Northern Oil & Gas (NOG)

[dan_s]

From time to time the market gives us an opportunity to pick up shares at a bargain price. This morning a block decided to sell NOG. With oil moving over $105/bbl this morning, I can't see any reason for NOG not doing very well this year.

For NOG:
> My Fair Value estimate is $39/share (see my forecast model under the Sweet 16 tab, click on NOG logo)
> First Call's 12-month target price is $36.88/share, so I'm not way out there.
> Earnings and cash flow forecasts submitted to First Call have been on the rise for the last 90 days but they are still below my forecast.

Northern Oil & Gas, Inc. (AMEX: NOG) was added to the Sweet 16 Growth Portfolio on November 29, 2010 because it is heavily weighed to Bakken oil and it has significant production and reserve growth locked in for several years.

The Company is based in Wayzata, Minnesota. It is an oil and gas exploration and production company focused exclusively on the Bakken Shale region. As of March 1, 2011 Northern controls over 147,400 net acres in the heart of the Bakken and Three Forks play in western North Dakota and eastern Montana. It has leveraged its leasehold position to become the largest non-operating participant in the Bakken.

Northern’s participation in Bakken and Three Forks wells is proportionate to its leasehold interest in each drilling unit that is drilled by its operating partners. For example, if Northern controls leases on 64 acres in a 640-acre drilling unit—or 10% of the unit—Northern would participate for its proportionate 10% working interest in any well drilled in that unit. Several of our Sweet 16 companies, including Brigham Exploration, Continental Resources and EOG Resources, are operating partners with NOG. They currently operate approximately 50% of Northern’s wells.

As a non-operating (minority) working interest owner in a well, Northern does not bear the pre-drill geological and overhead costs of its operating partners, making it the lowest-cost producer in the Bakken and Three Forks play.
Northern Oil and Gas has a fairly simple strategy:
• Maximize Bakken/Three Forks exposure as a non-operator. This has been accomplished by acquiring extensive leasehold in Mountrail County, ND, where there is substantial permitting activity on Northern acreage, and by partnering with experienced operators that are aggressively developing the acreage.
• Acquiring opportunistic acreage and production. In 2010, Northern acquired leasehold interests covering 56,858 net mineral acres for an average of $1,043 per net acre in its key prospect area.
• Maintaining a strong balance sheet and financial stability by holding no debt, holding $152.1 million in cash (as of 12/31/2010), and maintaining an undrawn credit facility of $100 million.
• On Nov. 24 the Company announced the completed sale of 10,292,500 shares of common stock. The net proceeds of $200.1 million will be used primarily to fund their accelerated drilling program in the Bakken. NOG should not need additional funding to meet their 2011 capital program.

Northern had a successful 4th quarter, increasing production volumes by 36% compared to the previous quarter. NOG exited the 4th quarter with production of 5,204 BOE per day (95% crude oil and natural gas liquids). NOG expects to average production of 6,500 BOE per day in 2011. Based on Northern’s track record, we are expecting NOG to top their forecast and exit 2011 at over 10,000 BOE per day.
4th Quarter Highlights:
• 2010 Reserve Replacement of 1,183%
• 2010 Reserve Growth of 158%
• Quarter-over-quarter production increased by 36%
• Quarter-over-quarter oil and gas sales revenue increased by 54%
Northern expects to spud approximately 36 net wells in 2011 with drilling capital expenditures of approximately $230 million, based on an estimated weighted average well cost of $6.3 million. This compares to estimated capital expenditures of $132 million for the entire 2010 year.

What I like most is their clean, virtually debt free Balance Sheet.

Northern Oil is heavily weighted to oil and they have significant production and reserve growth locked in for several years. It deserves to trade at a high multiple of operation cash flow per share. Based on our forecast model, NOG’s operating cash flows will more than triple in 2011 and we expect that trend to continue as their aggressive development program expands.

[setliff]

dan here is an article i found on IV posted by susan----

http://www.businessinsider.com/northern ... ong-2011-3

scroll down to "The Bakken shale oil plays"

this may be reason nog is getting hammered today.
key to article is based on petrobakken's fast decline rate based on one well and he uses this to really bash nog. this one well assumption is suspicious to me because the IP was only 250bpd with only a 7 stage frac (and he descibes it as a "big" well.)
most of the wells i have read about in the bakken have IP's of >1000bpd.

anyhow, would sure appreciate your reviewing the article and commenting on it.

[setliff]

my comments about this article-----

john hempton is comparing nog's decline rate to one well by petrobakken in Saskatchewan that only has seven frac stages. this one well he describes as "big" had an IP of only 250bpd and it declined to 12bpd in a year. several things wrong with this.

-nog is leveraging off a bunch of major operators like eog, bexp, clr, et al and they use many more frac stages.
-IP rates for these operators are usually >1000bpd with 30 day avg's ~40-60% of IP.
-nog's plays are a long way away from those in Saskatchewan--are the formations different or is it just the well design?

this boils down to an unjust comparison.

now i don't know about the other inuendos like the cfo's credentials or their auditors creditability. on the surface they are enough to make one nervous. but, his technical comparison to petrobakken sucks.

[setliff]

another opinion of john hempton's article from smittyfrmta on the BRY IV bd.---

I'm not familiar with NOG, and frankly, have no interest in them. That said, the linked article has numerous errors of omission, some of which I suspect are intentional. For example, in the case of Petrobakken, prominently mentioned, the author seems unaware that a new fraccing technology has been developed, and is just now being deployed, by Petrobakken. In addition, Petrobakken is moving into EOR through the injection of natural gas, with all of the NG coming from their own wells. Further, the Sask. Bakken is much thinner, and less prolific, than the ND Bakken, another fact that has completely escaped the "author". If memory serves, EOR (in more than one form) is being actively developed in the ND Bakken, and new fraccing technologies are always coming forward. Hard to believe anyone would trade on the swiss cheese this guy presents.

[ghrcap]

Might be a short put candidate at the $24 strike. Chart shows some support there.

[ghrcap]

A $23 strike was just added for April and I'm playing it for $0.65 premium. The breakout began in November around $22.60.

[dan_s]

I try to all my trading based on fundamentals and a look at a company very hard before it "graduates" to the Sweet 16.

Sometime the market just gives investors a "gift" and I think this is one of those times.

> NOG has virtually no debt and more than enough liquidity to keep up with the aggressive drilling programs of their operators.
> BEXP, CLR and EOG (all Sweet 16 companies) operate ~50% of their Bakken / Three Forks wells. Since I follow these companies closely, I have a high level of confidence in NOG's drilling program.
> NOG has double digit growth locked in for years:
Year - EPS - CFPS - Average Daily Production
2008A: $0.07, $0.07, 141 boepd
2009A: $0.08, $0.28, 773 boepd
2010A: $0.12, $0.83, 2,428 boepd
2011E: $1.21, $2.80, 7,000 boepd
2012E: $2.21, $5.00, 12,167 boepd
My detailed forecast model can be found on the website under the Sweet 16 tab. Just click on the NOG logo.

[dan_s]

I wonder how many readers of the Street Sweeper article got down to the bottom to notice this:

* Important Disclosure: Prior to the publication of this article, TheStreetSweeper (through its members) effected a “short sale” of 50,000 shares of the stock of NOG beginning on March, 17, 2011, at an average price of $28.7536 a share, with the intent of profiting from decreases in the price of the stock. Following publication, TheStreetSweeper will continue to transact in the stock and will cover all or a portion of its short sale with the intent to profit. TheStreetSweeper will update this publication as it closes its position.

[prince_jake_33]

I sold lots of 24 PUTs at 0.85 and 0.90$ I followed Setleffs lead and sold my NOG stock yessterday so I have money for the cash covered puts. I hope to have this face on April 15

[dan_s]

I tested my NOG forecast carefully, even (a) increasing lease operating expenses, (b) increasing the severance tax rate, (c) lowering my production forecast and (d) lowering my estimated realised oil price to a flat $85/bbl for both 2011 and 2012.
> I still come up with a Fair Value of $36/share at 10 X CFPS (not an unreasonable multiple for a company with this high of a growth rate). BTW NOG has a lot of production hedged with a SWAP at $87/bbl and even more protected by collars with an average floor price of $85/bbl.

The StreetSweeper article makes a big deal out of NOG's 4th quarter depletion adjustment.
From NOG's 4th quarter report: "Depletion expense for fiscal year 2010 was $16.9 million, or $18.99 per BOE, compared to $4.3 million, or $15.06 per BOE, for fiscal year 2009. Depletion expense for the fourth quarter of 2010 was $8.6 million, or $25.31 per BOE, compared to $3.8 million, or $15.06 per BOE, for the third quarter of 2010. The fourth quarter included a depletion adjustment of $3.5 million.".
> Year-end depletion adjustment are not uncommon since they are determined by the year-end reserve update and FAS 69 report.
> Depletion is a non-cash charge
> $18.99/boe is not a very high rate. (BEXP using $18.90/boe, CLR at $16/boe, and EOG at $14.70/boe)

Obviously, there may be a cloud over this one for awhile so it may flop arround for awhile. On the surface, to this analyst, the company looks OK. The fact that the owners of StreetSweeper shorted the stock before they published the article really makes me wonder about their motives.

[setliff]

i found out about the short after i sold yesterday.

[setliff]

here's a positive take on nog from sun i found on the bry IV bd----

Sun Trust on NOG this morning

Just the Facts Ma'am

What’s going on? Mudslinging, but it’s business as usual for Northern as it continues to participate in a large number of wells and keeps picking up acreage in the Bakken. The drop in stock price, in our opinion, provides investors with an opportunity at a low entry point.

Insider selling happens. Northern’s management sold a considerable amount of stock recently, which has triggered some fears. But remember taxes have to be paid and management sold a similar amount of shares last year at this time. While the timing and amounts may not be ideal to some, we do not believe it is an issue at this time.

The depreciation numbers look fine. Northern’s depreciation figures look in line at $15/boe for 2010, while competitors were in the $15-$17/boe range. Interestingly enough, Northern’s depreciation is calculated at the same rate as the other companies in a given well.

Production and revenues look fine too. As a non-operator, Northern basically gets checks from its operated partner for the production from a well—making its revenue and production lines rather vanilla.

Reserves and production estimates by a world-class firm. Ryder Scott is known throughout the industry as a strong, conservative reserve engineering firm. We believe the fact that Ryder Scott estimates Northern’s reserves should give investors confidence.

We maintain our Buy and $40 price target as nothing about the story has changed in our minds. Our numbers do not change as we see no change operationally (except better oil prices); though we would point out the company is now trading well below our net asset value of $31.50/share. Northern has hard assets, and we believe it is undervalued across multiple metrics based on the recent pullback.

[prince_jake_33]

Dan thanks for the steady hand. I tend to panic from the unknown.
I cant believe it has been a year for the Energy Propectus.
I am sending the 250$ today by check. I dont put my credit card on the web. When I place an order for something, I give the numbers over the phone.
Thanks for your great help.