Northern Oil And Gas: Exchanges Of Debt For Preferred Shares Lower Its Risk And Upside

Summary

• Northern exchanged around $76.7 million in second-lien debt for $79.5 million in preferred shares and $2.6 million in cash.
• This brings its second-lien debt down to $341 million and slightly reduces its annual cash expenditures.
• It appears able to use its credit facility to deal with most of its remaining 2022 and 2023 debt maturities if needed.
• Northern's preferred shares could be converted into 100 million common shares, increasing its share count by 25%.
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Northern Oil and Gas (NYSE:NOG) has been working on reducing its second-lien debt, which is due in May 2023. It has been primarily using preferred stock (and a little bit of cash) in the exchanges for the second-lien debt and now has around $341 million in second-lien debt remaining. These transactions should modestly reduce its cash expenditures, and will improve Northern's ability to refinance or redeem its debt. The amount of dilution from the potential preferred stock conversion is increased though, and the outstanding preferred stock can be converted into 100 million common shares.

Debt Reduction Transactions

Northern's three recently announced debt reduction transactions involve the exchange of $76.7 million of its 8.5% second-lien notes due 2023 for 794,702 shares of its 6.5% Series A Preferred Stock and $2.6 million in cash. This reduces its outstanding second-lien principal to $341 million.

These transactions reduce Northern's annual cash outlay by around $1.25 million (the amount by which its interest costs decreased more than its preferred dividends increased). Northern's net debt decreased by $74.1 million and its preferred stock (at par) increased by $79.5 million, for a net increase of $5.4 million.

Northern's second-lien bonds mature in May 2023 and it appears that it is allowed to repurchase up to $200 million of those notes in the future using cash. Otherwise, it could refinance the debt or issue equity in order to deal with the second-lien notes.

Source: Northern Oil and Gas

It appears that Northern is making significant use of preferred stock to shrink its second-lien debt, which is a good path to take. If Northern can reduce its outstanding second-lien notes to $200 million (less whatever part of the basket it uses up in cash repurchases) by 2023, it will eliminate the refinancing risk with those notes. Reducing its second-lien debt via exchanges for preferred shares also

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in NOG over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.