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Rating Action:

Moody's upgrades Northern Oil and Gas' CFR to Caa1; PDR to Caa1-PD/LD

16 May 2018

New York, May 16, 2018 -- Moody's Investors Service (Moody's) upgraded Northern Oil and Gas, Inc.'s (NOG) Corporate Family Rating (CFR) to Caa1 from Caa2 and Probability of Default Rating (PDR) to Caa1-PD/LD from Caa2-PD. Moody's affirmed the Caa3 rating on the senior unsecured notes and SGL-3 Speculative Grade Liquidity Rating. The rating outlook is stable.

NOG recently completed the exchange of $497 million of its 8% notes due 2020 for $344 million of new second lien secured notes due 2023 (unrated) and $155 million of common stock. Moody's considers the transaction, which extends the maturity of the debt and exchanges debt for equity to be a distressed exchange, which is a default under Moody's definition of default. Moody's appended the PDR with an "/LD" designation indicating a limited default, which will be removed after three business days.

"NOG's notes exchange and equity raise is a credit positive resulting in lower debt, an improved maturity profile and increased liquidity," stated James Wilkins, Moody's Vice President. "This will allow the company to outspend its operating cash flows as it increases its drilling and completion expenditures and potentially engages in additional modest-sized acquisitions."

The following summarizes the ratings activity.

...Issuer: Northern Oil and Gas, Inc.

Ratings upgraded:

...Corporate Family Rating, Upgraded to Caa1 from Caa2

...Probability of Default Rating, Upgraded to Caa1-PD/LD from Caa2-PD

Ratings affirmed:

...Senior Unsecured Notes, Affirmed Caa3 (LGD5) from (LGD4)

...Speculative Grade Liquidity Rating, Affirmed SGL-3

Outlook:

....Outlook, Remains Stable

RATINGS RATIONALE

The upgrade of NOG's CFR to Caa1 reflects its improved leverage profile, reduced refinancing risk associated with the remaining $203 million of notes due June 2020, and Moody's expectation that the company will grow production and operating cash flows. The notes exchange eliminated $152 million of debt, leaving the company with $908 million balance sheet debt comprised of $203 million of notes due June 1, 2020, $360 million of term loans and $344 million of second lien secured notes due 2023. The company also had a cash balance in excess of $260 million following the transactions, giving it ample resources to pursue capital expenditures and modest-sized acquisitions.

NOG's Caa1 CFR reflects its high leverage, modest asset coverage of debt, limited scale and Moody's expectation that NOG's cash flows will modestly improve into mid-2019. Despite the improved oil price environment, Moody's expects the company to generate negative free cash flow in 2018 that will be partially funded by existing cash balances and leave debt balances unchanged. However, NOG's increased capital expenditures will result in higher production volumes and cash flows. NOG hedges expected oil production three years in the future as required under its term loan credit agreement, which will limit the volatility in its revenue, as well as limit the benefit NOG realizes from the improvement in oil prices. Notwithstanding its oil-weighted production mix, a heavy interest burden and basis differentials are a drag on NOG's profits. Moody's projects NOG's retained cash flow to debt ratio will improve to around 15% in 2018, assuming WTI crude oil prices of $55/bbl. Moody's estimates that the PV-10 value of the company's reserves is now greater than its net debt. The rating is supported by NOG's strong acreage position, considerable well diversity for a company of its size and the diversity and operational track record of its operating partners.

The SGL-3 Speculative Grade Liquidity Rating reflects adequate liquidity, supported by cash flow from operations, cash balances and availability under a delayed draw term loan facility. The company has $40 million available under its committed $100 million delayed-draw term loan facility available until May 2019 ($60 million was drawn at the time the debt exchange was completed). NOG had $89 million of cash as of March 31, 2018, but the balance grew to more than $260 million in mid-May after the company raised $93 million of gross proceeds through an equity issuance in April 2018, as well as $52 million realized from additional shares sold through subscription agreements and $60 million borrowed under the delayed draw term loan when the notes exchange offer closed. Moody's expects the cash balance will be sufficient to fund continued negative free cash flow through 2019, as NOG operates under an increased drilling program. NOG's first lien senior secured term loan facility agreement has three financial covenants: a minimum PDP coverage ratio (PDP PV-10 plus cash to secured debt) of 1.3x; a maximum net secured debt to EBITDAX ratio of 3.75x; and a minimum liquidity requirement of $20 million (consisting of cash and undrawn delayed draw commitments). Moody's expects that NOG will maintain compliance with the covenants through mid-2019, although with a limited cushion. The company's next debt maturity is June 1, 2020, when the remaining $203 million of senior notes that did not participate in the debt exchange mature. The $360 million of term loans mature in November 2022, but have a springing maturity of March 1, 2020, if more than $30 million principal amount of the notes due June 1, 2020, are outstanding. Substantially all of the company's assets are pledged as security under the term loan facility, which limits the extent to which asset sales could provide a source of additional liquidity, if needed.

NOG's $203 million of senior unsecured notes are rated Caa3, two notches below the company's Caa1 CFR, consistent with Moody's Loss Given Default Methodology, reflecting the more senior priority claim on assets of the secured debt that consists of $360 million of first lien secured term loans (unrated) and the $344 million second lien secured notes (unrated). The rating on the senior unsecured notes was not upgraded in line with the CFR upgrade as a result of the addition to the capital structure of the second lien notes, which have a more senior priority claim on assets.

The stable outlook reflects Moody's expectation that NOG will grow its production and reduce leverage through improving its profitability. The ratings could be upgraded if NOG generates retained cash flow to debt in excess of 15%, makes progress towards refinancing or repaying the remaining notes due 2020 and maintains adequate liquidity. A downgrade may be considered if liquidity deteriorates or interest coverage declines below 1.5x.

The principal methodology used in these ratings was Independent Exploration and Production Industry published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Northern Oil and Gas, Inc., based in Minnetonka, Minnesota, owns non-operated working interests in oil and gas wells and acreage primarily in the Bakken and Three Forks formations within the Williston Basin in North Dakota and Montana.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

James Wilkins
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Steven Wood
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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