Will Growth Spurt Last for Northern Oil and Gas?

Mar.21.11 | About: Northern Oil (NOG)

By Louis Bedigian

Northern Oil and Gas (NYSEMKT:NOG) may be one of the hottest names in the energy sector, but The Street Sweeper warns that its potentially unsustainable growth could be a horror story in the making.

Over the past year, NOG has tripled its revenue and more than doubled its profits. The company recently hit a stock record of nearly $34 a share – up 1,500% from its 2009 lows. But even now, with NOG trading at more than $28, the stock “still boasts a $1.72 billion market value that reminds skeptics of Cinderella on that wondrous night just before midnight struck,” The Street Sweeper's Melissa Davis wrote.

Davis says that NOG comes with a “powerful bull story.” In short, the company employs a well-connected chief executive who used his family's “deep roots” in Montana and North Dakota to negotiate “valuable leases in the oil-rich Bakken shale.” Davis also says that NOG managed to secure the land at cheap prices “by focusing on small ‘non-operated' properties that have yet to be explored.” Further, the company keeps overhead to a minimum by “partnering with established operators that actually drill the wells in exchange for a majority share of the gains that flow from those projects.”

This has allowed NOG to minimize risks and maximize returns, Davis says, “while generating massive gains for the company and those who have purchased its popular stock.”

Impressive? You bet. According to The Street Sweeper, analysts who follow NOG seem to be “as enchanted by the company as ever.”

“They continue to unanimously recommend buying the stock, responding to the recent surge by simply raising their price targets to levels as high as $40 a share,” Davis wrote.

However, ValuEngine computer models recently flagged NOG as a “potentially overpriced stock that could prove vulnerable to a significant correction.” At the time, ValuEngine issued a Hold recommendation while saying that it believed NOG's real value was $10 below the current share price (more than $32.50-plus at the time).

“This makes NOG 44.68% overvalued,” ValuEngine wrote in its report. “Fair value indicates what we believe the stock should be trading at today, if the stock market were perfectly efficient and everything traded at its true worth.”

After working through the math, Davis says that some long-term energy bulls, even those willing to gamble on small players, have “shied away” from NOG.

One energy expert told The Street Sweeper that while he likes the company's business model, he can't justify its valuation. “When you buy it, you're paying a big multiple for that acreage,” he says. “And you're not buying anything special. You might as well just buy Whiting Petroleum (NYSE:WLL) or Continental Resources (NYSE:CLR) instead."

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.