|Shares Out. (in M):||41||P/E||97.0x||28.0x|
|Market Cap (in $M):||507||P/FCF||N/A||N/A|
|Net Debt (in $M):||0||EBIT||11||52|
Northern Oil and Gas is an intriguing way to play the Williston Basin Bakken/Three Forks play. The Williston Basin Bakken has been one of the biggest beneficiaries of the advancements in the horizontal drilling multi-stage fraccing technique. NOG has properties in the heart of the play (adjacent to EOG's spectacular Parshall field) in Mountrail County. And, now, with BEXP having "cracked the code" on their acreage, the size of footprint for economic completions has extended to the west side of Williams and Mckenzie counties.
What is unique about NOG is that it is based on the non-operator model. When an operator wants to drill on land they've leased, they apply to the Industrial Commission to create a drilling block. These are usually 640 acre drill sections, tho they can be as large ast 1280 acres or as small as 320 acres. They rarely control all the land in the drill block; Other owners are entitled to participate pro rata according to percentage of acreage held. The operator thus sends out AFE's (Authority For Expenditures) to the minority lease/land holders, notifying them of their pro rata share of the upcoming costs to drill. These minority holders must then quickly respond. If they pay the operator for their share of the costs, they retain their rights to their pro rata share of the oil produced. If not, then the operator gets to keep an amount of oil equal to three times his costs before the minority holder starts getting his share. Often, a local landowner does not have the money or risk-tolerance to invest along with the operator.
That's where NOG comes in. NOG's CEO, Michael Reger, is the 4th generation of oil and gas men from the Williston Basin of MT and ND in his family. He knows the properties, the laws, and often the people. NOG is the only entity that is capable of fielding a phone call from a local and getting a check to the operator in time to preserve the pro rata rights. Large operators don't want to buy out local minority interests. Too cumbersome. Too potentially litigious. Additionally, there is intense competition between the large operators. Often times one will decide to drill and another will have a small piece on the drilling unit. They will sell this to NOG so as to not be involved in another operator's well. In this manner, NOG has accumulated about 85,000 (net) acres in the Bakken/Three Forks play. They just recently raised $60 million to continue to accumulate acreage and pay for drilling expenses. Another advantage of the non-operator model is that they get a free ride on the operators non-drilling expenses, such as geologic, geophysical, engineering, legal, accounting, etc. Perhaps the most critical advantage of NOG's model is that they picked up their leaseholds, which expire after five years if not drilled, after the big operators acquired theirs. Thus, the operators are much more incented to drill and NOG is highly unlikely to lose their leaseholds. Most NOG leaseholds do not expire until 2H2012 and it is believed that 80-100% of their acreage will be HBP by then. Once the properties are producing, the leases cannot expire, and given the long tail nature of the horizontal drilling, these wells are estimated to last 40 years or more. With the near-universal success of drilling on the Williston Bakken, it is highly likely that all the large operators will secure their leaseholds by drilling in the next 18-24 months. NOG has land positions in many different operators' fields. Thus, they are not tied to the fortunes of any one or two operators.
After that, the fun likely begins. There are two more ways in which the value of these properties is likely to jump dramatically. One is likely downspacing of the wells. Each unit only needs one well to hold it by production, which as we just discussed will happen soon. It is believed that the radius that the fraccing drains is not that great, which, with the favorable IP's is amazing. Thus, it is highly likely that the operators will aggressively downspace wells in each unit to fully exploit the resource. It is currently expected that your typical 640acre unit will ultimately have four wells on it. This is just to tap the Bakken. Underneath the Bakken is another layer known as the Three Forks. It is thought that TFS will be as productive, if not more productive than the Middle Bakken. It is believed likely that the TFS will also be amenable to downspacing. Thus, each drilling unit could potentially have a total of 8 wells on it.
Valuation: It is currently expected that the EUR of the wells will average 500,000 bbls. Currently, NOG has 85,000 net acres. At 640 acres per drilling unit, that means 130 net (primary) wells, or 65million bbls of oil by the end of 2011. There are 41million shares out; or about 1 ½ bbls per shr using these (admittedly rough) numbers. Pick a cost per barrel, an oil price, a discount rate (tho production will be front-loaded), do the math and you can see the potential here. Again, these are the expectations for the FIRST well on each drilling unit. Cost for drilling keep coming down and economics get better as more stages are fracced. NOG just participated (23% WI) in a well that included 36 fraccing stages and IP'd an incredible 2700boe/d, with Slawson as the operator.
NOG currently has $45M in cash, no debt, and will likely have $25-50M in borrowing base after the 2009 re-determination. As PDP's go up, the borrowing base will go up if necessary. The biggest risk to NOG is a sharp decline in oil prices. The Bakken currently works down to $30 or $40/bbl. NOG has hedged 20% of its anticipated 2010 production at $78. Enbridge has recently added pipe to facilitate oil export. EOG uses the pipeline as well as railcars to Cushing.
Continued successfully drilling in Bakken. Likely lower drilling costs.
Complete Bakken drillout resulting in all land being HBP by yr end 2011.
Downspacing of drilling.
Drilling on the Three Forks layer.