BUY (NOG, $5.69)
Bakken Producer “Operates” More As Portfolio Manager Than Driller
July 09, 2015
Glenn Williams Jr.
We are initiating coverage on Northern Oil & Gas with a BUY rating and $7 price target. Following a 64% decline in its 12 month stock price, we contend that Northern is undervalued at current levels. We value Northern’s equity on the basis of daily production and proved reserves, along with projected EBITDA. In doing so, we find that Northern shares trade at a discount to its peers on the selected metrics. Additionally, Northern trades at a 29% discount to its most recent PV-10 value (12/13/2014)
Northern acts more as “portfolio manager” than traditional E&P firm, selecting wells that meet its IRR thresholds. As a “non-operator”, Northern partners with larger operators in the Bakken shale, taking minority working interests in prospective wells. In doing so, Northern forgoes drilling control, but maintains the ability to “consent” (i.e. select) to wells they wish to participate in. As such, this often allows Northern to maintain a lower expense profile than that of a traditional operator. To that end, we note that Northern estimates a break even price range of $35-$50 for West Texas Intermediate (WTI) oil. (exhibit 4, highlights our own internal break even analysis)
Northern employs an aggressive hedging program, designed to provide price certainty. We note that 80% of Northern’s 2015 production is hedged at approximately $90 per bbl. Given the 50% decline in oil prices (12 month), we expect this to give Northern a pricing advantage over its less hedged competitors in 2015. We also note 1Q and 2Q16 hedges in place at $90 per bbl, along with $65 per bbl hedges in place for the 3rd and 4th quarters.
We base our price target on a blended average of Northern’s daily production, proved reserves, and projected EBITDA figures. In doing so, we arrive at a price target of $7 per share (exhibit 13). Additionally, our model deducts $0.16 for a working capital deficit, along with $13.87 per share for net debt. Thus, given the 23% implied upside to current prices, we initiate coverage on Northern with a BUY rating.
Source: Capital IQ; National Securities Corporation
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