Northern Oil May Be Headed South - Barron's

|
 |  Includes: NOG, OIL
by: Judy Weil

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 (NYSEMKT: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.

 

==============

 

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.