Northern Oil & Gas (NOG) Price Target Update - June 20
Posted: Tue Jun 20, 2023 10:04 am
Neal Dingmand at Truist Financial rates NOG a BUY with a price target of $60. < Matches my current valuation.
Here are Neal's notes:
Northern Oil and Gas, Inc. (NOG)
Conference Call Suggests M&A Pause Coming Post Latest Accretive Deal
We held a call Friday with the Northern executive team to go over the latest $500mm
acquisition along with future expectations.
We estimate the company’s Novo (private) deal to potentially generate among
the highest future return of any deal NOG has done to date. Despite the exceptional potential
returns, the company suggested it would do no further near-term transactions essentially
catching their breath after a series of positions deals. We continue to forecast NOG to
potentially generate the highest 2024 FCF in our group as we further increase our estimates
and price target.
Joint Acquisition Aligns Shared Interests & Inventory Focus
Friday’s Northern conference call provided insightful financial and operational details
of the company’s rationale for its latest deal. Further specifics were given over how
Earthstone Energy (ESTE, Buy) and NOG plan to initially moderately develop the new
assets though remain open to potentially ramping activity when warranted. Novo’s assets
provide optionality as they are inventory-rich that could ultimately drive 5%+ of NOG’s total
future production based on its working interest in ESTE-operated wells. While NOG’s non-op
business model emphasizes rates of return over the traditional E&P business model of
profitable production growth, we forecast this transaction to deliver both.
Notable Inventory Upside
While NOG was appropriately not prepared to outline a preliminary pro-forma 2024 plan, we
anticipate the latest deal boosting future production by 12% despite moderate initial activity.
We believe the latest assets offer material inventory upside that could be realized as soon
as late this year. However, operator ESTE is likely to maintain limited initial activity that could
delay the incremental location results.
Upon Acquisition Close, Focus Transitions to Managing Debt
With expectations of the deal closing in mid-3Q23, NOG’s focus will likely transition to
reassessing its capital allocations with a particular focus on debt reduction. We anticipate debt
repayment to be a focal point of the company’s capital allocation for 2H23 particularly with
steady, anticipated FCF generation driven by well production in the Williston and Permian
basins driving leverage below the 1.0x target level, While we anticipate NOG’s dividend to
potentially increase, we believe any boost will be financially measured to ensure optimal
returns are realized. And while we do not anticipate the company to pursue any further M&A
transactions in the immediate future, we recognize cash-on-hand has been, and will continue
to be a critical advantage of NOG’s growth strategy.
Updating Estimates, Increasing Price Target to $60 from $58
We have updated our production, capex, cost, and EBITDAX estimates to account for the
transaction and the updated hedging profile. Our $60 price target is derived from two equally
weighted methodologies with the first being our ’24 EV/EBITDAX multiple of 4.0x applied to
our 2024E EBITDAX estimate of $1,796MM ($1,552MM consensus) and the second being
a FCF/EV Yield assumption of 13.0%.
Here are Neal's notes:
Northern Oil and Gas, Inc. (NOG)
Conference Call Suggests M&A Pause Coming Post Latest Accretive Deal
We held a call Friday with the Northern executive team to go over the latest $500mm
acquisition along with future expectations.
We estimate the company’s Novo (private) deal to potentially generate among
the highest future return of any deal NOG has done to date. Despite the exceptional potential
returns, the company suggested it would do no further near-term transactions essentially
catching their breath after a series of positions deals. We continue to forecast NOG to
potentially generate the highest 2024 FCF in our group as we further increase our estimates
and price target.
Joint Acquisition Aligns Shared Interests & Inventory Focus
Friday’s Northern conference call provided insightful financial and operational details
of the company’s rationale for its latest deal. Further specifics were given over how
Earthstone Energy (ESTE, Buy) and NOG plan to initially moderately develop the new
assets though remain open to potentially ramping activity when warranted. Novo’s assets
provide optionality as they are inventory-rich that could ultimately drive 5%+ of NOG’s total
future production based on its working interest in ESTE-operated wells. While NOG’s non-op
business model emphasizes rates of return over the traditional E&P business model of
profitable production growth, we forecast this transaction to deliver both.
Notable Inventory Upside
While NOG was appropriately not prepared to outline a preliminary pro-forma 2024 plan, we
anticipate the latest deal boosting future production by 12% despite moderate initial activity.
We believe the latest assets offer material inventory upside that could be realized as soon
as late this year. However, operator ESTE is likely to maintain limited initial activity that could
delay the incremental location results.
Upon Acquisition Close, Focus Transitions to Managing Debt
With expectations of the deal closing in mid-3Q23, NOG’s focus will likely transition to
reassessing its capital allocations with a particular focus on debt reduction. We anticipate debt
repayment to be a focal point of the company’s capital allocation for 2H23 particularly with
steady, anticipated FCF generation driven by well production in the Williston and Permian
basins driving leverage below the 1.0x target level, While we anticipate NOG’s dividend to
potentially increase, we believe any boost will be financially measured to ensure optimal
returns are realized. And while we do not anticipate the company to pursue any further M&A
transactions in the immediate future, we recognize cash-on-hand has been, and will continue
to be a critical advantage of NOG’s growth strategy.
Updating Estimates, Increasing Price Target to $60 from $58
We have updated our production, capex, cost, and EBITDAX estimates to account for the
transaction and the updated hedging profile. Our $60 price target is derived from two equally
weighted methodologies with the first being our ’24 EV/EBITDAX multiple of 4.0x applied to
our 2024E EBITDAX estimate of $1,796MM ($1,552MM consensus) and the second being
a FCF/EV Yield assumption of 13.0%.