Northern Oil & Gas (NOG) Update - Dec 17

[dan_s]

Northern Oil and Gas will be moved into our Sweet 16 "officially" on 1-1-2022
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Notes below are from BofA Equity Research on 12-17-2021
Upgrade to Buy: As divvy plan may provide more support for shares
Rating Change: BUY | PO: 28.00 USD | Price: 18.52 USD

Announces three year base dividend plan
Following a period of recent underperformance (down ~10% relative to the Russell 3000
Energy Index) after it announced plans to acquire Veritas’ non-operated Permian assets
on Nov 16th (see report) we upgrade Northern Oil and Gas (NOG) to Buy from Neutral
with potential upside of ~51% to our unchanged $28 PO. Additionally, management has
laid out its cash return strategy announcing a long-term base dividend plan where it
expects to grow the dividend ~20% per quarter on average through 2023. Under this
base plan, the quarterly dividend will grow from $0.12 in 1Q22 to ~$0.33 by 4Q23,
which on an annualized basis has an implied yield of~7.1%. NOG estimates it should be
able to achieve this under what it sees as ‘conservative’ price structure based on $50
WTI / $3 HH and has suggested potential upside to both free cash flow and the dividend
from potential accretive acquisitions (the ground game) and higher commodity prices. At
the same time, it retains optionality for other uses of free cash including buybacks,
special dividends and debt reduction. At this level, NOG is just too cheap. Buy.

Plan may start to help alleviate equity fatigue in name
We see management’s base plan alleviating some of the equity fatigue in the name after
its latest Veritas acquisition. Additionally, while NOG is entirely no-op, which presumably
makes it more difficult to model than say, an operated E&P, management’s confidence
in long term dividend visibility arguably helps support confidence in underlying cash flow
– while providing some monetary incentive for investors to take on a higher perceived
level of uncertainty.

Upgrade to Buy: we see the plan providing share support
With that said, this plan, effectively raises NOG’s future transaction costs, as it
would have to pay a dividend on any new shares issued, and may tilt it towards deals
with more producing assets. Furthermore, investors have to wait for the maximum base
payout. Despite these risks, we see this plan as starting to provide a firmer floor under
shares. Given this, and with ~51% potential upside to our $28 PO, we raise NOG to Buy.
Our target is based on ex growth DCF that assumes 10 yrs of inventory followed by a
25% terminal decline and 6.8% WACC. It is also the average of two long-term pricing
scenarios: one assuming long term 56.50 WTI and the other $61.50 WTI. Our long-term
gas assumption under both scenarios is $3 HH

[dan_s]

Here is what other analysts think about NOG

Price Tarkets From TipRanks:
Raymond James 11/19/21 $43.00
Wells Fargo 11/19/2021 $32.00
Truist Financial 10/26/21 $40.00
RBC Capital 10/26/21 $32.00

[dan_s]

Raymond James:

Northern Oil & Gas Inc.
Market Leading Dividend Growth Plan; Reiterate Strong Buy by John Freeman , CFA (RJA)
NOG-NYSE American | $19.18 Strong Buy 1 | $43.00 target
Dividend growth plan implemented. Last week, NOG announced an updated dividend
growth plan that creates the gold standard among SMID-cap E&Ps. Pending the close of
the Veritas acquisition, NOG had previously announced they were going to raise the base
dividend to $0.12/share beginning in 1Q22. The updated shareholder return framework
anticipates a base dividend that will grow ~20% on average per quarter through the
end of 2023! At the current share price, their plan represents a solid dividend yield of
~3.5% in 2022 and increasing toward ~7% yield by YE23. Keep in mind, this plan assumes
a very conservative $50/bbl and $3/mcf commodity price over that timeframe. Given the
increasing strength of their balance sheet (below 1x net debt/EBITDA by YE22), as well as
$68M available for share buybacks (~5% market cap), we are anticipating further returns
in the form of special dividends and/or buybacks. As such, we reiterate our
Strong Buy rating and price target of $43.