It's In Our Hands Now, Step Aside Institutions - An Analysis Of Northern Oil & Gas Ownership

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Includes: BNO, NOG, XOP
by: Trading Alpha
Summary

Institutions decreased their ownership from 58% to 31% of NOG from 3/31/17 to 9/30/17.

This drove the stock from $2.50 to under $.80.

The decrease in institutional holdings was 21% of the trading volume in these 6 months.

The institutions have substantially reduced their positionand now the stock has based, the 50 day moving average has crossed the 200 dayline and the stock is up 150% of its lows the selling pressure is very likelyover.

As I wrote two weeks ago, when the stock was $1.20 per share in this article, Northern Oil & Gas suffered a decline from $4 to under $1 after oil bottomed in January. XOP a representative ETF of E&P companies is now down 17% YTD was down 33% at the worst) and BNO is up 6% YTD after being down 25% earlier in the year.

I attributed the loss to be driven by concerns over debt and the departure of the CEO. I have discovered there is another reason that should be added to the list. The institutions bailed on this company as the stock declined below $2.50 per share. See the institutional ownership primarily from Gurufocus (see note below):

Date

Institutional Ownership (%)

Institutional Ownership (Shares in Mil)

September 30, 2017

31.79

21.24

June 30, 2017

42.23

26.95

March 31, 2017

58.37

37.09

December 31, 2016

56.67

35.91

September 30, 2016

61.14

38.35

June 30, 2016

60.98

39.39

March 31, 2016

63.03

40.11

December 31, 2015

79.33

48.41

September 30, 2015

86.5

53.29

June 30, 2015

89.5

55.20

Note Gurufocus appears to have an error in their 9/30/17 institutional ownership, notes in validating article for this article. Yahoo Finance and NASDAQ have it at 31.8 - 31.9% at this date so the above table was modified to reflect this just for 9/30/17.

Sources:

Clearly there has been substantial institutional selling. Here is some data from NASDAQ's site reflecting Q3'17 data:

Active Positions

HOLDERS

SHARES

Increased Positions

17

3,114,407

Decreased Positions

72

11,731,090

Held Positions

18

6,396,893

Total Institutional Shares

107

21,242,390

New and Sold Out Positions

HOLDERS

SHARES

New Positions

6

1,259,603

Sold Out Positions

46

5,735,789

And here is how the stock performed:

http://stockcharts.com/c-sc/sc?s=NOG&p=W&b=5&g=0&i=t65528607868&r=1512823960624

Source

The institutional selling was significant part of this decline. Think about a large institution with 1mm shares of the stock selling to individual investors who are buying 100 - 500 share blocks. It takes a long time using limit orders to avoid destroying the price to sell 1mm shares. This is why it took 10 months from January 2017 to October 2017 for the stock to base as the institutions bailed. See the above stock chart.

Here is the weekly volume and price data from Yahoo finance during the period in which the vast majority of the price decline took place, slightly less than the 6 months ended 9/30/17:

4/2/2017

2.65

2.68

2.45

2.5

2.5

3,340,600

4/9/2017

2.5

2.55

2.3

2.3

2.3

2,648,900

4/16/2017

2.3

2.4

2.25

2.25

2.25

2,709,600

4/23/2017

2.3

2.35

2.2

2.25

2.25

2,518,900

4/30/2017

2.25

2.25

1.9

1.95

1.95

3,005,300

5/7/2017

2.05

2.25

1.9

1.95

1.95

3,965,000

5/14/2017

2

2

1.6

1.7

1.7

4,934,700

5/21/2017

1.7

2.25

1.65

1.65

1.65

5,940,800

5/28/2017

1.7

1.75

1.6

1.6

1.6

3,378,900

6/4/2017

1.6

1.8

1.6

1.65

1.65

2,854,800

6/11/2017

1.65

1.75

1.6

1.65

1.65

1,902,100

6/18/2017

1.65

1.65

1.25

1.3

1.3

11,055,600

6/25/2017

1.35

1.5

1.3

1.4

1.4

6,131,800

7/2/2017

1.4

1.45

1.2

1.25

1.25

2,848,100

7/9/2017

1.25

1.3

1.05

1.2

1.2

2,877,900

7/16/2017

1.2

1.25

1.1

1.15

1.15

3,233,200

7/23/2017

1.15

1.45

1.15

1.3

1.3

4,278,000

7/30/2017

1.3

1.3

1.1

1.2

1.2

3,730,800

8/6/2017

1.15

1.15

0.85

1.01

1.01

12,361,800

8/13/2017

1.05

1.05

0.95

1.01

1.01

2,351,300

8/20/2017

1

1.04

0.91

0.93

0.93

4,818,900

8/27/2017

0.95

0.97

0.77

0.86

0.86

4,408,900

9/3/2017

0.86

0.9

0.73

0.74

0.74

2,374,100

9/10/2017

0.74

0.85

0.66

0.85

0.85

3,207,100

total

100,877,100

So when institutions sell shares some of the shares are purchased by another institution and the change in quarter end holdings is a net number. If one examines the Q3 data listed above from NASDAQ you'll observe that institutions sold out 5,738K in shares (elimination of all of their 6/30/17 holdings) and decreased open positions by 11,731K for a total reduction or sales of 17,467K shares. This amount is 33% higher than NASDAQ's net decrease in shares of 13,092 (which is the 17,467 offset by a total of increased positions of 3,114K and new positions of 1,260K). So this means for Q3, actual sales were 133% of the net reduction.

Applying this 133% to the total decrease from the first table above of 15.85mm shares this means total institutional sales can be estimated at 21mm shares (15.85 times 1.33) which is 21% of the total shares traded of 100mm shares.

Said differently, institutions were selling 4 shares for every 1 share purchased. I would expect the Q4 institutional results to be much different once reported and with the investment thesis presented in the article linked above, this should be followed by quarters with increased institutional ownership in 2018.

There are two other perspectives that should be recognized when analyzing the ownership of NOG.

First the short position at 11/15/17 was still pretty high at 14% of float or 6.6mm shares and with the stock closing at $1.06 on that day compared to yesterday's closing price of approximately $1.60 the shorts lost 50% of their position in the last month so I would expect a lower short position once reported at 11/30 and 12/15. More tailwind for the stock.

Finally, as mentioned in my first article a significant insider ownership interest has built in this stock by smart money, currently at almost 26%, double from where it was in March 2016:

Date

Insider Ownership (%)

Insider Ownership (Shares in Mil)

October 31, 2017

25.35

16.18

September 30, 2017

25.35

16.18

August 31, 2017

25.35

16.18

July 31, 2017

25.35

16.18

June 30, 2017

15.79

10.00

May 31, 2017

15.01

9.51

April 30, 2017

15.08

9.56

March 31, 2017

14.84

9.38

February 28, 2017

14.96

9.43

January 31, 2017

14.96

9.43

December 31, 2016

14.97

9.43

November 30, 2016

14.91

9.40

October 31, 2016

14.55

9.40

September 30, 2016

14.52

9.38

August 31, 2016

14.44

9.33

July 31, 2016

14.44

9.33

June 30, 2016

14.44

9.33

May 31, 2016

14.8

9.35

April 30, 2016

14.8

9.35

March 31, 2016

12.33

7.79

Source Gurufocus - NOG Ownership tab

So to put this all together, since March 2016 the institutions have decreased their ownership level by 31% from 63% to 32% (first table) and insiders have bought 42% of that decrease (13% over 31%). Find another stock with that dynamic!

Conclusion

Step aside institutions it is up to insiders and private investors who don't just run with the herd of others to enjoy the appreciation in this stock.

The institutional selling should be over based on the strong performance of NOG since 9/30/17 (up more than 70% QTD) and do to the substantial decrease in institutional ownership almost cut in half Y/Y from 9/30/16. Institutions now represent a tailwind to help propel the stock price higher as it crosses $2 and $3 per share. If the $2.50 was a price level that drove to the selling once crossed this will help the stock go higher. If NOG's market cap to total enterprise value (EV), which bottomed around 5% was driven around the fear about debt levels - this concern should be elevated as the recovery continues. This current metric for NOG at 12/8/17 is over 11%. At $2 this metric would be almost 16%.

For comparison these E&P companies have a market cap to EV metric as follows at 12/8/17:

LGCY 7%

CRK 11%

PQ 11%

CRC 12%

To provide some context, from my studies, when this metric is below 10% and the market has considerable concern about solvency and debt. Between 10-15% it is a watch item and the trend of the company is important (positive for NOG) and above 15% the company is undercapitalized but the metric is much less of a concern.

PQ - Valuation Measures from Yahoo Finance Statistics page

Market Cap (intraday) 5

35.31M

Enterprise Value 3

325.81M

Divide market cap into enterprise value and PQ has 11% of its enterprise value represented by equity, the rest is debt.

Disclosure: I am/we are long NOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: One of my largest positions and have been in the stock for over three years watching and learning.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.