Many oil and gas investors seem to have recently lost some interest in the Williston Basin, despite several extremely attractive aspects of the play:
1) Very high quality light, sweet crude
2) High production levels of oil relative to natural gas (about 90% of production is crude, 10% natural gas)
3) Virtually zero dry hole risk
4) Huge potential for growth
Continental (NYSE:CLR) recently talked about 3 new layers of shale (in addition to the Bakken & Three Forks) that may have economic quantities of oil. The CEO said that current estimates are for only 4% of the oil in the Williston basis to be recovered and he believes over time that percentage will increase. If you consider the advent of horizontal drilling and how that essentially made the Williston Basin a major field, I think it's ridiculous to think that technology won't continue to improve, ultimately enabling a multiple of current expectations to be extracted from this field, both as most layers of shale are found to be economic and as technology enables producers to harvest more oil from existing layers.
In this first of a series, I would like to compare the relative value of Northern Oil and Gas, my personal favorite Williston Basin producer, to another - Oasis Petroleum:
- Oasis has 307,430 net acres, added 19.9 net wells in the first quarter of 2012, had 25.6 net wells drilling and awaiting completion as of 3/31/12, averaged 5,206 boepd in 2010, 10,724 in 2011 and 17,633 in the first quarter of 2012. Production per day grew 106% in 2011 vs. 2010 and 16% from the fourth quarter of 2011 to the first quarter of 2012. Oasis has an enterprise value of $3.38 billion.
- Northern has 170,000 net acres, added 13.4 net wells in the first quarter of 2012, had 16.5 net wells drilling and awaiting completion as of 3/31/12, averaged 2,435 boepd in 2010, 5,275 in 2011 and 8,500 in the first quarter of 2012. Production per day grew 117% in 2011 vs. 2010 and 20% from the fourth quarter of 2011 to the first quarter of 2012. Northern has an enterprise value of $1.27 billion.
- Oasis then has 80% more acreage than Northern and just over twice the production in 2010, 2011 and the first quarter of 2012. Yet Northern is now showing a higher growth rate as production grew 117% (vs. 16% for Oasis) in 2011 and 20% (vs. 16% for Oasis) in the first quarter of 2012. As an indicator of future production growth, despite having twice the current production, Oasis completed only 149% as many wells as Northern in the first quarter of 2012 and has only 155% as many wells drilling and awaiting completion at 3/31/12.
In summary, OAS has twice the current production and 1.8 times the acreage of NOG, has a lower growth rate yet has 2.66 times the enterprise value of NOG. NOG is a non-operator while most of OAS's acreage is operated and held by production so perhaps NOG deserves a small discount on an apples to apples basis, but I would argue that NOG's higher growth rate, ability to operate "leaner" and be much more diversified as a non-operator and proportionally more room to grow (with a higher % of acreage awaiting development) more than compensates for the non-operator discount, especially since NOG has interests in many of the same wells that OAS operates.
At $32.51 a share, OAS has an enterprise value of $3.38 billion. If you assume NOG deserves half the enterprise value of OAS (with half the production, well over half the acreage and a faster growth rate), or $1.69 billion, the current fair value of NOG (now $19.00 relative to OAS at $32.51) is $25.76, meaning that NOG is currently approximately 36% undervalued!
Production, acreage and other metrics were taken from respective company press releases, enterprise value data from Yahoo Finance.
Disclosure: I am long NOG.