Northern Oil & Gas (NOG) Valuation Update - Aug 6

[dan_s]

NOG closed at $26.76 on August 5. < Just 2X my Operating Cash Flow per Share estimate for 2022.

TipRanks: "In the last 3 months, 7 ranked analysts set 12-month price targets for NOG. The average price target among the analysts is $44.71. The 7 price targets range from $32 to $61 and NONE of them have been updated since NOG released Q2 results and fresh guidance."

I have updated my forecast/valuation model for NOG and it will be posted to the EPG website this afternoon.

My current/valuation increases by $2 to $62.00/share.

Why?
> NOG's 1H 2022 operating cash flow (net of preferred stock dividends and repurchases) was $456.1 million; raising the confidence that I have in my full-year operating cash flow forecast of $1,045.7 million ($13.20/share).
> The high end of their capex guidance has been raised to $470 million, so free cash flow this year should be approximately $575 million. That is an increase over the company's FCF guidance at the beginning of the year.
> NOG's full-year 2022 production mix is expected to be approximately 60.5% crude oil and 39.5% natural gas and NGLs, which they report on a combined basis. Their realized natural gas price (net of cash settlements on their hedges) was $6.34/mcfe in Q2.
> The Company's production increased from Q1 to Q2 1,434 Boepd to 72,689 Boepd despite some weather-related problems during April in North Dakota. I now expect Q3 production to be over 75,000 Boepd, which includes about 1,500 Boepd from an acquisition that will close this month. Q4 production should be over 80,000 Boepd as drilling activity on their leasehold continues. They expect to complete ~10 net new wells each quarter.
> Year-over-year production growth in 2022 s/b close to 40% and my model assumes 16% YOY production growth in 2023. < This is KEY since upstream companies with double digit production growth that is FULLY FUNDED BY OPERATING CASH FLOW should be trading at a much higher multiple than I am using.
> The confidence in my forecast model increases with each quarter of actual results, which have confirmed my model assumptions. I increased my valuation multiple from 4.5 to 5.0 X annualized operating cash flow. < Still conservative for a company with this much growth potential.

The recent pullback in the price of oil has very little impact on my current valuation because NOG as a lot of their 2022 oil hedged and the recent improvement in natural gas and NGL prices offsets most of the impact anyway.