Northern Oil and Gas: A Good Response to Second Quarter Results

Aug.10.11 | About: Northern Oil (NOG)

Northern Oil and Gas (NYSEMKT:NOG) had a good response to its second quarter earnings announcement. NOG did not have great numbers as it earned 33 cents/share in the second quarter, but 21 cents was unrealized gains on derivative instruments. NOG missed on both the bottom and top line as revenues were $35.5 million versus the Street's $39.07 million. The Street also expected earnings of 19 cents/share.

This was the fourth straight quarterly earnings miss and could make it difficult to make this year's earnings estimates of 89 cents/share. NOG traded as high as $18.96/share yesterday, but pulled back with the market after the Fed statement. Net income increased 30% quarter over quarter. Production volumes increased 12.5% quarter over quarter. Average daily production was 4,400 Boepd in the second quarter with 5,200 Boepd the average for June. This increase duplicates what many companies have said in the Williston Basin. April and May were slow months due to flooding in North Dakota and Montana. The large increase in production for June shows production is coming back on line.

NOG reaffirmed it will spud 40 net wells in 2011. The story for next quarter may have to do with hedged oil. As of June 30th, NOG had a total volume on open commodity swaps of 1.447 million barrels of oil at a weighted average price of approximately $88.13. It had 243,000 barrels of crude oil collared between $85 and $101.75. NOG plans to spend $20 million per quarter on acreage acquisitions. In the second quarter it purchased 12,767 net acres at an average cost of $1,995/acre. Although the numbers were not great for this company, its move in stock price has more to do with forward expectations. Northern Oil and Gas managed to keep costs in check, has hedged a large portion of production, is adding acres at low prices, has had some very good well results, and was oversold. Since most of the oil players in the Bakken had a difficult second quarter, NOG as a non-operator also did. The third quarter is looking very good for the Williston Basin, and because of this NOG should benefit.

Abraxas (NASDAQ:AXAS) missed earnings estimates for the second quarter. Its numbers were received well given that its share price was up significantly. Abraxas posted EPS at 1 cent/share versus the Street's estimate of 5 cents/share. Revenues were $17 million versus the Street's $18.9 million. With unrealized mark to market hedges, Abraxas posted 10 cents/share. Abraxas reiterated difficulties associated with heavy snowfall that resulted in heavy flooding around its acreages in the Rocky Mountain region. This reduced production by approximately 100 Boepd. Abraxas announced results of its Stenehjem well in McKenzie County which was good. Abraxas has also been busy and should be able to increase production significantly through 2011. Abraxas also has acreage in the Niobrara, Eagle Ford, West Texas and Canada. July production increased from 3,845 Boepd in the second quarter, to 4,160 Boepd. Although Abraxas missed earnings, it had good drilling results and outlook.

Magnum Hunter (MHR) was one of the few companies on Tuesday in negative territory. Second quarter revenues were $33.4 million. Some of these revenues were attributable to its NGAS and NuLoch acquisitions. The Street's revenue expectations for Magnum were $29.24 million. It recorded a second quarter net loss of $18.5 million or 16 cents/share versus a 1 cent/share loss expectation of the Street. Also, $16.8 million of non-recurring, non-cash charges were included in the quarter. Without these charges, Magnum would have reported an in line second quarter EPS. This increased its 2011 EPS loss to 29 cents. Magnum recently completed $575 million of acquisitions and a $57 million purchase of acreage in the Williston Basin. I have been a proponent of Magnum's stock, and really like three areas of interest it has. The Williston Basin, Eagle Ford and Marcellus are some of the best areas of unconventional resource in the United States, but I think worries are increasing about its ability to fund cap ex. On top of the added debt, Magnum has lost money for at least five straight quarters. Magnum announced 450 Boepd has been shut in due to poor weather in the Bakken. It estimates this will be returned to production sometime in August. Current production is now 1,400 Boepd, and Magnum expects 2011 exit production of 2,400 Boepd. Magnum stated its most challenging area this year was in the Williston Basin, as completion activities were slowed significantly by a harsh winter, and very wet spring. This coupled with difficulty in getting equipment has significantly slowed progress.

Voyager Oil and Gas (VOG) posted second quarter earnings on Tuesday. Voyager missed on both the top and bottom line. Revenues were $1,666,535 as opposed to the street's estimate of $2,180,000. EPS was a loss of 1 cent versus the Street's estimate of 1 cent/share in earnings. Voyager has realized significant revenues from 24 gross or 1.13 net Bakken/Three Forks wells in the Williston Basin. Voyager OIl and Gas seems to be seeing the same increases in production as Northern Oil and Gas as they both share a non-operator model. Although it missed expectations, the numbers were not bad as weather hampered drilling operations through the Williston Basin. It added 2,232 net acres at $1282/acre. Voyager is not a pure Bakken/Three Forks play in the Williston Basin as it has acres in the Niobrara, Heath and Tiger Ridge. I would be careful with this name, as it could still lose significant ground if the market continues downward.

The articles Second Quarter Earnings in the Bakken and Kodiak Oil and Gas: Setting the Stage for Pure Bakken Players both address current conditions in the Williston Basin. The first quarter of 2011 was hampered by harsh winter conditions and unrealized losses in mark to market derivatives instruments. These two situations created a difficult environment. The second quarter was also difficult due to flooding throughout the region. June was a better month as some of the flooding diminished enough to bring well shut ins back on line, and good reports for July are also being seen. All of this bodes well for the third and fourth quarters of this year. Watch specifically Brigham (BEXP) as it had two upgrades on Wednesday morning, and Kodiak (NYSE:KOG) as it had two very good wells in the second quarter and was recently upgraded. Both of these names have attractive entry points at these levels.

Disclosure: I am long BEXP, KOG.

Additional disclosure: I own NOG call options. This is a list of companies with operations in the Williston Basin in the second quarter of 2011. This is only a list and not a buy recommendation.