Northern Oil & Gas (NOG) Update - Oct 7

[dan_s]

I have updated my NOG forecast/valuation model for this acquisition and posted it to the EPG website.
My valuation increases by $1.50 to $36.50 because the acquisition will be accretive to operating cash flow.
NOG should generate about $650 million of operating cash flow in 2022 with over half being free cash flow.

Northern Oil and Gas, Inc. Announces Williston Basin Bolt-on Acquisition
October 07, 2021 6:30am EDT

HIGHLIGHTS

$154 million bolt-on acquisition of proved producing properties in the Williston Basin
> 4,500 Boe per day of production (2-stream, ~65% oil)
> Mature, shallow decline (~18% first year decline expected)
> Northern owns existing interests in 84% of the acquired wellbores, providing high confidence and visibility in the acquired assets
> Forward 1-year unhedged cash flow from operations expected to be approximately $60 million at current strip pricing as of October 4, 2021, representing a > purchase price transaction multiple of approximately 2.6x
> De minimis capital expenditures expected to drive a significant increase to corporate free cash flow
> Northern estimates PDP PV-10 of approximately $205 million, based on current strip pricing as of October 4, 2021
> Transaction expected to be accretive to all material valuation metrics, including TEV / EBITDA, earnings per share, free cash flow and cash flow per share over a multi-year period

Northern reiterates current 2021 Capital Budget of $215 – 260 million

Management to submit request to Northern’s Board of Directors for a 33.3% increase to the quarterly dividend to $0.06 per share upon closing of transaction

WILLISTON BASIN ACQUISITION

Northern has entered into a definitive agreement to acquire non-operated interests across over 400 producing wellbores located primarily in Williams, McKenzie, Mountrail and Dunn Counties, ND for a purchase price of $154 million in cash, subject to typical closing adjustments. Northern expects to fund the acquisition with cash on hand, operating free cash flow and borrowings under Northern’s revolving credit facility.

Northern expects a significant increase to its borrowing base from both the acquired and existing assets and will begin the process to expand its elected commitment during its regularly scheduled fall borrowing base redetermination, which it expects to complete in November 2021.

October production on the assets is expected to be greater than 4,500 Boe per day (2-stream, ~65% oil) and Northern expects average production of more than 4,100 Boe per day in 2022 (2-stream, ~65% oil). Northern expects negligible capital expenditures on the assets.

The acquired assets include 65.9 net producing wells. The assets are operated by multiple operators in the Williston Basin, and Northern holds existing ownership positions in 84% of the wellbores acquired.

The effective date for the transaction is October 1, 2021 and Northern expects to close the transaction within 40 days.

INCREASED STOCKHOLDER RETURNS

Given the strong, low risk cash flows from the acquired properties, Northern’s Management plans to submit a request to the Board of Directors for a 33.3% increase to the common stock dividend for the fourth quarter of 2021, for shareholders on record as of December 31, 2021. This anticipated increase to a dividend of $0.06 per common share represents a 100% increase since the initiation of a dividend program in May 2021. Under Delaware law, the Board may approve such a measure within 60 days of the record date.

MANAGEMENT COMMENTS

“We remain consistent with our strategy,” commented Nick O’Grady, Chief Executive Officer of Northern. “The focus continues on being the natural consolidator of working interests and executing with financial discipline, concentrating on cost of entry, return on capital employed and cash flow net to our shareholders. Despite purchasing the assets with cash, we still expect a 1x leverage ratio by year-end 2022. With the planned dividend increase, we will have doubled our shareholder return program in less than five months since inception.”

“This is our third major transaction this year in as many basins,” commented Adam Dirlam, Chief Operating Officer of Northern. “Our team’s ability to actively pivot has provided for consistent optionality to pursue value enhancing opportunities in the most prolific basins across the US.”

[dan_s]

TipRanks: "Truist Financial analyst Neal Dingmann raised the firm's price target on Northern Oil and Gas to $38 from $33 and keeps a Buy rating on the shares as part of a broader research on Exploration and Production names in the Energy sector. The analyst is increasing his oil price deck estimates by over 6% for Q4 of 2021 to 2023 period and natural gas prices by over 34%. Dingmann adds that consensus estimates continue to trend below rising spot and forward prices, creating an environment whereby free cash flows should for the most part be able to surprise to the upside."

[dan_s]

On October 8 BofA raised their NOG price target by $4 to $28.

"In our view this transaction is yet another that highlights the advantages of NOG’s non-op model where it remains an opportunistic buyer of less known and less loved assets. From our estimates, PV-10 value implies long term $55 WTI/ $3.00 HH, in line with current strip and $230mm vs NOG’ s actual cost of capital which we est has trended lower towards 6.5% (from ~7%), implying $1/sh of uplift. Incorporating this uplift and the lower cost of capital across the portfolio, our ex-growth value points to $28 (v $24 previously). We see capacity to ‘stay in the fairway’ on transactions inspiring confidence in management to continue to seek out further acquisitions which remains a key pre-requisite to NOG’s investment case as it remains a financial company at its core. We rate it a Buy."