and our Chief Financial Officer—Ryan Gilbertson—are
responsible for all material policy-making decisions. They are
assisted in the implementation of our company’s business by our Vice President
of Operations and our General Counsel. All employees have entered
into written employment agreements. As drilling production activities
continue to increase, we may hire additional technical or administrative
personnel as appropriate. We do not expect a significant change in
the number of full time employees over the next 12 months, assuming our
currently-projected drilling plan. We are using and will continue to
use the services of independent consultants and contractors to perform various
professional services, particularly in the area of land services and reservoir
engineering. We believe that this use of third-party service
providers enhances our ability to contain general and administrative
expenses.
Office
Locations
Our
executive offices are located at 315 Manitoba Avenue, Suite 200, Wayzata,
Minnesota 55391. Our office space consists of 3,044 square feet
leased pursuant to a five-year office lease agreement that commenced in February
2008. We believe our current office space is sufficient to meet our
needs for the foreseeable future.
Financial
Information about Segments and Geographic Areas
We have
not segregated our operations into geographic areas given the fact that all of
our production activities occur within the Williston Basin.
Available
Information – Reports to Security Holders
Our
website address is www.northernoil.com. We
make available on this Website under “Investor Relations,” free of charge, our
annual reports on Form 10-K (formerly Form 10-KSB), quarterly reports on Form
10-Q (formerly Form 10-QSB), current reports on Form 8-K and amendments to those
reports as soon as reasonably practicable after we electronically file those
materials with, or furnish those materials to, the SEC. These filings
are also available to the public at the SEC’s Public Reference Room at 100 F
Street, NE, Room 1580, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Electronic filings with the SEC are also available on
the SEC internet website at www.sec.gov.
We have
also posted to our website our Audit Committee Charter, Compensation Committee
Charter, Nominating Committee Charter and our Code of Business Conduct and
Ethics, in addition to all pertinent company contact information.
7
Item
1A. Risk
Factors
The
possibility of a global financial crisis may significantly impact our business
and financial condition for the foreseeable future.
The
credit crisis and related turmoil in the global financial system may adversely
impact our business and our financial condition, and we may face challenges if
conditions in the financial markets do not improve. Our ability to
access the capital markets may be restricted at a time when we would like, or
need, to raise financing, which could have a material negative impact on our
flexibility to react to changing economic and business
conditions. The economic situation could have a material negative
impact on operators upon whom we are dependent for drilling our wells, our
lenders or customers, causing them to fail to meet their obligations to
us. Additionally, market conditions could have a material negative
impact on our crude oil hedging arrangements if our counterparties are unable to
perform their obligations or seek bankruptcy protection. We believe
we have sufficient capital to fund our 2010 drilling
program. However, additional capital would be required in the event
that we accelerate our drilling program or that crude oil prices decline
substantially resulting in significantly lower revenues.
We
may be unable to obtain additional capital that we will require to implement our
business plan, which could restrict our ability to grow.
We expect
that our cash position, unused credit facility and revenues from oil and gas
sales will be sufficient to fund our 2010 drilling program. However,
those funds may not be sufficient to fund both our continuing operations and our
planned growth. We may require additional capital to continue to grow
our business via acquisitions beyond the initial phase of our current properties
and to further expand our exploration and development programs. We
may be unable to obtain additional capital if and when required.
Future
acquisitions and future exploration, development, production and marketing
activities, as well as our administrative requirements (such as salaries,
insurance expenses and general overhead expenses, as well as legal compliance
costs and accounting expenses) will require a substantial amount of additional
capital and cash flow.
We may
pursue sources of additional capital through various financing transactions or
arrangements, including joint venturing of projects, debt financing, equity
financing or other means. We may not be successful in identifying
suitable financing transactions in the time period required or at all, and we
may not obtain the capital we require by other means. If we do not
succeed in raising additional capital, our resources may not be sufficient to
fund our planned expansion of operations following 2010.
Any
additional capital raised through the sale of equity may dilute the ownership
percentage of our stockholders. Raising any such capital could also
result in a decrease in the fair market value of our equity securities because
our assets would be owned by a larger pool of outstanding equity. The
terms of securities we issue in future capital transactions may be more
favorable to our new investors, and may include preferences, superior voting
rights and the issuance of other derivative securities, and issuances of
incentive awards under equity employee incentive plans, which may have a further
dilutive effect.
Our
ability to obtain financing, if and when necessary, may be impaired by such
factors as the capital markets (both generally and in the oil and gas industry
in particular), our limited operating history, the location of our oil and
natural gas properties and prices of oil and natural gas on the commodities
markets (which will impact the amount of asset-based financing available to us)
and the departure of key employees. Further, if oil or natural gas
prices on the commodities markets decline, our revenues will likely decrease and
such decreased revenues may increase our requirements for capital. If
the amount of capital we are able to raise from financing activities, together
with our revenues from operations, is not sufficient to satisfy our capital
needs (even to the extent that we reduce our operations), we may be required to
cease our operations, divest our assets at unattractive prices or obtain
financing on unattractive terms.
8
We may
incur substantial costs in pursuing future capital financing, including
investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also
be required to recognize non-cash expenses in connection with certain securities
we may issue, which may adversely impact our
financial condition.
We
have a limited operating history, and may not be successful in developing
profitable business operations.
We have a
limited operating history. Our business operations must be considered
in light of the risks, expenses and difficulties frequently encountered in
establishing a business in the oil and natural gas industries. We
first generated revenues from operations in the fiscal year ended December 31,
2008, and have been primarily focused on exploratory drilling and fund raising
activities. There is nothing at this time on which to base an
assumption that our business operations will prove to be successful in the
long-term. Our future operating results will depend on many factors,
including:
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our
ability to raise adequate working capital;
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success
of our development and exploration;
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•
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demand
for natural gas and oil;
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the
level of our competition;
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our
ability to attract and maintain key management and employees;
and
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our
ability to efficiently explore, develop and produce sufficient quantities
of marketable natural gas or oil in a highly competitive and speculative
environment while maintaining quality and controlling
costs.
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To
achieve profitable operations in the future, we must, alone or with others,
successfully manage the factors stated above, as well as continue to develop
ways to enhance our production efforts, when commenced. Despite our
best efforts, we may not be successful in our exploration or development
efforts, or obtain required regulatory approvals. There is a
possibility that some, or all, of our wells may never produce natural gas or
oil.
We
are highly dependent on Michael Reger, our Chief Executive Officer, Chairman and
Director, and Ryan Gilbertson, Chief Financial Officer and
Director. The loss of either of them, upon whose knowledge,
leadership and technical expertise we rely, would harm our ability to execute
our business plan.
Our
success depends heavily upon the continued contributions of Michael Reger and
Ryan Gilbertson, whose knowledge, leadership and technical expertise would be
difficult to replace, and on our ability to retain and attract experienced
engineers, geoscientists and other technical and professional
staff. If we were to lose their services, our ability to execute our
business plan would be harmed and we may be forced to cease operations until
such time as we could hire a suitable replacement for them. Mr. Reger
and Mr. Gilbertson have entered into employment agreements with our company,
however, they may terminate their employment with our company at any
time.
Our
lack of diversification will increase the risk of an investment in our company,
and our financial condition and results of operations may deteriorate if we fail
to diversify.
Our
business focus is on the oil and gas industry in a limited number of properties,
initially in Montana and North Dakota. Larger companies have the
ability to manage their risk by diversification. However, we will
lack diversification, in terms of both the nature and geographic scope of our
business. As a result, we will likely be impacted more acutely by
factors affecting our industry or the regions in which we operate than we would
if our business were more diversified, enhancing our risk profile. If
we do not diversify our operations, our financial condition and results of
operations could deteriorate.
9
Strategic
relationships upon which we may rely are subject to change, which may diminish
our ability to conduct our operations.
Our
ability to successfully acquire additional properties, to increase our reserves,
to participate in drilling opportunities and to identify and enter into
commercial arrangements with customers will depend on developing and maintaining
close working relationships with industry participants and our ability to select
and evaluate suitable properties and to consummate transactions in a highly
competitive environment. These realities are subject to change and
our inability to maintain close working relationships with industry participants
or continue to acquire suitable property may impair our ability to execute our
business plan.
To
continue to develop our business, we will endeavor to use the business
relationships of our management to enter into strategic relationships, which may
take the form of joint ventures with other private parties and contractual
arrangements with other oil and gas companies, including those that supply
equipment and other resources that we will use in our business. We
may not be able to establish these strategic relationships, or if established,
we may not be able to maintain them. In addition, the dynamics of our
relationships with strategic partners may require us to incur expenses or
undertake activities we would not otherwise be inclined to in order to fulfill
our obligations to these partners or maintain our relationships. If
our strategic relationships are not established or maintained, our business
prospects may be limited, which could diminish our ability to conduct our
operations.
As
a non-operator, our development of successful operations relies extensively on
third-parties who, if not successful, could have a material adverse affect on
our results of operation.
We have
only participated in wells operated by third-parties. Our current
ability to develop successful business operations depends on the success of our
consultants and drilling partners. As a result, we do not control the
timing or success of the development, exploitation, production and exploration
activities relating to our leasehold interests. If our consultants
and drilling partners are not successful in such activities relating to our
leasehold interests, or are unable or unwilling to perform, our financial
condition and results of operation would be materially adversely
affected.
Competition
in obtaining rights to explore and develop oil and gas reserves and to market
our production may impair our business.
The oil
and gas industry is highly competitive. Other oil and gas companies
may seek to acquire oil and gas leases and other properties and services we will
need to operate our business in the areas in which we expect to
operate. This competition is increasingly intense as prices of oil
and natural gas on the commodities markets have risen in recent
years. Additionally, other companies engaged in our line of business
may compete with us from time to time in obtaining capital from
investors. Competitors include larger companies which, in particular,
may have access to greater resources, may be more successful in the recruitment
and retention of qualified employees and may conduct their own refining and
petroleum marketing operations, which may give them a competitive
advantage. In addition, actual or potential competitors may be
strengthened through the acquisition of additional assets and
interests. If we are unable to compete effectively or respond
adequately to competitive pressures, our results of operation and financial
condition may be materially adversely affected.
We
may not be able to effectively manage our growth, which may harm our
profitability.
Our
strategy envisions the expansion of our business. If we fail to
effectively manage our growth, our financial results could be adversely
affected. Growth may place a strain on our management systems and
resources. We must continue to refine and expand our business
capabilities, our systems and processes and our access to financing
sources. As we grow, we must continue to hire, train, supervise and
manage new employees. We cannot assure that we will be able
to:
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meet
our capital needs;
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expand
our systems effectively or efficiently or in a timely
manner;
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allocate
our human resources optimally;
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identify
and hire qualified employees or retain valued employees;
or
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incorporate
effectively the components of any business that we may acquire in our
effort to achieve growth.
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If we are
unable to manage our growth, our operations and our financial results could be
adversely affected by inefficiency, which would diminish our
profitability.
Our
hedging activities could result in financial losses or could reduce our net
income, which may adversely affect your investment in our common
stock.
We
generally expect to enter into swap arrangements from time-to-time to hedge our
expected production depending on reserves and market
conditions. While intended to reduce the effects of volatile oil and
natural gas prices, such transactions may limit our potential gains and increase
our potential losses if oil and natural gas prices were to rise substantially
over the price established by the hedge. In addition, such
transactions may expose us to the risk of loss in certain circumstances,
including instances in which:
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our
production is less than expected;
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there
is a widening of price differentials between delivery points for our
production and the delivery point assumed in the hedge arrangement;
or
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the
counterparties to our hedging agreements fail to perform under the
contracts.
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Risks
Related To Our Industry
Crude
oil and natural gas prices are very volatile. A protracted period of
depressed oil and natural gas prices may adversely affect our business,
financial condition, results of operations or cash flows.
The oil
and gas markets are very volatile, and we cannot predict future oil and natural
gas prices. The price we receive for our oil and natural gas
production heavily influences our revenue, profitability, access to capital and
future rate of growth. The prices we receive for our production and
the levels of our production depend on numerous factors beyond our
control. These factors include, but are not limited to, the
following:
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changes
in global supply and demand for oil and gas;
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the
actions of the Organization of Petroleum Exporting
Countries;
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the
price and quantity of imports of foreign oil and gas;
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political
and economic conditions, including embargoes, in oil-producing countries
or affecting other oil-producing activity;
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the
level of global oil and gas exploration and production
activity;
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the
level of global oil and gas inventories;
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weather
conditions;
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technological
advances affecting energy consumption;
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11
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domestic
and foreign governmental regulations;
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proximity and capacity of oil and gas pipelines and other transportation facilities; | |||
| • | the price and availability of competitors’ supplies of oil and gas in captive market areas; and | |||
| • | the price and availability of alternative fuels. | |||
Furthermore,
the recent worldwide financial and credit crisis has generally reduced the
availability of liquidity and credit to fund the continuation and expansion of
industrial business operations worldwide. The shortage of liquidity
and credit combined with recent substantial losses in worldwide equity markets
has lead to a worldwide economic recession. The slowdown in economic
activity caused by such recession has reduced worldwide demand for energy and
resulted in somewhat lower oil and natural gas prices.
Lower oil
and natural gas prices may not only decrease our revenues on a per unit basis
but also may reduce the amount of oil and natural gas that we can produce
economically and therefore potentially lower our reserve bookings. A
substantial or extended decline in oil or natural gas prices may result in
impairments of our proved oil and gas properties and may materially and
adversely affect our future business, financial condition, results of
operations, liquidity or ability to finance planned capital
expenditures. To the extent commodity prices received from production
are insufficient to fund planned capital expenditures, we will be required to
reduce spending or borrow to cover any such shortfall. Lower oil and
natural gas prices may also reduce the amount of our borrowing base under our
credit agreement, which is determined at the discretion of the lenders based on
the collateral value of our proved reserves that have been mortgaged to the
lenders, and is subject to regular redeterminations, as well as special
redeterminations described in the credit agreement.
Drilling
for and producing oil and natural gas are high risk activities with many
uncertainties.
Our
future success will depend on the success of our development, exploitation,
production and exploration activities. Our oil and natural gas
exploration and production activities are subject to numerous risks beyond our
control, including the risk that drilling will not result in commercially viable
oil or natural gas production. Our decisions to purchase, explore,
develop or otherwise exploit prospects or properties will depend in part on the
evaluation of data obtained through geophysical and geological analyses,
production data and engineering studies, the results of which are often
inconclusive or subject to varying interpretations. Our cost of
drilling, completing and operating wells is often uncertain before drilling
commences. Overruns in budgeted expenditures are common risks that
can make a particular project uneconomical. Further, many factors may
curtail, delay or cancel drilling, including the following:
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delays
imposed by or resulting from compliance with regulatory
requirements;
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pressure
or irregularities in geological formations;
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shortages
of or delays in obtaining qualified personnel or equipment, including
drilling rigs and CO2;
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equipment
failures or accidents; and
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adverse
weather conditions, such as freezing temperatures, hurricanes and
storms.
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The
presence of one or a combination of these factors at our properties could
adversely affect our business, financial condition or results of
operations.
Our
business of exploring for oil and gas is risky and may not be commercially
successful, and the advanced technologies we use cannot eliminate exploration
risk.
Our
future success will depend on the success of our exploratory drilling
program. Oil and gas exploration involves a high degree of
risk. These risks are more acute in the early stages of
exploration. Our ability to produce revenue and our resulting
financial performance are significantly affected by the prices we receive for
oil and natural gas produced from wells on our acreage. Especially in
recent years, the prices at which oil and natural gas trade in
12
the open
market have experienced significant volatility and will likely continue to
fluctuate in the foreseeable future due to a variety of influences including,
but not limited to, the following:
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domestic
and foreign demand for oil and natural gas by both refineries and end
users;
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the
introduction of alternative forms of fuel to replace or compete with oil
and natural gas;
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domestic
and foreign reserves and supply of oil and natural gas;
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competitive
measures implemented by our competitors and domestic and foreign
governmental bodies;
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political
climates in nations that traditionally produce and export significant
quantities of oil and natural gas (including military and other conflicts
in the Middle East and surrounding geographic region) and regulations and
tariffs imposed by exporting and importing nations;
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weather
conditions; and
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domestic
and foreign economic volatility and
stability.
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Our
expenditures on exploration may not result in new discoveries of oil or natural
gas in commercially viable quantities. Projecting the costs of
implementing an exploratory drilling program is difficult due to the inherent
uncertainties of drilling in unknown formations, the costs associated with
encountering various drilling conditions, such as over-pressured zones and tools
lost in the hole, and changes in drilling plans and locations as a result of
prior exploratory wells or additional seismic data and
interpretations thereof.
Even when
used and properly interpreted, three-dimensional (3-D) seismic data and
visualization techniques only assist geoscientists in identifying subsurface
structures and hydrocarbon indicators. Such data and techniques do
not allow the interpreter to know conclusively if hydrocarbons are present or
economically producible. In addition, the use of three-dimensional
(3-D) seismic data becomes less reliable when used at increasing
depths. We could incur losses as a result of expenditures on
unsuccessful wells. If exploration costs exceed our estimates, or if
our exploration efforts do not produce results which meet our expectations, our
exploration efforts may not be commercially successful, which could adversely
impact our ability to generate revenues from our operations.
We
may not be able to develop oil and gas reserves on an economically viable basis,
and our reserves and production may decline as a result.
If we
succeed in discovering oil and/or natural gas reserves, we cannot assure that
these reserves will be capable of production levels we project or in sufficient
quantities to be commercially viable. On a long-term basis, our
viability depends on our ability to find or acquire, develop and commercially
produce additional oil and natural gas reserves. Without the addition
of reserves through acquisition, exploration or development activities, our
reserves and production will decline over time as reserves are
produced. Our future reserves will depend not only on our ability to
develop then-existing properties, but also on our ability to identify and
acquire additional suitable producing properties or prospects, to find markets
for the oil and natural gas we develop and to effectively distribute our
production into our markets.
Future
oil and gas exploration may involve unprofitable efforts, not only from dry
wells, but from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, operating and other
costs. Completion of a well does not assure a profit on the
investment or recovery of drilling, completion and operating
costs. In addition, drilling hazards or environmental damage could
greatly increase the cost of operations, and various field operating conditions
may adversely affect the production from successful wells. These
conditions include delays in obtaining governmental approvals or consents,
shut-downs of connected wells resulting from extreme weather conditions,
problems in storage and distribution and adverse geological and mechanical
conditions. While we will endeavor to effectively manage these
conditions, we cannot be assured of doing so optimally, and we will not be able
to eliminate them completely in any case. Therefore, these conditions
could diminish our revenue and cash flow levels and result in the impairment of
our oil and natural gas interests.
13
Estimates
of oil and natural gas reserves that we make may be inaccurate and our actual
revenues may be lower than our financial projections.
We will
make estimates of oil and natural gas reserves, upon which we will base our
financial projections. We will make these reserve estimates using
various assumptions, including assumptions as to oil and natural gas prices,
drilling and operating expenses, capital expenditures, taxes and availability of
funds. Some of these assumptions are inherently subjective, and the
accuracy of our reserve estimates relies in part on the ability of our
management team, engineers and other advisors to make accurate
assumptions. Economic factors beyond our control, such as interest
rates, will also impact the value of our reserves.
Determining
the amount of oil and gas recoverable from various formations where we have
exploration and production activities involves great uncertainty. For
example, in 2006, the North Dakota Industrial Commission published an article
that identified three different estimates of generated oil recoverable from the
Bakken formation. An organic chemist estimated 50% of the reserves in
the Bakken formation to be technically recoverable, an oil company estimated a
recovery factor of 18%, and values presented in the North Dakota Industrial
Commission Oil and Gas Hearings ranged from 3 to 10%.
The
process of estimating oil and natural gas reserves is complex and will require
us to use significant decisions and assumptions in the evaluation of available
geological, geophysical, engineering and economic data for each
property. As a result, our reserve estimates will be inherently
imprecise. Actual future production, oil and natural gas prices,
revenues, taxes, development expenditures, operating expenses and quantities of
recoverable oil and natural gas reserves may vary substantially from those we
estimate. If actual production results vary substantially from our
reserve estimates, this could materially reduce our revenues and result in the
impairment of our oil and natural gas interests.
Drilling
new wells could result in new liabilities, which could endanger our interests in
our properties and assets.
There are
risks associated with the drilling of oil and natural gas wells, including
encountering unexpected formations or pressures, premature declines of
reservoirs, blow-outs, craterings, sour gas releases, fires and spills, among
others. The occurrence of any of these events could significantly
reduce our revenues or cause substantial losses, impairing our future operating
results. We may become subject to liability for pollution, blow-outs
or other hazards. We intend to obtain insurance with respect to these
hazards; however, such insurance has limitations on liability that may not be
sufficient to cover the full extent of such liabilities. The payment
of such liabilities could reduce the funds available to us or could, in an
extreme case, result in a total loss of our properties and
assets. Moreover, we may not be able to maintain adequate insurance
in the future at rates that are considered reasonable. Oil and
natural gas production operations are also subject to all the risks typically
associated with such operations, including premature decline of reservoirs and
the invasion of water into producing formations.
Decommissioning
costs are unknown and may be substantial. Unplanned costs could
divert resources from other projects.
We may
become responsible for costs associated with abandoning and reclaiming wells,
facilities and pipelines which we use for production of oil and natural gas
reserves. Abandonment and reclamation of these facilities and the
costs associated therewith is often referred to as
“decommissioning.” We accrue a liability for decommissioning costs
associated with our wells, but have not established any cash reserve account for
these potential costs in respect of any of our properties. If
decommissioning is required before economic depletion of our properties or if
our estimates of the costs of decommissioning exceed the value of the reserves
remaining at any particular time to cover such decommissioning costs, we may
have to draw on funds from other sources to satisfy such costs. The
use of other funds to satisfy such decommissioning costs could impair our
ability to focus capital investment in other areas of our business.
14
We
may have difficulty distributing our production, which could harm our financial
condition.
In order
to sell the oil and natural gas that we are able to produce, the operators of
our wells may have to make arrangements for storage and distribution to the
market. We will rely on local infrastructure and the availability of
transportation for storage and shipment of our products, but infrastructure
development and storage and transportation facilities may be insufficient for
our needs at commercially acceptable terms in the localities in which we
operate. This situation could be particularly problematic to the
extent that our operations are conducted in remote areas that are difficult to
access, such as areas that are distant from shipping and/or pipeline
facilities. These factors may affect our ability to explore and
develop properties and to store and transport our oil and natural gas production
and may increase our expenses.
Furthermore,
weather conditions or natural disasters, actions by companies doing business in
one or more of the areas in which we will operate, or labor disputes may impair
the distribution of oil and/or natural gas and in turn diminish our financial
condition or ability to maintain our operations.
Environmental
risks may adversely affect our business.
All
phases of the oil and gas business present environmental risks and hazards and
are subject to environmental regulation pursuant to a variety of federal, state
and municipal laws and regulations. Environmental legislation
provides for, among other things, restrictions and prohibitions on spills,
releases or emissions of various substances produced in association with oil and
gas operations. The legislation also requires that wells and facility
sites be operated, maintained, abandoned and reclaimed to the satisfaction of
applicable regulatory authorities. Compliance with such legislation
can require significant expenditures, and a breach may result in the imposition
of fines and penalties, some of which may be material. Environmental
legislation is evolving in a manner we expect may result in stricter standards
and enforcement, larger fines and liability and potentially increased capital
expenditures and operating costs. The discharge of oil, natural gas
or other pollutants into the air, soil or water may give rise to liabilities to
governments and third parties and may require us to incur costs to remedy such
discharge. The application of environmental laws to our business may
cause us to curtail our production or increase the costs of our production,
development or exploration activities.
Our
business will suffer if we cannot obtain or maintain necessary
licenses.
Our
operations will require licenses, permits and in some cases renewals of licenses
and permits from various governmental authorities. Our ability to
obtain, sustain or renew such licenses and permits on acceptable terms is
subject to change in regulations and policies and to the discretion of the
applicable governments, among other factors. Our inability to obtain,
or our loss of or denial of extension of, any of these licenses or permits could
hamper our ability to produce revenues from our operations.
Challenges
to our properties may impact our financial condition.
Title to
oil and gas interests is often not capable of conclusive determination without
incurring substantial expense. While we intend to make appropriate
inquiries into the title of properties and other development rights we acquire,
title defects may exist. In addition, we may be unable to obtain
adequate insurance for title defects, on a commercially reasonable basis or at
all. If title defects do exist, it is possible that we may lose all
or a portion of our right, title and interests in and to the properties to which
the title defects relate. If our property rights are reduced, our
ability to conduct our exploration, development and production activities may be
impaired. To mitigate title problems, common industry practice is to
obtain a Title Opinion from a qualified oil and gas attorney prior to the
drilling operations of a well.
We
will rely on technology to conduct our business, and our technology could become
ineffective or obsolete.
We rely
on technology, including geographic and seismic analysis techniques and economic
models, to develop our reserve estimates and to guide our exploration,
development and production activities. We will be required to
continually enhance and update our technology to maintain its efficacy and to
avoid obsolescence. The costs of doing so may be substantial and may
be higher than the costs that we anticipate for technology maintenance and
development. If we are unable to maintain the efficacy of our
technology, our ability to manage our business and to compete may be
impaired. Further, even if we are able to maintain technical
effectiveness, our technology may not be the most efficient means of reaching
our objectives, in which case we may incur higher operating costs than we would
were our technology more efficient.
15
Risks
Related to our Common Stock
The
market price of our common stock is, and is likely to continue to be, highly
volatile and subject to wide fluctuations.
The
market price of our common stock is likely to continue to be highly volatile and
could be subject to wide fluctuations in response to a number of factors, some
of which are beyond our control, including:
|
•
|
dilution
caused by our issuance of additional shares of common stock and other
forms of equity securities, which we expect to make in connection with
future capital financings to fund our operations and growth, to attract
and retain valuable personnel and in connection with future strategic
partnerships with other companies;
|
|
|
•
|
announcements
of new acquisitions, reserve discoveries or other business initiatives by
our competitors;
|
|
|
•
|
our
ability to take advantage of new acquisitions, reserve discoveries or
other business initiatives;
|
|
|
•
|
fluctuations
in revenue from our oil and gas business as new reserves come to
market;
|
|
|
•
|
changes
in the market for oil and natural gas commodities and/or in the capital
markets generally;
|
|
|
•
|
changes
in the demand for oil and natural gas, including changes resulting from
the introduction or expansion of alternative fuels;
|
|
|
•
|
quarterly
variations in our revenues and operating expenses;
|
|
|
•
|
changes
in the valuation of similarly situated companies, both in our industry and
in other industries;
|
|
|
•
|
changes
in analysts’ estimates affecting our company, our competitors and/or our
industry;
|
|
|
•
|
changes
in the accounting methods used in or otherwise affecting our
industry;
|
|
|
•
|
additions
and departures of key personnel;
|
|
|
•
|
announcements
of technological innovations or new products available to the oil and gas
industry;
|
|
|
•
|
announcements
by relevant governments pertaining to incentives for alternative energy
development programs;
|
|
|
•
|
fluctuations
in interest rates and the availability of capital in the capital markets;
and
|
|
|
•
|
significant
sales of our common stock, including sales by selling stockholders
following the registration of shares under a
prospectus.
|
Some of
these and other factors are largely beyond our control, and the impact of these
risks, singly or in the aggregate, may result in material adverse changes to the
market price of our common stock and/or our results of operations and financial
condition.
16
Our
operating results may fluctuate significantly, and these fluctuations may cause
the price of our common stock to decline.
Our
operating results will likely vary in the future primarily as the result of
fluctuations in our revenues and operating expenses, including the coming to
market of oil and natural gas reserves that we are able to discover
and
develop, expenses that we incur, the prices of oil and natural
gas in the commodities markets and other factors. If our results of
operations do not meet the expectations of current or potential investors, the
price of our common stock may decline.Stockholders
will experience dilution upon the exercise of options and issuance of common
stock under our incentive plans.
As of
December 31, 2009, we had authorized the issuance of up to 2,000,000 shares of
common stock underlying options that may be granted, of which options for
1,660,000 shares of common stock had already been granted, and of those granted,
300,000 remain outstanding, pursuant to our 2006 Incentive Stock Option
Plan. On January 30, 2009, our Board of Directors also adopted the
2009 Equity Incentive Plan, pursuant to which we may issue up to 3,000,000
shares of our common stock either upon exercise of stock options granted under
such plan or through restricted stock awards under such plan. As of
December 31, 2009, we had issued 642,916 shares of common stock pursuant to our
2009 Equity Incentive Plan. No options have been issued under our
2009 Equity Incentive Plan. If the holders of outstanding options
exercise those options or our Compensation Committee determines to grant
additional restricted stock awards under our incentive plan, stockholders may
experience dilution in the net tangible book value of our common
stock. Further, the sale or availability for sale of the underlying
shares in the marketplace could depress our stock price.
We
do not expect to pay dividends in the foreseeable future.
We do not
intend to declare dividends for the foreseeable future, as we anticipate that we
will reinvest any future earnings in the development and growth of our
business. Therefore, investors will not receive any funds unless they
sell their common stock, and stockholders may be unable to sell their shares on
favorable terms or at all. Investors cannot be assured of a positive
return on investment or that they will not lose the entire amount of their
investment in our common stock.
None.
Item
2. Properties
Leasehold
Properties
As of
December 31, 2009, our principal assets included approximately 104,000 net acres
located in the Williston Basin region of the northern United States and
approximately 10,000 net acres located in Yates County, New York, more fully
described as follows:
| ▪ |
Approximately
30,400 net acres located in Mountrail County, North Dakota, whithin and
surrounding to the north south and west of the Parshall Field currently
being developed by EOG Resources. Slawson Exploration Company, Inc.
(“Slawson”) and others to target the Bakken Shale;
|
| ▪ | Approximately 26,800 net acres located in Dunn County, North Dakota, in which we are targeting the Bakken Shale and Three Forks/Sanish formations; |
| ▪ | Approximately 10,000 net acres located in Burke and Divide Counties, North Dakota, targeting the Bakken Shale and Three Forks/Sanish formations near significant drilling activities by Continental Resources; |
| ▪ | Approximately 8,900 net acres located in McKenzie, Williams and Mercer Counties, North Dakota, in which we are targeting the Bakken Shale; |
| ▪ | Approximately 22,400 net acres located in Sheridan County, Montana, representing a stacked pay prospect over which we have significant proprietary 3-D seismic data; |
| ▪ | Approximately 5,500 net acres located in Roosevelt and Richland Counties, Montana, in which we are targeting the Bakken Shale; and |
| ▪ |
Approximately 10,000
net acres located in the "Finger Lakes" region of Yates County, New York,
in which we are targeting natural gas production from the Trenton/Black
River, Marcellus and Queenstown-Medina
formations.
|
17
We
believe the Bakken formation represents one of the most oil rich, rapidly
developing and exciting plays in the Continental United States. The
North Dakota Geological Survey currently estimates the reserves of the Bakken
formation to be approximately 300 billion barrels of oil in place. We
commenced drilling on the Bakken properties in late 2007 and increased drilling
activities quarter-over-quarter throughout 2008 and 2009.
Recent
Acreage Acquisitions
In 2009,
we acquired leasehold interests covering an aggregate of 20,316 net mineral
acres in our key prospect areas. The discussion that follows summarizes
these acquisitions.
On May
22, 2009, we entered into an agreement with Slawson pursuant to which we
acquired certain North Dakota Bakken assets from Windsor Bakken LLC as part of a
syndicate led by Slawson. In the transaction we acquired leases
covering 3,323 net mineral acres.
On
November 3, 2009, we acquired 24 high working interest sections comprising
approximately 11,274 net acres located in western McKenzie and Williams Counties
of North Dakota. We acquired a 50% participation interest in these
properties with Slawson and will participate in drilling on a heads-up
basis. These properties are proximal to several recent high-rate
producing wells. We expect to begin drilling these properties in
early 2011.
On
November 13, 2009, we entered into an agreement with Slawson pursuant to which
we acquired a 20% participation interest in Slawson’s Big Sky Project in
Richland County, Montana. The project area encompasses 11,586 net
acres of leases.
On
November 17, 2009, we entered into an Exploration and Development Agreement with
Area of Mutual Interest with Slawson pursuant to which we acquired a 30%
participation interest in Slawson’s Anvil Project in Williams County, North
Dakota and Roosevelt County, Montana. The project area encompasses
12,500 net acres of leases.
In
addition to acquiring acreage through large block acquisitions, we have
organically acquired approximately 5,289 net mineral acres in our key prospect
areas.
18
Developed
and Undeveloped Acreage
The
following table summarizes our estimated gross and net developed and undeveloped
acreage by county at December 31, 2009. Net acreage
represents our percentage ownership of gross acreage. The following
table does not include acreage in which our interest is limited to royalty and
overriding royalty interests.
|
Developed
Acreage
|
Undeveloped
Acreage
|
Total
Acreage
|
||||||||||||||||||||||
|
Gross
|
Net
|
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||||||||
|
North
Dakota
|
44,076 | 7,433 | 396,685 | 68,084 | 440,761 | 75,516 | ||||||||||||||||||
|
Montana
|
1,046 | 479 | 32,514 | 27,459 | 33,560 | 27,938 | ||||||||||||||||||
|
New
York
|
0 | 0 | 10,000 | 10,000 | 10,000 | 10,000 | ||||||||||||||||||
|
Total:
|
45,122 | 7,912 | 439,199 | 105,542 | 484,321 | 113,454 | ||||||||||||||||||
Production
History
The
following table presents information about our produced oil and gas volumes
during each fiscal quarter in 2009 and the year ended December 31,
2009. The table below does not provide any information for our fiscal
year ended December 31, 2007 because we did not commence drilling activities
until the fourth fiscal quarter of 2007 and did not receive payment or recognize
revenue from crude oil or natural gas sales in 2007. As of December
31, 2009, we were selling oil and natural gas from a total of 179 gross wells,
all of which are located within the Williston Basin. As of December
31, 2008, we were selling oil and natural gas from a total of 36 gross
wells. All data presented below is derived from accrued revenue and
production volumes for the relevant period indicated.
|
Year
Ended December 31,
|
||||||||
|
2009
|
2008
|
|||||||
| Net Production: | ||||||||
|
Oil
(Bbl)
|
274,328 | 50,880 | ||||||
|
Natural
Gas (Mcf)
|
47,305 | 3,969 | ||||||
|
Barrel
of Oil Equivalent (Boe)
|
282,212 | 51,542 | ||||||
| Average Sales Prices: | ||||||||
|
Oil
(per Bbl)
|
$ | 60.45 | $ | 75.63 | ||||
|
Effect
of Oil Hedges on Average Price (per Bbl)
|
$ | (3.60 | ) | $ | 15.31 | |||
|
Oil
Net of Hedging (per Bbl)
|
$ | 56.85 | $ | 90.94 | ||||
|
Natural
Gas (per Mcf)
|
$ | 3.81 | $ | 8.19 | ||||
|
Effect
of Natural Gas Hedges on Average Price (per Mcf)
|
-- | -- | ||||||
| Natural Gas Net of Hedging (per Mcf) | $ | 3.81 | $ | 8.19 | ||||
| Average Production Costs: | ||||||||
|
Oil
(per Bbl)
|
$ | 2.67 | $ | 1.37 | ||||
|
Natural
Gas (per Mcf)
|
$ | 0.19 | $ | 0.32 | ||||
|
Barrel
of Oil Equivalent (BOE)
|
$ | 2.63 | $ | 1.38 | ||||
19
Depletion
of oil and natural gas properties
Our depletion expense is driven by many
factors including certain exploration costs involved in the development of
producing reserves, production levels and estimates of proved reserve quantities
and future developmental costs. The following table presents our
depletion expenses during 2008 and 2009.
|
Year
Ended December 31,
|
||||
|
2009
|
2008
(adjusted)
|
|||
|
Depletion
of oil and natural gas properties
|
$ 4,250,983
|
$
677,915 *
|
||
* See
Note 2 to the financial statements accompanying this report.
Productive
Oil Wells
The
following table summarizes gross and net productive oil wells by state at
December 31, 2009, 2008 and 2007. A net well represents our
percentage ownership of a gross well. No wells have been permitted or
drilled on any of our Yates County, New York acreage. The following
table does not include wells in which our interest is limited to royalty and
overriding royalty interests. The following table also does not
include wells which were awaiting completion, in the process of completion or
awaiting flowback subsequent to fracture stimulation.
|
Year
Ended December 31,
|
||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
||||||||||||||||||||||
|
Gross
|
Net
|
Gross
|
Net
|
Gross
|
Net
|
|||||||||||||||||||
|
North
Dakota
|
170 | 8.17 | 34 | 1.54 | 1 | 0.06 | ||||||||||||||||||
|
Montana
|
9 | 1.02 | 2 | 0.50 | 1 | 0.10 | ||||||||||||||||||
|
Total
|
179 | 9.19 | 36 | 2.04 | 2 | 0.16 | ||||||||||||||||||
Dry
Holes
As of
December 31, 2009, we have participated in the completion of 179 gross wells
with a 100% success rate in the Bakken and Three Forks formations. In
the second quarter of 2007, we participated in the Teigen Trust #9-13 with a
6.25% working interest, a well identified, proposed and drilled by Kodiak Oil
and Gas, Inc. The well was intended to target the Red River
formation, but produced a dry hole. This is the only dry hole in our
company’s history.
Research
and Development
We do not
anticipate performing any significant product research and development under our
plan of operation.
Reserves
We
completed our most recent reservoir engineering calculation as of December 31,
2009. Tables summarizing the results of our most recent reserve
report are included under the heading “Business – Reserves” in Item 1 of this
report. A complete discussion of our proved reserves is set forth in
“Supplemental Oil and Gas Information” to our financial statements included
later in this report.
Delivery
Commitments
We do not currently have any delivery
commitments for product obtained from our wells.
20
Item
3. Legal
Proceedings
As of
March 8, 2010, our company was a party to one litigation claim arising in the
ordinary course of business and seeking the quieting of title for a leasehold
interest acquired from a third party. To the knowledge of management,
no federal, state or local governmental agency is presently contemplating any
proceeding against our company. No director, executive officer or
affiliate of our company or owner of record or beneficially of more than five
percent of our company’s common stock is a party adverse to our company or has a
material interest adverse to our company in any
proceeding.
On or
about December 19, 2008, we instituted a FINRA dispute resolution matter against
UBS Financial Services, Inc. (“UBS”) relating to certain unauthorized trades
conducted by UBS in connection with our commodities hedging account at that
institution. The matter related to UBS’s improper attribution of an
unauthorized long trade to our hedging account. Ultimately UBS
liquidated the contracts at a loss without any instruction from our
company. The matter was presented to a FINRA arbitration board in
September 2009. On November 12, 2009, FINRA issued an Award in favor
of our company directing UBS to pay us compensatory damages in the amount of
$875,352, the entire loss in dispute, plus interest at the statutory rate of 10%
per annum from and including October 13, 2008, through and including October 1,
2009, for a total award of $960,018.
Our
management believes that all litigation matters in which we are involved are not
likely to have a material adverse effect on our financial position, cash flows
or results of operations.
Item
4. Reserved
PART
II
Item
5. Market for
Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market
Information
Our
common stock was listed on the OTC Bulletin Board of the National Association of
Securities Dealers (“NASD”) on January 19, 2006, under the symbol “KNTX”, but
there was no active trading prior to approximately December
2006. There was no established public trading market for our common
stock prior to April 13, 2007. Effective April 13, 2007, after the
Merger and our name change, our trading symbol was changed to
“NOGS.OB.” Our common stock commenced trading on the AMEX on March
26, 2008 under the symbol “NOG.”
The high and low sales
prices for shares of common stock of our company for each quarter during 2008
and 2009 are set forth below.
|
Sales
Price
|
||||||||
|
2009
|
High
|
Low
|
||||||
|
First
Quarter
|
$ | 4.24 | $ | 2.01 | ||||
|
Second
Quarter
|
8.89 | 3.40 | ||||||
|
Third
Quarter
|
8.44 | 4.74 | ||||||
|
Fourth
Quarter
|
12.66 | 7.65 | ||||||
|
Sales
Price
|
||||||||
|
2008
|
High
|
Low
|
||||||
|
First
Quarter
|
$ | 7.30 | $ | 5.65 | ||||
|
Second
Quarter
|
16.40 | 6.95 | ||||||
|
Third
Quarter
|
14.00 | 5.14 | ||||||
|
Fourth
Quarter
|
8.13 | 2.05 | ||||||
The
closing price for our common stock on the NYSE Amex Equities Market on March 1,
2010 was $12.60 per share.
21
Comparison
Chart
The
following information in this Item 5 of this Annual Report on Form 10-K is
not deemed to be “soliciting material” or to be “filed” with the SEC or subject
to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to
the liabilities of Section 18 of the Securities Exchange Act of 1934, and
will not be deemed to
be incorporated by reference into any filing under the Securities Act of 1933 or
the Securities Exchange Act of 1934, except to the extent we specifically
incorporate it by reference into such a filing.
The
following graph compares the 32-month cumulative total shareholder returns since
completion of our reverse merger on April 13, 2007 of Northern Oil and Gas,
Inc., and the cumulative total returns of Standard & Poor’s Composite
500 Index and the Amex Oil Index for the same period. This graph
assumes $100 was invested in the stock or the Index on April 13, 2007 and also
assumes the reinvestment of dividends. We have not included any graph
for any period prior to April 13, 2007, because there was no active trading in
our common stock prior to April 13, 2007 and, as such, data is not available for
any period prior to such date.
The
following table sets forth the total returns utilized to generate the foregoing
graph.
|
4/13/2007
|
12/31/2007
|
12/31/2008
|
12/31/2009
|
|||||||||||||
|
Northern
Oil and Gas, Inc.
|
$ | 100.00 | $ | 173.75 | $ | 65.00 | $ | 296.00 | ||||||||
|
Standard
& Poor’s Composite 500 Index
|
100.00 | 104.82 | 66.04 | 83.52 | ||||||||||||
|
Amex
Oil Index
|
100.00 | 125.65 | 92.74 | 99.77 | ||||||||||||
Holders
As of
March 1, 2010, we had 43,911,044 shares outstanding of our common stock, held by
approximately 405 shareholders of record. The number of record
holders does not necessarily bear any relationship to the number of beneficial
owners of our common stock.
22
Dividends
The
payment of dividends is subject to the discretion of our Board of Directors and
will depend, among other things, upon our earnings, our capital requirements,
our financial condition, and other relevant factors. We have not paid
or declared any dividends upon our common stock since our inception and, by
reason of our present financial status and our contemplated financial
requirements and do not anticipate paying any dividends upon our common stock in
the foreseeable future. We intend to reinvest any earnings in the
development and expansion of our business. Any cash dividends in the
future to common stockholders will be payable when, as and if declared
by
our Board
of Directors or our Compensation Committee, based upon either the Board’s or the
Committee’s assessment of:
|
▪
|
our
financial condition and
performance;
|
|
▪
|
earnings;
|
|
▪
|
need
for funds;
|
|
▪
|
capital
requirements;
|
|
▪
|
prior
claims of preferred stock to the extent issued and outstanding;
and
|
|
▪
|
other
factors, including income tax consequences, restrictions and any
applicable laws.
|
There can
be no assurance, therefore, that any dividends on the common stock will ever be
paid.
Recent
Sales of Unregistered Securities; Use of Proceeds from Registered
Securities
On
November 16, 2009, we issued 12,533 shares of unregistered common stock to
Missouri River Royalty Corporation as partial consideration for our acquisition
of leases covering approximately 46 net mineral acres in North Dakota and
related pre-paid drilling expenses. These shares were issued pursuant
to an agreement originally entered into on October 1, 2008. On
December 18, 2009, we issued 66,472 shares of unregistered common stock to
certain parties controlling mineral rights as partial consideration for our
acquisition of leases covering approximately 1,084 net mineral acres in North
Dakota.
The
foregoing transactions were approved by our board of directors. None
of the foregoing shares of our common stock were issued for cash consideration
and, as such, we did not receive any proceed from the issuance of the foregoing
securities. All of the foregoing shares were issued pursuant to the
exemption from registration provided in Section 4(2) of the Act. In
each instance, the recipients of the shares were afforded an opportunity for
effective access to files and records of our company that contained the relevant
information needed to make its investment decision, including our company’s
financial statements and reports filed pursuant to the Exchange
Act. We reasonably believe that each recipient, immediately prior to
issuing the shares, had such knowledge and experience in financial and business
matters that it was capable of evaluating the merits and risks of its
investment. Each recipient had the opportunity to speak with our
officers and directors on several occasions prior to their investment
decision.
Item
6. Selected
Financial Data
The
financial statement information set forth below is derived from our balance
sheets as of December 31, 2009, 2008, and 2007, and the related statements of
operations, stockholders’ equity, and cash flows for the years ended December
31, 2009, 2008, and 2007 and for the period from inception [October 5, 2006]
through December 31, 2006 included elsewhere in this
report. Financial statement information for the year ended December
31, 2005 and the balance sheet information at December 31, 2006 and 2005
are derived from audited financial statements presented in our December 31, 2006
Form 10-KSB report and not included in this report, which financial statements
were the historical financial statements of Kentex Petroleum, Inc, our company
prior to the acquisition of Northern on March 20, 2007.
23
|
Year
Ended December 31, 2009
|
Year
Ended December 31, 2008,
Adjusted
|
Year
Ended December 31, 2007
|
From
Inception on October 5, 2006 through December 31, 2006
|
Year
Ended December 31, 2005
|
||||||||||||||||
|
Statements
of Income Information:
|
||||||||||||||||||||
|
Revenues
|
|
|
||||||||||||||||||
|
Oil
and Gas Sales
|
$ | 15,171,824 | $ | 3,542,994 | -- | -- | -- | |||||||||||||
|
Gain
(Loss) on Settled Derivatives
|
(624,541 | ) | 778,885 | -- | -- | -- | ||||||||||||||
|
Mark-to-Market
of Derivative Instruments
|
(363,414 | ) | ||||||||||||||||||
|
Other
Revenue
|
37,630 | -- | -- | -- | --- | |||||||||||||||
|
Total
Revenues
|
$ | 14,221,499 | $ | 4,321,879 | -- | -- | -- | |||||||||||||
|
Operating
Expenses
|
||||||||||||||||||||
|
Production
Expenses
|
$ | 754,976 | $ | 70,954 | -- | -- | -- | |||||||||||||
|
Production
Taxes
|
1,300,373 | 203,182 | -- | -- | -- | |||||||||||||||
|
General
and Administrative Expense
|
2,452,823 | 1,985,914 | $ | 1,754,826 | $ | 76,374 | $ | 12,267 | ||||||||||||
|
Share
Based Compensation
|
1,233,507 | 105,375 | 2,754,917 | -- | -- | |||||||||||||||
|
Depletion
Oil and Gas Properties
|
4,250,983 | 677,915 | -- | -- | -- | |||||||||||||||
|
Depreciation
and Amortization
|
91,794 | 67,060 | 3,446 | -- | -- | |||||||||||||||
|
Accretion
of Discount on Asset Retirement Obligations
|
8,082 | 1,030 | -- | -- | -- | |||||||||||||||
|
Total
Expenses
|
$ | 10,092,538 | $ | 3,111,430 | $ | 4,513,189 | $ | 76,374 | $ | 12,267 | ||||||||||
|
Income
(Loss) from Operations
|
$ | 4,128,961 | $ | 1,210,449 | $ | (4,513,189 | ) | $ | ( 76,374 | ) | $ | ( 12,267 | ) | |||||||
|
Other
Income
|
135,991 | 383,891 | 207,896 | 267 | 25,000- | |||||||||||||||
|
Income
(Loss) Before Income Taxes
|
$ | 4,264,952 | $ | 1,594,340 | $ | ( 4,305,293 | ) | $ | ( 76,107 | ) | $ | ( 12,733 | ) | |||||||
|
Income
Tax Provision (Benefit)
|
1,466,000 | (830,000 | ) | -- | -- | -- | ||||||||||||||
|
Net
Income (Loss)
|
$ | 2,798,952 | $ | 2,424,340 | $ | ( 4,305,293 | ) | $ | ( 76,107 | ) | $ | ( 12,733 | ) | |||||||
|
Net
Income (Loss) Per Common Share – Basic
|
0.08 | 0.08 | (0.18 | ) | (0.01 | ) | (0.01 | ) | ||||||||||||
|
Net
Income (Loss) Per Common Share – Diluted
|
0.08 | 0.07 | (0.18 | ) | (0.01 | ) | (0.01 | ) | ||||||||||||
|
Weighted
Average Shares Outstanding – Basic
|
36,705,267 | 31,920,747 | 23,667,119 | 18,000,000 | 2,357,998 | |||||||||||||||
|
Weighted
Average Shares Outstanding - Diluted
|
36,877,070 | 32,653,552 | 23,667,119 | 18,000,000 | 2,357,998 | |||||||||||||||
|
Balance
Sheet Information:
|
||||||||||||||||||||
|
Total
Assets
|
$ | 135,594,968 | $ | 54,520,399 | $ | 18,131,464 | $ | 1,105,935 | -- | |||||||||||
|
Total
Liabilities
|
$ | 12,035,518 | $ | 4,991,336 | $ | 224,247 | $ | 1,143,067 | $ | 30,811 | ||||||||||
|
Stockholder’s
Equity (Deficit)
|
$ | 123,559,450 | $ | 49,529,063 | $ | 17,907,217 | $ | ( 37,132 | ) | $ | ( 30,811 | ) | ||||||||
|
Statement
of Cashflow Information:
|
||||||||||||||||||||
|
Net
cash used provided by (used for) operating activities
|
$ | 9,812,910 | $ | 2,506,492 | $ | ( 491,509 | ) | $ | ( 38,532 | ) | -- | |||||||||
|
Net
cash used provided by (used for) investing activities
|
$ | (71,848,701 | ) | $ | (40,357,962 | ) | $ | ( 5,078,758 | ) | $ | ( 255,000 | ) | -- | |||||||
|
Net
cash used provided by (used for) financing activities
|
$ | 67,488,447 | $ | 28,519,526 | $ | 14,832,992 | $ | 1,143,467 | -- | |||||||||||
24
In the
third quarter of 2009, we changed our method of accounting for drilling costs
from the accrual of drilling costs at the time drilling commenced for a well to
recording the costs when amounts are invoiced by operators. Recording
drilling costs when the invoices are received from operators is deemed
preferable as it better represents our actual drilling costs. The
recording of drilling costs in this method also is consistent with other
companies in the oil and gas industry. The change decreased Depletion
Expense by $512,794, increased Income Tax Provision by $206,000, and increased
Net Income by $306,794 or $0.01 per share on a diluted basis for the nine
months ended September 30, 2009. The effect of the change on the
three months ended September 30, 2009 was to decrease Depletion Expense by
$261,870, increase Income Tax Provision by $105,000 and to Increase Net Income
by $156,870 or $0.00 per share on a diluted basis.
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
The
following discussion should be read in conjunction with the “Selected Financial
Data” in Item 6 and the Financial Statements and Accompanying Notes appearing
elsewhere in this report. A discussion of our past financial
results before March 20, 2007 is not pertinent to the business plan of our
company on a going forward basis, due to the change in our business which
occurred upon consummation of the merger on March 20, 2007.
Overview
and Outlook
We are an
oil and gas exploration and production company. Our properties are
located in Montana, North Dakota and New York. Our corporate strategy
is to build shareholder value through the development and acquisition of oil and
gas assets that exhibit economically producible hydrocarbons.
As of
March 1, 2010, we controlled the rights to mineral leases covering approximately
119,720 net acres of land. Our goal is to continue to explore for and
develop hydrocarbons within the mineral leases we control as well as continue to
expand our acreage position should opportunities present
themselves. In order to accomplish our objectives we will need to
achieve the following;
|
▪
|
Continue
to develop our substantial inventory of high quality core Bakken acreage
with results consistent with those
to-date;
|
|
▪
|
Retain
and attract talented personnel;
|
|
▪
|
Continue
to be a low-cost producer of hydrocarbons;
and
|
|
▪
|
Continue
to manage our financial obligations to access the appropriate capital
needed to develop our position of primarily undrilled
acreage.
|
25
The
following table sets forth selected operating data for the periods
indicated. Production volumes and average sales prices are derived
from accrued accounting data for the relevant period indicated.
|
Year
End December 31,
|
||||||||||||
|
2009
|
2008
Adjusted
|
2007
|
||||||||||
|
Net
Production:
|
||||||||||||
|
Oil
(Bbl)
|
274,328 | 50,880 | - | |||||||||
|
Natural
Gas (Mcf)
|
47,305 | 3,969 | - | |||||||||
|
Net
Sales:
|
||||||||||||
|
Oil
Sales
|
$ | 14,977,556 | $ | 3,510,596 | - | |||||||
|
Natural
Gas
|
194,268 | 32,397 | - | |||||||||
|
Gain
(Loss) on Settled Derivatives
|
(624,541 | ) | 778,885 | - | ||||||||
|
Mark-to-Market
on Derivative Instruments
|
(363,414 | ) | - | - | ||||||||
|
Other
Revenues
|
37,630 | - | - | |||||||||
|
Total
Revenues
|
$ | 14,221,499 | $ | 4,321,879 | - | |||||||
|
Average
Sales Prices:
|
||||||||||||
|
Oil
(per Bbl)
|
$ | 60.45 | $ | 75.63 | - | |||||||
|
Effect
of Oil Hedges on Average Price (per Bbl)
|
$ | (3.60 | ) | $ | 15.31 | - | ||||||
|
Oil
Net of Hedging (per Bbl)
|
$ | 56.85 | $ | 90.94 | - | |||||||
|
Natural
Gas (per Mcf)
|
$ | 3.81 | $ | 8.19 | - | |||||||
|
Effect
of Natural Gas Hedges on Average Price (per Mcf)
|
- | - | - | |||||||||
|
Natural
gas net of hedging (per Mcf)
|
$ | 3.81 | $ | 8.19 | - | |||||||
|
Operating
Expenses:
|
||||||||||||
|
Production
Expenses
|
$ | 754,976 | $ | 70,954 | - | |||||||
|
Production
Taxes
|
$ | 1,300,373 | $ | 203,182 | - | |||||||
|
General
and Administrative Expense (Including Share Based
Compensation)
|
$ | 3,686,330 | $ | 2,091,289 | $ | 4,509,743 | ||||||
|
Depletion
of Oil and Gas Properties*
|
$ | 4,250,983 | $ | 677,915 | - | |||||||
* See
Note 2 to the financial statements accompanying this report.
Results
of Operations for the periods ended December 31, 2008 and December 31,
2009.
During
2008 and 2009 we significantly increased our drilling activities, generated
income and achieved net earnings for both the 2008 and 2009 fiscal
years. To-date, we have developed approximately seven percent of our
total drillable acreage inventory (assuming one well per 640-acre spacing unit)
and we expect to continue to add substantial volumes of production on a
quarter-over-quarter basis going forward into the foreseeable
future.
As of
December 31, 2009, we had established production from 179 gross (9.19 net)
wells in which we hold working interests, 36 gross (2.04 net) wells of which had
established production as of December 31, 2008. Our production at
December 31, 2009 approximated 1,508 barrels of oil per day, compared to
approximately 460 barrels of oil per day as of December 31, 2008. Our
production increased to 1,986 barrels of oil per day as of March 1,
2010.
We
drilled with a 100% success rate in 2008 and 2009 with 176 Bakken or Three Forks
wells completed or completing. We also had three successful Red River
discoveries at December 31, 2009. As of March 1, 2010, we expect to
participate in the drilling of approximately 200 gross (15 net) wells in
2010.
Our
revenues, costs and net income increased in 2009 compared to 2008 as we
continued our development plans and significantly increased our
production. Revenues for the twelve-month period ended December 31,
2009 were $14,221,499, compared to $4,321,879 for the twelve-month period ended
December 31, 2008 primarily due to increases in production.
26
Adjusted
total cash and non-cash expenses (including production expenses, production
taxes, general and administrative expenses, director fees, depletion expenses,
depreciation and amortization expenses) for the twelve
month period
ended December 31, 2009 were $10,092,538 and for the twelve-month period ended
December 31, 2008 were $3,111,430. Of this amount in 2009,
approximately $1,233,507 consisted of non-cash expense related to the issuance
of restricted stock and an additional $4,250,983 consisted of non-cash depletion
expenses. Depletion expenses for the twelve-month period ended
December 31, 2008 were $677,915.We had
net income of $2,798,952 (representing approximately $0.08 per basic share) for
the twelve-month period ended December 31, 2009 compared to adjusted net income
of $2,424,340 (representing approximately $0.08 per basic share) for the
twelve-month period ended December 31, 2008.
Results
of Operations for the periods ended December 31, 2007 and December 31,
2008.
Our first
successful well commenced drilling in the fourth quarter of 2007, and we did not
realize revenue from that well until the first quarter of
2008. During 2008 we significantly increased our drilling activities
compared to 2007, generated income and achieved net earnings in the third and
fourth quarters of 2008 and for the 2008 fiscal year as a whole. Our
production at December 31, 2008 approximated 460 barrels of oil per
day. This compares to approximately 100 barrels of oil per day as of
December 31, 2007.
Revenues
for the twelve-month period ended December 31, 2008 were $4,321,879, compared to
no revenues for the twelve-month period ended December 31, 2007. Our
expenses in fiscal years 2006 and 2007 consisted principally of general and
administrative costs. Our costs increased moderately as we proceeded
with our development plans in 2008. Total expenses for the
twelve-month period ended December 31, 2008 were $3,111,430 and for the
twelve-month period ended December 31, 2007 were $4,513,189. We had
net income of $2,424,340 (representing approximately $0.08 per basic share) for
the twelve-month period ended December 31, 2008, compared to a net loss of
$4,305,293 for the twelve-month period ended December 31, 2007.
Operation
Plan
We expect to
drill approximately 15 net wells in 2010 with drilling capital expenditures
approximating $67.5 million. The 2010 wells are expected to target both
the Bakken and Three Forks formations. Drilling capital expenditures are
expected to increase in 2010 compared to previously published guidance due to
the continued success of longer laterals and additional fractional stimulation
stages. We currently expect to drill wells during 2010 at an average
completed cost of $4.5 million per well. Based on evolving conditions in
the field, we expect to deploy approximately $10 million towards further
strategic acreage acquisitions during 2010. We expect to fund all 2010
commitments using cash-on-hand, cash flow and our currently undrawn credit
facility.
Our
future financial results will depend primarily on: (i) the ability to continue
to source and screen potential projects; (ii) the ability to discover commercial
quantities of oil and gas; (iii) the market price for oil and gas; and (iv) the
ability to fully implement our exploration and development program, which is
dependent on the availability of capital resources. There can be no
assurance that we will be successful in any of these respects, that the prices
of oil and gas prevailing at the time of production will be at a level allowing
for profitable production, or that we will be able to obtain additional funding
if necessary.
Liquidity
and Capital Resources
Liquidity
is a measure of a company’s ability to meet potential cash
requirements. We have historically met our capital requirements
through the issuance of common stock and by short term borrowings. In
the future, we anticipate we will be able to provide the necessary liquidity by
the revenues generated from the sales of our oil and gas reserves in our
existing properties, however, if we do not generate sufficient sales revenues we
will continue to finance our operations through equity and/or debt
financings.
The
following table summarizes total current assets, total current liabilities and
working capital at December 31, 2009.
|
Current
Assets $ 42,017,813
|
|
Current
Liabilities
$ 8,910,256
|
|
Working
Capital $ 33,107,557
|
27
CIT
Capital USA, Inc. Credit Facility
On February 27, 2009, we completed the
closing of a revolving credit facility with CIT that provides up to a maximum
principal amount of $25 million of working capital for exploration and
production operations (the “Credit Facility”). The borrowing
base of funds available under the Credit Facility will be redetermined
semi-annually based upon the net present value, discounted at 10% per annum, of
the future net revenues expected to accrue from our interests in proved reserves
estimated to be produced from our oil and gas properties. $16 million
of financing is currently available under the Credit Facility. An
additional $9 million of financing could become available upon subsequent
borrowing base redeterminations based on the deployment of funds from the Credit
Facility. The Credit Facility terminates on February 27,
2012. As of December 31, 2009, we had no borrowings outstanding under
the Credit Facility.
We have
the option to designate the reference rate of interest for each specific
borrowing under the Credit Facility as amounts are
advanced. Borrowings based upon the London interbank offering rate
(LIBOR) will be outstanding for a period of one, three or six months (as
designated by us) and bear interest at a rate equal to 5.50% over the one-month,
three-month or six-month LIBOR rate to be no less than 2.50%. Any
borrowings not designated as being based upon LIBOR will have no specified term
and generally will bear interest at a rate equal to 4.50% over the greater of
(a) the current three-month LIBOR rate plus 1.0% or (b) the current prime rate
as published by JP Morgan Chase Bank, N.A. We have the option to
designate either pricing mechanism. Payments are due under the Credit
Facility in arrears, in the case of a loan based on LIBOR on the last day of the
specified loan period and in the case of all other loans on the last day of each
March, June, September and December. All outstanding principal is due
and payable upon termination of the Credit Facility.
The
applicable interest rate increases under the Credit Facility and the lenders may
accelerate payments under the Credit Facility, or call all obligations due under
certain circumstances, upon an event of default. The Credit Facility
references various events constituting a default on the Credit Facility,
including, but not limited to, failure to pay interest on any loan under the
Credit Facility, any material violation of any representation or warranty under
the Credit Agreement in connection with the Credit Facility, failure to observe
or perform certain covenants, conditions or agreements under the Credit
Facility, a change in control of our company, default under any other material
indebtedness we might have, bankruptcy and similar proceedings and failure to
pay disbursements from lines of credit issued under the Credit
Facility.
The
Credit Facility requires that we enter into a swap agreement with Macquarie Bank
Limited (“Macquarie”) to hedge production over the 36-month term of the Credit
Facility. We have strategically entered into constant priced swap
arrangements with Macquarie since inception of the Credit Facility to hedge our
expected production. A full discussion of our current swap
arrangements is set forth in “Quantitative and Qualitative Disclosures about
Market Risk – Commodity Price Risk” in Item 7A of this report.
All of
our obligations under the Credit Facility and the swap agreements with Macquarie
are secured by a first priority security interest in any and all of our assets
pursuant to the terms of a Guaranty and Collateral Agreement and perfected by a
mortgage, notice of pledge and security and similar documents.
28
Follow-On
Equity Offerings
On June 30, 2009, we completed a
follow-on equity offering pursuant to which we sold 2.25 million shares of
common stock to various institutional investors for $6.00 per share, resulting
in gross proceeds of $13.5 million. Net proceeds to our company
following deduction of agency fees and expenses were approximately $12.7 million
and were used to repay outstanding borrowings under our Credit Facility,
primarily including borrowings incurred in connection with our acquisition of
North Dakota Bakken assets from Windsor Bakken LLC. C.K. Cooper &
Company acted as lead placement agent for the offering.
On November 4, 2009, we completed an
additional follow-on equity offering pursuant to which we sold 6.5 million
shares of common stock to various institutional investors for $9.12 per share,
resulting in gross proceeds of $59.3 million. Net proceeds to our
company following deduction of agency fees and expenses were approximately $56.3
and were used to repay outstanding borrowings under our Credit Facility, pursue
acquisition opportunities and for other working capital
purposes. Canaccord Adams Inc. acted as lead placement agent for the
offering. FIG Partners, LLC acted as co-placement agent for the
offering.
Satisfaction
of Our Cash Obligations for the Next 12 Months
With the
addition of equity capital during 2009 and our Credit Facility, we believe we
have sufficient capital to meet our drilling commitments and expected general
and administrative expenses for the next twelve months at a
minimum. Nonetheless, any strategic acquisition of assets may require
us to access the capital markets at some point in 2010. We may also
choose to access the equity capital markets rather than our Credit Facility or
other debt instruments to fund accelerated or continued drilling at the
discretion of management and depending on prevailing market
conditions. We will evaluate any potential opportunities for
acquisitions as they arise. Given our non-leveraged asset base and
anticipated growing cash flows, we believe we are in a position to take
advantage of any appropriately priced sales that may occur. However,
there can be no assurance that any additional capital will be available to us on
favorable terms or at all.
Over the
next 24 months it is possible that our existing capital, the Credit Facility and
anticipated funds from operations may not be sufficient to sustain continued
acreage acquisition. Consequently, we may seek additional capital in
the future to fund growth and expansion through additional equity or debt
financing or credit facilities. No assurance can be made that such
financing would be available, and if available it may take either the form of
debt or equity. In either case, the financing could have a negative
impact on our financial condition and our stockholders.
Though we
achieved profitability in 2008 and remained profitable throughout 2009, our
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of operations,
particularly companies in the oil and gas exploration industry. Such
risks include, but are not limited to, an evolving and unpredictable business
model and the management of growth. To address these risks we must,
among other things, implement and successfully execute our business and
marketing strategy, continue to develop and upgrade technology and products,
respond to competitive developments, and attract, retain and motivate qualified
personnel. There can be no assurance that we will be successful in
addressing such risks, and the failure to do so can have a material adverse
effect on our business prospects, financial condition and results of
operations.
Effects
of Inflation and Pricing
The oil
and gas industry is very cyclical and the demand for goods and services of oil
field companies, suppliers and others associated with the industry put extreme
pressure on the economic stability and pricing structure within the
industry. Typically, as prices for oil and natural gas increase, so
do all associated costs. Conversely, in a period of declining prices,
associated cost declines are likely to lag and may not adjust downward in
proportion. Material changes in prices also impact our current
revenue stream, estimates of future reserves, borrowing base calculations of
bank loans, impairment assessments of oil and gas properties, and values of
properties in purchase and sale transactions. Material changes in
prices can impact the value of oil and gas companies and their ability to raise
capital, borrow money and retain personnel. While we do not currently
expect business costs to materially increase, higher prices for oil and natural
gas could result in increases in the costs of materials, services and
personnel.
29
Contractual Obligations and Commitments
As of
December 31, 2009, we did not have any material long-term debt obligations,
capital lease obligations, operating lease obligations or purchase obligations
requiring future payments other than our office lease that expires on January
31, 2013, and outstanding promissory notes issued to our executive
officers. The following table illustrates our contractual obligations
as of December 31, 2009.
|
Payment
due by Period
|
||||||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than 1 year
|
1-3
years
|
3-5
years
|
More
than 5 years
|
|||||||||||||||
|
Office
Lease(1)
|
$ | 462,474 | $ | 148,151 | $ | 314,323 | $ | -- | $ | -- | ||||||||||
|
Note
Payable to Michael L. Reger(2)
|
$ | 250,000 | $ | -- | $ | 250,000 | $ | -- | $ | -- | ||||||||||
|
Note
Payable to Ryan R. Gilbertson(2)
|
$ | 250,000 | $ | -- | $ | 250,000 | $ | -- | $ | -- | ||||||||||
|
Automobile
Leases(3)
|
$ | 61,116 | $ | 41,372 | $ | 19,744 | $ | -- | $ | -- | ||||||||||
| $ | 1,023,590 | $ | 189,523 | $ | 834,067 | $ | -- | $ | -- | |||||||||||
_________________
|
(1)
|
Our
office lease commenced on February 1, 2008 and continues for a period of
five years.
|
|
(2)
|
In
February 2009, our Audit Committee and the Compensation Committee approved
the issuance of $250,000 principal amount non-negotiable, unsecured
subordinated promissory notes to both Michael Reger – our Chief Executive
Officer – and Ryan Gilbertson – our Chief Financial Officer – in lieu of
paying cash bonuses earned in 2008. The notes bear interest at
a rate of 12% per annum and are subordinate to any secured debt of our
company. Our Credit Facility now limits our ability to make
interest and principal payments on the notes. All unpaid
principal and interest on the notes are due and payable in full in a
single lump sum on March 8, 2013.
|
|
(3)
|
In
July 2007, we entered into automobile leases for vehicles utilized by two
of our employees, which expire in July, 2010. In September 2008
we entered into automobile leases for vehicles utilized by two additional
employees, which expire in September,
2011.
|
Product
Research and Development
We do not
anticipate performing any significant product research and development given our
current plan of operation.
Expected
Purchase or Sale of Any Significant Equipment
We do not
anticipate the purchase or sale of any plant or significant equipment as such
items are not required by us at this time or anticipated to be needed in the
next twelve months.
Critical
Accounting Policies
Note 2 to the Financial Statements and
Accompanying Notes appearing elsewhere in this report describe various
accounting policies critical to an understanding of our financial
condition.
30
Off-Balance
Sheet Arrangements
We
currently do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
Item
7A. Quantitative
and Qualitative Disclosures about Market Risk
Commodity
Price Risk
The price
we receive for our oil and natural gas production heavily influences our
revenue, profitability, access to capital and future rate of
growth. Crude oil and natural gas are commodities and, therefore,
their prices are subject to wide fluctuations in response to relatively minor
changes in supply and demand. Historically, the markets for oil and
gas have been volatile, and these markets will likely continue to be volatile in
the future. The prices we receive for our production depend on
numerous factors beyond our control. Our revenue during 2009
generally would have increased or decreased along with any increases or
decreases in crude oil or natural gas prices, but the exact impact on our income
is indeterminable given the variety of expenses associated with producing and
selling oil that also increase and decrease along with oil prices.
We have
previously entered into derivative contracts to achieve a more predictable cash
flow by reducing our exposure to oil and natural gas price
volatility. On November 1, 2009, due to the volatility of price
differentials in the Williston Basin, we de-designated all derivatives that were
previously classified as cash flow hedges and in addition, we have elected not
to designate any subsequent derivative contracts as accounting
hedges. As such, all derivative positions are carried at their fair
value on the balance sheet and are marked-to-market at the end of each
period. Any realized and unrealized gains or losses are recorded as
gain (loss) on derivatives net, as an increase or decrease in revenues on the
Statement of Operations rather than as a component of other comprehensive income
(loss) or other Income (expense). We had the following swap
arrangements outstanding as of December 31, 2009:
|
Dates
|
Volumes
(bbl/month)
|
Price
|
||||||
|
January 2010 – December 2010
|
3,000 | $ | 51.25 | |||||
|
January
2011 – December 2011
|
2,000 | $ | 51.25 | |||||
|
January
2012 – February 2012
|
1,500 | $ | 51.25 | |||||
|
Dates
|
Volumes
(bbl/month)
|
Price
|
||||||
|
January
2010 – December 2010
|
1,500 | $ | 66.15 | |||||
|
January
2011 – December 2011
|
1,500 | $ | 66.15 | |||||
|
Dates
|
Volumes
(bbl/month)
|
Price
|
||||||
|
January
2010 – December 2010
|
7,000 | $ | 82.60 | |||||
|
January
2011 – December 2011
|
4,000 | $ | 82.60 | |||||
|
Dates
|
Volumes
(bbl/month)
|
Price
|
||||||
|
January
2010 – December 2010
|
3,000 | $ | 84.25 | |||||
|
January
2011 – December 2011
|
1,500 | $ | 84.25 | |||||
Interest
Rate Risk
We did
not have outstanding any borrowings under our credit facilities or other
obligations that would subject us to significant interest rate risk at December
31, 2009. Our Credit Facility entered into with CIT on February 27,
2009, will, however, subject us to interest rate risk on borrowings under that
facility.
Our
Credit Facility with CIT allows us to fix the interest rate of borrowings under
our Credit Facility for all or a portion of the principal balance for a period
up to six months. To the extent the interest rate is fixed, interest
rate changes affect the instrument’s fair market value but do not impact results
of operations or cash flows. Conversely, for the portion of our
borrowings that has a floating interest rate, interest rate changes will not
affect the fair market value but will impact future results of operations and
cash flows.
31
Item
8. Financial
Statements and Supplementary Data
Our
Financial Statements required by this item are included on the pages immediately
following the Index to Financial Statements appearing on page F-1.
Item
9. Changes In and
Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item
9A. Controls and
Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain a system of disclosure controls and procedures that is designed to
ensure that information required to be disclosed in our Exchange Act reports is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and that such information is accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosures.
As of
December 31, 2009, our management, including our Chief Executive Officer and
Chief Financial Officer, had evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) pursuant to Rule 13a-15(b) under the
Exchange Act. Based upon and as of the date of the evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that information
required to be disclosed is recorded, processed, summarized and reported within
the specified periods and is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial Officer, to allow for
timely decisions regarding required disclosure of material information required
to be included in our periodic SEC reports. Based on the foregoing,
our management determined that our disclosure controls and procedures were
effective as of December 31, 2009.
Management’s
Annual Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act
Rule 13a-15(f). The design of any system of controls is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions, regardless of how remote. All
internal
control systems, no matter how well designed, have inherent
limitations. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
We
carried out an evaluation, under the supervision and with the participation of
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
our internal controls over financial reporting as of December 31,
2009. In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in “Internal Control-Integrated Framework.” Based on this
assessment, management believes that, as of December 31, 2009, our internal
control over financial reporting was effective based on those
criteria. There have been no changes in internal control over
financial reporting since December 31, 2009, that has materially affected or is
reasonably likely to materially affect our internal control over financial
reporting.
The
effectiveness of our internal control over financial reporting as of
December 31, 2009 has been audited by Mantyla McReynolds LLC, an
independent registered public accounting firm, as stated in their report which
is included herein on the following page.
32
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Northern
Oil and Gas, Inc.:
We have
audited Northern Oil and Gas, Inc.’s (the Company) internal control over
financial reporting as of December 31, 2009, based on criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting
included in the accompanying Management’s Annual Report on Internal Control Over
Financial Reporting (Item 9A). Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our
audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit of internal control over financial reporting included
obtaining an understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on criteria
established in Internal
Control—Integrated Framework issued by COSO.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the balance sheets of Northern Oil and Gas,
Inc. as of December 31, 2009 and 2008, and the related statements of operations,
stockholders’ equity, and cash flows for each of the years in the three-year
period ended December 31, 2009, and our report dated March 8, 2010 expressed an
unqualified opinion on those financial statements.
Mantyla
McReynolds LLC
Salt Lake
City, Utah
March 8,
2010
33
Item
9B. Other
Information
None.
34
PART
III
We are
incorporating by reference information in Items 10 through 14 below from the
definitive proxy statement for our 2010 Annual Meeting of Stockholders, which we
intend to file with the SEC not later than 120 days subsequent to December
31, 2009.
Item
10. Directors,
Executive Officers and Corporate Governance
Executive
Officers of the Registrant
Pursuant
to Instruction 3 to Item 401(b) of Regulation S-K and General Instruction G(3)
to Form 10-K, the following information is included in Part I of this annual
report. The following are our executive officers as of March 1,
2010.
|
Name
|
Age
|
Positions
|
||
|
Michael
L. Reger
|
33
|
Chairman,
Chief Executive Officer and Secretary
|
||
|
Ryan
R. Gilbertson
|
33
|
Director
and Chief Financial Officer
|
Michael L. Reger has served
as our Chief Executive Officer, Secretary and a Director since March
2007. Mr. Reger has been primarily involved in the acquisition of
oil, gas and mineral rights for his entire professional life and is a director
of Reger Oil based in Billings, Montana. Mr. Reger holds a Bachelor
of Arts in Finance and an MBA in Finance/Management from the University of St.
Thomas in St. Paul, Minnesota. The Reger family has a history of
acreage acquisition in the Williston Basin dating to 1952.
Ryan R. Gilbertson has served
as our Chief Financial Officer and a Director since March 2007. Mr.
Gilbertson’s last position prior to co-founding Northern was at Piper Jaffray in
Minneapolis from March 2004 to August 2006. Prior to Piper Jaffray,
Ryan was a portfolio manager at Telluride Asset Management, a multi-strategy
hedge fund based in Wayzata, Minnesota. Ryan holds a BA from Gustavus
Adolphus College in International Business/Finance.
The remaining information required by
this Item is incorporated by reference to the definitive proxy statement for our
2010 Annual Meeting of Stockholders, which we intend to file with the SEC not
later than 120 days subsequent to December 31, 2009.
We have adopted a Code of Business
Conduct and Ethics that applies to our chief executive officer, chief financial
officer and persons performing similar functions. A copy is available
on our website at www.northernoil.com. We
intend to post on our website any amendments to, or waivers from, our Code of
Business Conduct and Ethics pursuant to the rules of the SEC and NYSE Amex
Equity Market.
Item
11. Executive
Compensation
The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2010 Annual Meeting of Stockholders, which we intend to
file with the SEC not later than 120 days subsequent to December 31,
2009.
35
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Securities
Authorized for Issuance under Equity Compensation Plans
The
following table provides information with respect to our common shares issuable
under our equity compensation plans as of December 31, 2009:
|
Plan
Category
|
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
||||||||||||
|
2006
Incentive Stock Option Plan
|
300,000 | $ | 5.18 | 340,000 | ||||||||
|
2009
Equity Incentive Plan
|
- | - | 2,357,084 | |||||||||
|
Equity
compensation plans not approved by security holders
|
||||||||||||
|
None
|
- | - | - | |||||||||
|
Total
|
300,000 | $ | 5.18 | 2,697,084 | ||||||||
The
remaining information required by this Item is incorporated by reference to the
definitive proxy statement for our 2010 Annual Meeting of Stockholders, which we
intend to file with the SEC not later than 120 days subsequent to December
31, 2009.
Item
13. Certain
Relationships and Related Transactions, and Director
Independence
The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2010 Annual Meeting of Stockholders, which we intend to
file with the SEC not later than 120 days subsequent to December 31,
2009.
Item
14. Principal
Accountant Fees and Services
The
information required by this Item is incorporated by reference to the definitive
proxy statement for our 2010 Annual Meeting of Stockholders, which we intend to
file with the SEC not later than 120 days subsequent to December 31,
2009.
36
PART
IV
Item
15. Exhibits and
Financial Statement Schedules
(a) Documents
filed as Part of this Report:
|
1.
|
Financial
Statements
|
See Index
to Financial Statements on page F-1.
|
2.
|
Financial
Statement Schedules
|
All
schedules are omitted because they are either not applicable or required
information is shown in the financial statements or notes thereto.
(b) Exhibits:
Unless
otherwise indicated, all documents incorporated by reference into this report
are filed with the SEC pursuant to the Securities Exchange Act of 1934, as
amended, under file number 000-33999.
|
Exhibit
No.
|
Description
|
Reference
|
|
3.1
|
Composite
Articles of Incorporation of Northern Oil and Gas, Inc.
|
Incorporated
by reference to Exhibit 3.1 to our company’s Annual Report on Form 10-K/A
(Amendment No. 3) filed with the SEC on June 24,
2009
|
|
3.2
|
Amended
and Restated Bylaws of Northern Oil and Gas, Inc.
|
Incorporated
by reference to Exhibit 99.2 to the Registrant’s Current Report on Form
8-K filed with the SEC on December 6, 2007 (File
No. 000-30955)
|
|
4.1
|
Specimen
Stock Certificate of Northern Oil and Gas, Inc.
|
Incorporated
by reference to Exhibit 2.2 to the Registration Statement on Form SB-2
filed with the SEC on June 11, 2007, as amended (File
No. 333-143648)
|
|
10.1
|
Form
of Warrant
|
Incorporated
by reference to Exhibit 10.2 to the current report on Form 8-K filed with
the SEC on September 14, 2007 (File
No. 000-30955)
|
|
10.2*
|
Amended
and Restated Employment Agreement by and between Northern Oil and Gas,
Inc. and Michael L. Reger, dated January 30, 2009
|
Incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K filed with the SEC on February 2, 2009 (File
No. 000-30955)
|
|
10.3*
|
Amended
and Restated Employment Agreement by and between Northern Oil and Gas,
Inc. and Ryan R. Gilbertson, dated January 30, 2009
|
Incorporated
by reference to Exhibit 10.3 to the Registrant’s Current Report on Form
8-K filed with the SEC on February 2, 2009 (File
No. 000-30955)
|
|
10.4
|
Irrevocable
Proxy Provided by Joseph A. Geraci II, Kimerlie Geraci, Lantern Advisers,
LLC, Isles Capital, LLC and Mill City Ventures, LP, dated February 21,
2008
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed with the SEC on March 19, 2008 (File
No. 000-30955)
|
|
10.5
|
Agreement
by and between Northern Oil and Gas, Inc. and Deephaven MCF Acquisition
LLC dated April 14, 2008
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed with the SEC on April 16, 2008 (File
No. 000-30955)
|
|
10.6
|
Second
Amendment to Agreement by and between Northern Oil and Gas, Inc. and
Deephaven MCF Acquisition LLC dated April 14, 2008
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed with the SEC on September 29, 2008 (File
No. 000-30955)
|
37
|
Exhibit
No.
|
Description
|
Reference
|
|
10.7
|
Registration
Rights Agreement By and Among Northern Oil and Gas, Inc. and Deephaven MCF
Acquisition LLC dated April 14, 2008
|
Incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K filed with the SEC on April 16, 2008 (File
No. 000-30955)
|
|
10.8
|
Lease
Purchase Agreement By and Between Northern Oil and Gas, Inc. and Woodstone
Resources, L.L.C.
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed with the SEC on June 17, 2008 (File
No. 000-30955)
|
|
10.9*
|
Northern
Oil and Gas, Inc. 2009 Equity Compensation Plan
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed with the SEC on February 2, 2009 (File
No. 000-30955)
|
|
10.10
|
Credit
Agreement dated as of February 27, 2009 among Northern Oil and Gas, Inc.,
as Borrower, CIT Capital USA Inc., as Administrative Agent, and The
Lenders Party Hereto
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed with the SEC on March 2, 2009 (File
No. 000-30955)
|
|
10.11
|
Form
of Note Under that Certain Credit Agreement dated as of February 27, 2009
among Northern Oil and Gas, Inc., as Borrower, CIT Capital USA Inc., as
Administrative Agent, and The Lenders Party Hereto
|
Incorporated
by reference to Exhibit 10.2 to the Registrant’s Current Report on Form
8-K filed with the SEC on March 2, 2009 (File
No. 000-30955)
|
|
10.12
|
Guaranty
and Collateral Agreement dated as of February 27, 2009 made by Northern
Oil and Gas, Inc. in favor of CIT Capital USA Inc., as Administrative
Agent
|
Incorporated
by reference to Exhibit 10.3 to the Registrant’s Current Report on Form
8-K filed with the SEC on March 2, 2009 (File
No. 000-30955)
|
|
10.13
|
Guaranty
and Collateral Agreement dated as of February 27, 2009 made by Northern
Oil and Gas, Inc. in favor of CIT Capital USA Inc., as Administrative
Agent
|
Incorporated
by reference to Exhibit 10.4 to the Registrant’s Current Report on Form
8-K filed with the SEC on March 2, 2009 (File
No. 000-30955)
|
|
10.14
|
Warrant
to Purchase Shares of Northern Oil and Gas, Inc. Common Stock Issued to
CIT Group/Equity Investments, Inc. on February 27, 2009
|
Incorporated
by reference to Exhibit 10.5 to the Registrant’s Current Report on Form
8-K filed with the SEC on March 2, 2009 (File
No. 000-30955)
|
|
10.15*
|
Northern
Oil and Gas, Inc. 2009 Equity Incentive Plan
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Registration
Statement on Form S-8 filed with the SEC on July 16, 2009 (File
No. 333-160602)
|
|
10.16
|
Exploration
and Development Agreement dated effective as of April 1, 2009 by and
between Slawson Exploration Company, Inc. and Northern Oil and Gas,
Inc.
|
Incorporated
by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K
filed with the SEC on May 29, 2009
|
|
10.17
|
First
Amendment to Credit Agreement dated as of May 22, 2009 among Northern Oil
and Gas, Inc., CIT Capital USA Inc., and the Lenders party
thereto
|
Incorporated
by reference to Exhibit 10.1 to the Registrant’s Current Report on Form
8-K filed with the SEC on May 29, 2009
|
|
10.18*
|
Form
of Promissory Note issued to Michael L. Reger and Ryan R.
Gilbertson
|
Filed
herewith
|
|
10.19*
|
Form
of Restricted Stock Agreement issued under the Northern Oil and Gas, Inc.
2009 Equity Incentive Plan
|
Filed
herewith
|
38
|
Exhibit No.
|
Description | Reference |
|
18.1
|
Letter
from Mantyla McReynolds, LLC Regarding Change in Accounting
Principles
|
Incorporated
by reference to Exhibit 18.1 to the Registrant’s Current Report on Form
10-Q filed with the SEC on October 27, 2009
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm Mantyla McReynolds
LLC
|
Filed
herewith
|
|
23.2
|
Consent
of Ryder Scott Company, LP
|
Filed
herewith
|
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
Filed
herewith
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as adopted pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
|
Filed
herewith
|
|
32.1
|
Certification
of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
Filed
herewith
|
|
99.1
|
Report
of Ryder Scott Company, LP.
|
Filed
herewith
|
|
|
* Management
contract or compensatory plan or arrangement required to be filed as an
exhibit to this report.
|
39
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NORTHERN
OIL AND GAS, INC.
|
Date:
|
March
8, 2010
|
By:
|
/s/
Michael L. Reger
|
|
|
Michael
L. Reger
|
||||
|
Chief
Executive Officer
|
POWER
OF ATTORNEY
Each
person whose signature appears below constitutes and appoints, Michael L. Reger
and Ryan R. Gilbertson, or either of them, his true and lawful attorney-in-fact
and agent, acting alone, with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments (including post-effective amendments) to this Annual Report on
Form 10-K and to file the same, with all exhibits thereto, and other documents
in connection wherewith, with the Commission, granting unto said
attorney-in-fact and agent, each acting alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all said attorney-in-fact
and agent, acting alone, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacity and on the dates indicated:
|
Signature
|
Title
|
Date
|
||
|
/s/
Michael L. Reger
|
Chief
Executive Officer, Director and Secretary
|
March
8, 2010
|
||
|
Michael
L. Reger
|
||||
|
/s/
Ryan R. Gilbertson
Ryan
R. Gilbertson
|
Chief
Financial Officer, Principal Financial Officer, Principal Accounting
Officer, Director
|
March
8, 2010
|
||
|
/s/
Loren J. O’Toole
|
Director
|
March
8, 2010
|
||
|
Loren
J. O’Toole
|
||||
|
/s/
Carter Stewart
|
Director
|
March
8, 2010
|
||
|
Carter
Stewart
|
||||
|
/s/
Jack King
|
Director
|
March
8, 2010
|
||
|
Jack
King
|
||||
|
/s/
Robert Grabb
|
Director
|
March
8, 2010
|
||
|
Robert
Grabb
|
||||
|
/s/
Lisa Bromiley Meier
|
Director
|
March
8, 2010
|
||
|
Lisa
Bromiley Meier
|
40
NORTHERN
OIL AND GAS, INC.
INDEX
TO FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
Balance
Sheets as of December 31, 2009 and 2008
|
F-3
|
|
Statements
of Operations for the Years Ended December 31, 2009, December 31, 2008 and
December 31, 2007
|
F-4
|
|
Statements
of Stockholders’ Equity for the Years Ended December 31, 2009, December
31, 2008 and December 31, 2007
|
F-5
|
|
Statements
of Cash Flows for the Years Ended December 31, 2009, December 31, 2008 and
December 31, 2007
|
F-6
|
|
Notes
to the Financial Statements
|
F-7
|
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
Northern
Oil and Gas, Inc.:
We have
audited the accompanying balance sheets of Northern Oil and Gas, Inc. (the
Company) as of December 31, 2009 and 2008, and the related statements of
operations, stockholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2009. These financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 2009
and 2008, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2009 in conformity with
accounting principles generally accepted in the United States of
America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial
reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO), and our report dated March 8, 2010 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
As
discussed in Note 2 to the financial statements, the Company has elected to
change its method of accounting for accrued drilling costs in 2009.
Mantyla
McReynolds LLC
Salt Lake
City, Utah
March 8,
2010
F-2
|
BALANCE
SHEETS
|
||||||||||||||
|
DECEMBER
31, 2009 AND 2008
|
||||||||||||||
|
ASSETS
|
||||||||||||||
| Year Ended December 31, | ||||||||||||||
| 2009 | 2008 | |||||||||||||
| Adjusted* | ||||||||||||||
| CURRENT ASSETS | ||||||||||||||
| Cash and Cash Equivalents | $ 6,233,372 | $ 780,716 | ||||||||||||
| Trade Receivables |
7,025,011
|
2,028,941
|
||||||||||||
| Other Receivables | - | 874,453 | ||||||||||||
| Prepaid Drilling Costs |
1,454,034
|
4,549
|
||||||||||||
| Prepaid Expenses |
143,606
|
71,554
|
||||||||||||
| Other Current Assets |
201,314
|
- | ||||||||||||
| Short - Term Investments |
24,903,476
|
- | ||||||||||||
|
Deferred Tax
Asset
|
2,057,000
|
1,390,000
|
||||||||||||
| Total Current Assets | 42,017,813 | 5,150,213 | ||||||||||||
|
PROPERTY
AND EQUIPMENT
|
||||||||||||||
|
Oil
and Natural Gas Properties, Full Cost Method
(including unevaluated cost of
|
||||||||||||||
|
$53,862,529
at 12/31/09 and $35,990,267 at 12/31/2008)
|
96,801,626
|
47,260,838
|
||||||||||||
|
Other
Property and Equipment
|
439,656
|
408,400
|
||||||||||||
|
Total
Property and Equipment
|
97,241,282
|
47,669,238
|
||||||||||||
|
Less
- Accumulated Depreciation and Depletion
|
5,091,198
|
748,421
|
||||||||||||
|
Total
Property and Equipment, Net
|
92,150,084
|
46,920,817
|
||||||||||||
|
LONG
- TERM INVESTMENTS
|
-
|
2,416,369
|
||||||||||||
|
DEBT
ISSUANCE COSTS
|
1,427,071
|
-
|
||||||||||||
|
DEFERRED
TAX ASSET
|
-
|
33,000
|
||||||||||||
|
Total
Assets
|
$ 135,594,968
|
$
54,520,399
|
||||||||||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||||||||
|
CURRENT
LIABILITIES
|
||||||||||||||
|
Accounts
Payable
|
$ 6,419,534
|
$ 1,934,810
|
||||||||||||
|
Line
of Credit
|
834,492
|
1,650,720
|
||||||||||||
|
Accrued
Expenses
|
316,977
|
1,270,075
|
||||||||||||
|
Derivative
Liability
|
1,320,679
|
-
|
||||||||||||
|
Other
Liabilities
|
18,574
|
18,574
|
||||||||||||
|
Total
Current Liabilities
|
8,910,256
|
4,874,179
|
||||||||||||
|
LONG-TERM
LIABILITIES
|
||||||||||||||
|
Revolving
Line of Credit
|
||||||||||||||