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Monday, March 21, 2011

For Investors Only: NOG -- Questions Regarding Valuation -- Bakken, North Dakota, USA

Updates

May 13, 2011: On wives, friends, and beauticians.

March 29, 2011: NOG bounces back

March 28, 2011: NOG provides operational update. Responds to recent "bear raid."

March 28, 2011: SeekingAlpha.com replies. All smoke, no gun.

March 24, 2011: NOG has leveled off; now going back up.

March 24, 2011: Bakken Shale Discussion Group weighs in

March 24, 2011: My hunch -- a lot of folks are waiting for NOG to level off and then they will buy back in. Traders only make money with volatility. This will be very interesting to follow.

March 24, 2011: The Wall Street Journal weighs in.  Be sure to read the comments.

March 23, 2011: Motley Fool says "no" to NOG.

March 23, 2011: It appears the article has its intended effects. It will be interesting to see how this all plays out. I would think that if the stock is oversold, the company would go back in and aggressively buy back stock, or there would be increased insider buying. If not, one has to wonder how relevant the research is. Regardless, it was good to see this happen: it keeps folks like me who are inappropriately exuberant about the Bakken grounded, cautious, and diversified. The next three quarters will be the most important quarters in NOG's relatively young history as a billion-dollar market cap company. My enthusiasm for NOG's unique business model has not waned one iota. 

March 22, 2011, 2200 hrs: here's another blog that has piggy-backed unto the original Street Sweeper blog questioning the valuation of NOG, and shorting the stock. The blog appears to be coming out of Australia, and it sounds like in addition to questioning NOG, he questions the entire Bakken. Again, I am glad the article on NOG came out: it keeps me grounded, cautious, and diversified. Also, if NOG pulls back significantly, it provides another opportunity to accumulate more shares.


ORIGINAL POST

Someone alerted me to this 2-part story regarding the valuation of NOG:

http://thestreetsweeper.org/undersurveillance.html?i=1665
http://thestreetsweeper.org/undersurveillance.html?i=1671

The story was picked up by a contributor to SeekingAlpha.com and can be found here:

http://seekingalpha.com/article/259340-will-growth-spurt-last-for-northern-oil-and-gas?source=yahoo

I have always been a fan of NOG's business model. It will be interesting to see how this plays out.

The contention is that NOG is not accounting for the huge decline rates in Bakken wells. The articles do not discuss the effect $100 oil has on the company, or the valuation. I would suspect many of these companies are being valuated on $60 or $75 oil at a time when more and more pundits see $100 oil for the foreseeable future.

Update: for traders, this may be an opportunity to sell and buy back in when NOG settles at its new "floor."

For long term investors, this could be typical volatility that will work itself out over time.

15 comments:

  1. Bruce, please use this post rather than the one I just sent....I also posted this comment at Seeking Alpha:

    If you read to the bottom of their article, you may discover some of the motivation behind this "story". Here is their disclosure:

    ""* 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.

    As a matter of policy, Melissa Davis – the editor of this website and the author of this story – will never take a financial position (short or long) in any of the stocks that she covers. To contact Ms. Davis, please send an email to editor@thestreetsweepe...
    ----------------------

    One last observation, when the article talks about significant decline rates over time, they do not consider that new wells are being drilled each year. As these first year wells "decline", they are added to the portfolio and replaced with new wells that ultimately add to the portfolio, and so on, and so on. If we were at the end of the drilling phase it would be more relevant, but we are at the early stages of the Bakken. "Frackin' the Bakken" has only just begun...

    Perhaps "the decline" is very different in the Bakken.

    Disclaimer: I am long on NOG. They see gaps...I see growth.

    Bakken Brett

    ReplyDelete
  2. I have the same "position" as you do.

    For me, it's a reminder not to be complacent and to remain diversified.

    The best example: I do not own AAPL shares, but I follow it closely and felt there was nothing that could stop AAPL moving from 350 to 500, and then the Japanese earthquake and AAPL "plunges" to 330.

    I agree; we are very, very early in the Bakken.

    There are many, many aspects of the Bakken and the oil industry; the issue "Street Sweeper" brought up is only one of many.

    ReplyDelete
  3. Here is part 2 of the article: http://thestreetsweeper.org/undersurveillance.html?i=1671

    Bob

    ReplyDelete
  4. Thanks.

    This is a great opportunity for those who are nervous or unsure what to do: if they have a profit, sell, and then come back in when NOG has settled at a lower price.

    For long term investors, typical volatility and long term should do just fine.

    ReplyDelete
  5. Investors must understand that media is the enemy. Boutique firms have intent, information spun one way or another manifests intent.

    The following link must be understood, The Greatest Crime in History (edit; aka... Too Corrupt to Remedy)
    Crime of the Century" Bud Burrell with Jim Puplava.
    http://www.netcastdaily.com/broadcast/fsn2008-0712-2.asx

    ReplyDelete
  6. In my view, nog's business model has a serious flaw namely, they cannot control their own destiny. They lease land based on what other companies are doing as they have minimal to no geo or eng capability. To me, this is just gaming that the leased land will be developed during the term of the lease. Hindsight proved this plan in the bakken for nog. This needs to be repeated over and over to be sustainable. It's like craps, you can be on a roll but at some point you will roll a seven. Great roll tho so far.

    ReplyDelete
  7. In fact, they are in control of their own destiny.

    I don't have time to complete a post on this now, but will come back to it later.

    Bottom line: they choose how much they want to invest in any given well. If the operator has a great history and if the lease is in a great area, they will pony up a larger percent of working interest. If the lease is in a mediocre area and/or the operator has a poor record, they can pony up as little as nothing. If they hold the lease, they can still participate in any royalties.

    There are "no" dry holes in the Bakken.

    Once a well is producing, it holds that acreage for "eternity."

    ReplyDelete
  8. There is very little "bakken land" that is unleased. So where is nog leasing today to grow it's reserves? And how will nog control development of said new leases when its model is to lease fractional tracts over a large area? Nog has to cover large areas as they do not know (have no way of knowing) where and when leases will be developed . The plan is working for the bakken leases nog bought in 07-10. The question I am asking is where does nog go from here? If they play out the bakken leases and do not come up with new reserves the share price will peak (we may have seen the peak) and then decline. Not saying their position is hopeless but they won't be able to sustain market cap unless reserves can grow and be replaced.

    ReplyDelete
  9. You are correct. I have wondered the same thing. At some point the Bakken runs out.

    However, I would hope that with a market cap of over $1 billion, NOG is looking at the Niobrara, Eagle Ford, etc. If NOG is unable to jumpt to the next level you are exactly correct.

    Two issues for me: First, I don't know how to place a value of their company in terms of taxes, cash flow, investments, managing the company in other words. Warren Buffett started with an insurance company and grew it in to something entirely else. How NOG uses their money, that's the multi-billion dollar question.

    The second issue has to do with how others are valuing NOG's acreage. Remeber, Bakken wells are expected to produce 25 - 30 years. BEXP says 35 - 39 years. That's a lot of years of cash flow. When the whole Bakken thing started, folks like me thought it was going to be one well per section; now it's a minimum of three wells per section and that's just the Middle Bakken and the Three Forks. Once they have a producing well, they hold the lease for eternity for ALL formations under that well including Red River B and others.

    Bottom line: NOG has the opportunity to become a multi-billion dollar company and it may be something much different than what it is now. If it remains a mom-and-pop outfit unable to jump to a new level, that's the risk.

    I would hope that NOG executives are finding time to have serious discussions with some bright CEOs of Fortune 500 companies.

    But to answer the most basic question: it's going to be a long time before NOG quits drilling. Did they say they had 709 wells sites identified? And they will participate in 40 this year, which is an increase from 36 originally planned.

    40 wells/year and 700 wells to go -- that's a bunch of drilling. And the technology gets better, and, oh....did anyone mention that maybe the price of oil will maintain at $100. I do believe most Bakken companies have been valued with oil at $60.

    Sometimes folks can think too much about the downside and miss the upside. I missed BEXP and WLL because I was concerned about some of these issues.

    ReplyDelete
  10. Well, I assert that all of the positive points that you enumerate have been "priced in". Another item nog is facing is renewal of leases in the bakken that are coming to the end of their term and are not hbp. I am certain there are more than a few mineral owners of undrilled land who have expectations of new leases with higher bonus and royalty. Nog will have to be competitive in order to maintain it's leasehold position . The only lever nog has is to outbid the operators when leases come up for renewal since nog does not drill. However this plays out, nog will have to incur higher costs or scale back on it's leaseholds. Either expenses go up or revenue potential goes down. Not an easy call for nog mgmt with their "I'm just along for the ride" business model. None of this is to say not can't hit. They can. But their future is far from a slam dunk.

    ReplyDelete
  11. A buyout might be a good outcome for investors at this point but since the CEO is getting liquid a buyout would not seem to be in the near term future.

    So for investors who are long nog (disclosure: I have no position in nog and will not take a position) it looks to me like a hold and hope strategy.

    ReplyDelete
  12. What I am most interested in is where NOG goes from here: whether they remain the same company/same business model or whether they move to the next level.

    ReplyDelete
  13. Except for my political rants, no other issue has attracted so much attention as the current NOG issue.

    This speaks volumes.

    It coincides with the three or four segments on Jim Cramer's "Mad Money."

    Clearly, the Bakken has finally reached the national stage.

    I have learned a lot about the Bakken in these past two years. On the blog I am inappropriately exuberant about the Bakken; off-line I am very, very conservative.

    NOG has reminded me to remain grounded, conservative, and diversified.

    ReplyDelete
  14. Not sure what the next level would be.

    Can nog replicate it's bakken success in other areas ?
    Seems to be possible but not easy.

    Can nog become an operator with it's own geo and eng and go out and find/develop it's own land? Thereby in control of it's own destiny. (hint: this is the best way ahead but a very expensive and complex one and there is no indication nog is committed to this path)

    ReplyDelete
  15. That's what makes this so interesting -- for me, as a spectator. Watching this play out.

    As an example: Oasis seemed to have come out of nowhere, it seems, to become a $2.8 billion (market cap) company, almost overnight. It was founded in 2007, and has prospects "only" in the Bakken, and "only" in three areas. It got its big break, from my perspective, when it acquired Fidelity's (MDU) assets in 2008/2009 time frame.

    American Oil and Gas (AEZ) sold out; so did Anschutz, and maybe that's all that will happen with NOG. Grow the company a bit more and sell out.

    Or maybe they will just keep doing deals and not get to the next level. They have plenty to keep them busy.

    But unexpected things happen fast in the Bakken.

    ReplyDelete

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