Northern Oil May Be Headed South - Barron's

by: SA Editor Judy Weil July 27, 2008 | about stocks: NOG / OIL    
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With a potential oil find of 3-4.3 billion barrels and current partnerships in eleven successful oil wells (and forecasts of another 80), Northern Oil & Gas (NOG) has risen 240% since going public last year. Expensive oil should keep the momentum going, yet Barron’s cautions that Northern’s $10 shares have a downside.

The company’s land assets in the Northwest’s Bakken oil field are valued at eight times more than rival XTO’s recent Bakken purchase, and XTO has 352,000 acres to Northern’s 60,000. Investors gave Northern a $317 million market cap despite no earnings and Q1’08 revenue of just $287,029. Also, the huge oil deposit was found under thick shale, which despite technological advances is still difficult and uncertain. XTO extracted reserves from just 30% of their land. If even 50% of Northern’s land yields oil, that would denote a $211M market value. 

More profit hazards: Northern leases rather than owns its wells for a cut from production. Most of the company’s land was purchased from CEO Michael Reger’s family; and two of Northern’s founders were convicted of insider trading and fraud in the past. Top that off with major recent insider selling, including by the CEO and CFO, and bullish analyst estimates of a $17 share look improbable. 

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A lot of the hype surrounding Northern Oil is predicated upon the assumption that if oil remains expensive, it will still be worth digging below the thick shale to get at Bakken oil. In March, Goldman Sachs said oil prices won’t peak before $200. Many think oil prices are currently taking a temporary breather.

Mark Barath, however, says the oil and natural gas pullback is not just a “correction” but a sea change as demand moderates alongside global growth. Jason Schwarz says oil’s proper valuation is between $40-$50. Schwarz believes all the signs are in place for the oil bubble to go the way of tech and real estate.

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This article has 12 comments:

  •  
    Jul 27 07:55 PM
    What are the good Bakken plays out there?
    Reply | Link to Comment
  •  
    Jul 27 08:33 PM
    Mr Schwarz 40 - 50 dollars for oil !!!! Please tell us what your taking so we can all go to fantasy land . (Where in the world do you people come from )
    Reply | Link to Comment
  •  
    Jul 28 01:17 AM
    Which is more likely, $40 or $200? I guess I'd have to go with $200. Personally I expect $100 to be the rule of thumb for a while, and it's unclear to me that Bakken is worth that much at $100. NOG does indeed look quite speculative. XTO itself looks much better all around.
    Reply | Link to Comment
  •  
    Jul 28 03:31 AM
    Mathew Simmons ex-energy consultant for J.Bush is previewing world production in 2015 at 60 million barrels down from today's 85..40-50 dollars oil? yeh sure !
    Reply | Link to Comment
  •  
    Jul 28 09:37 AM
    The truth is that no one knows where oil is headed. There are too many variables that affect the price, to name a few - unpredictable supply,demand, speculation, geo-political issues,terrorists,OPEC and don't forget emotion and rumor and a lot of so called expert's with conflicting opinions are at the very top of the list. Long-term oil will go up is a fair guess because everything goes up long term but short-term it could go anywhere - up, down or sideways. If you guess wrong or you guess right it was all just a good or bad luck guess - no one and I repeat NO ONE has a clue where oil is going - and any person's guess is just as good as the next person's guess. Charts are worthless when one shut down refinery,one hurricane , one rebel attack on a pipeline or one estimate of future supply or demand by an "expert" can change oil prices overnight. There is way too much emotion in the stock market and too many people investing short term trying to make a quick buck for anyone to have any reliable insight as to future performance of any stock or sector and energy is the least predictable at the moment. Give it up chill out and stop impulse investing on the latest "sounds right" theory.
    Reply | Link to Comment
  •  
    Jul 28 11:25 AM
    Even if, as Soros and others have argued, the sector is showing signs of a bubble, and even if a slowing global economy leads to a reduction in demand, the U.S. dollar has declined significantly, inflation is up considerably almost everywhere, to which can be added the increasing cost of extracting oil from new sources such as Bakken (technology is improving but costs will not go down even if inflation abates).
    Long-term investors should be careful about taking profits in whatever solid investments they have made in the sector (may not make sense to sell your pipelines).
    Reply | Link to Comment
  •  
    Jul 28 01:27 PM
    BEXP is another U.S. player not mentioned here, and there are a few small explorers on the Canadian side, as well.

    The good news: There are virtually BILLIONS of recoverable barrels of oil in the Bakkens, at $20 per barrel or less.

    The bad news: It will take THOUSANDS of small wells to recover it, which will easily exceed our lifetimes.
    Reply | Link to Comment
  •  
    Jul 28 02:40 PM
    Crescent Point Energy Trust is the best "Blue Chip" Bakken play, in my not so humble opinion. Others are speculative, even XTO's large position. BEXP is partnered with Northern Oil so fallout may hit BEXP, but Marathon Oil is also partnered with Northern.

    NOG is expensive compared to others because of the rapid growth, which may stallout here somewhat. Could be a buy at lower levels.

    New technology will come about, and guys whi run oil producers like XTO know it. The idea is to grab the land and start some production and wait until newer technologies help you out.
    NAL Oil and Gas Trust, recently paid $120,000 per flowing barrel for Bakken oil. That's up about 50 percent from the purchase before that on the Canadian side.

    Maybe NOG is over valued, maybe at lower oil it is, maybe at higher oil it isn't. One thing for sure, there are several humdred billion barrels out there and at 60, 80 or 100 or higher, somebody will get it out.
    Bakken Trend is an invest and hold.
    Reply | Link to Comment
  •  
    Jul 28 03:20 PM
    Thanks for posts @ plays!

    Anyone looking @ KOG??? Good looking land assets & is partnered with Devon -
    Reply | Link to Comment
  •  
    Jul 28 07:19 PM
    Another article from Barron's that is bearish. I think its a requirement to get a job there that you are not allowed to ever give a positive piece of coverage. I don't know offhand, but I'll bet they said to sell GOOG at every point along its stock lifetime. If you want to not make money - buy a subscription to Barron's.

    While I don't own any NOG and don't plan on it, I did research them along with CLR when I was looking into the Bakken oil. I went with CLR, but not because I thought NOG was in trouble as the author of this article does.

    All Barron's does is print with abondon all the rumors they get from anonymous 'insiders' who in actuality are more likely hedge funds that have huge short positions they want to blow out at a profit (after using Barrons to disseminate the propaganda).

    I saw the cover of Barrons a week or two ago (and really, there's not much point in wasting your time reading past the front page) and they had the question on the front asking if the housing downturn was over. I bet they advocated to get in and buy some homebuilders. Watch how that one plays out over the next year while the market still tries to find a bottom, unsuccessfully, in housing. People like to bash Cramer, but these guys are soooo much worse. Cramer at least gets it right sometimes on some grand slams. These guys.... I think the best that can be said is that they might not lose you too much money if your lucky.
    Reply | Link to Comment
  •  
    Aug 06 06:19 PM
    CLR-HAS over 500,000 acres. Stock has come down quite a bit ($30)
    Reply | Link to Comment
  •  
    Aug 08 11:43 AM
    Remember the President's Plunge Protection Team can intervene secretly in supposed " free markets" and they may well be doing so in the NYMEX on oil futures as a $1 change in oil has an amplified impact on the Stock Market.

    Thus, to boost equity prices it is cheaper to sell futures in oil and they can be backed up with our Strategic Petroleum Reserve. Much as they have done by indemnifying those they directed to buy equities or future index contracts.

    Just cooking the books in a new receipt, as they have been doing with our federal reserve assets. Push the problem off until the election seems to be their mantra.
    Reply | Link to Comment
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