Monday, April 4, 2011

Northern Oil versus Brigham Exploration Company

Someone in the comments asked me why I was short Northern Oil versus (say) Brigham Exploration Company.  Brigham is another highly valued Bakken play.  Yahoo reports Brigham as having a 97 times PE ratio.

Northern Oil is – as previous posts have made clear – not an exploration and production company.  It buys acreage and it participates in wells drilled by other people on that acreage.  Its only skill – its only reason for existence – is choosing which acres to buy and managing their ownership position.  That is why it manages to be a $1.6 billion company with only 11 staff.  The staff don't do anything except buy and manage an acreage ownership position.

Well here is list of completions from the most recent 8K.


RECENT COMPLETION HIGHLIGHTS
The following table illustrates first quarter 2011 completions in which Northern Oil has participated with a working interest.
WELL NAME
OPERATOR
COUNTY/STATE
WI
IP/BOEPD *
JEANIE 25-36 #2H
URSA
MCKENZIE, ND
54.58%
1,185
HOVDEN FEDERAL #1-20H
SINCLAIR
DUNN, ND
45.72%
1,325
BORSETH #15-22 1H
URSA
MCKENZIE, ND
39.55%
2,015
BANDIT #2-29H
SLAWSON
MOUNTRAIL, ND
26.25%
959
NIELSEN #1-12H
CONTINENTAL
DIVIDE, ND
24.25%
857
VONA #1-13H
CONTINENTAL
DIVIDE, ND
20.31%
921
ERNEST SCHARCHENKO #34-33H
MARATHON
DUNN, ND
17.57%
400
MUSKRAT FEDERAL #1-28-33H
SLAWSON
MOUNTRAIL, ND
12.83%
1,453
ZI PAYETTE #10-15H
ZENERGY
MCKENZIE, ND
12.50%
1,323
HOLTE #1-32H
CONTINENTAL
WILLIAMS, ND
12.50%
933
GEORGE TANK #151-96-10C-3-3H
PETRO HUNT
MCKENZIE, ND
12.35%
902
ALMER 31X-6
XTO
WILLIAMS, ND
11.14%
388
BROWN 30-19 #1H
BRIGHAM
MOUNTRAIL, ND
9.25%
2,240

2
CROWFOOT #35-3031H
EOG
MOUNTRAIL, ND
8.38%
330
COWDEN #5404 13-35H
OASIS
WILLIAMS, ND
7.65%
1,594
EN-HEINLE #156-94-2536H-3
HESS
MOUNTRAIL, ND
7.29%
950
VIXEN FEDERAL #1-19-30H
SLAWSON
MOUNTRAIL, ND
6.70%
2,218
HELEN 11X-05
XTO
WILLIAMS, ND
6.64%
917
BENNY #1-13H
CONTINENTAL
RICHLAND, MT
6.25%
232
NORWAY #1-5H
CONTINENTAL
MCKENZIE, ND
5.14%
1,429
ROUND PRAIRIE #10-1819H
EOG
WILLIAMS, ND
4.82%
1,900
MILLER #44-11H
WHITING
WILLIAMS, ND
4.12%
1,144
BUD #1-19H
CONTINENTAL
WILLIAMS, ND
3.70%
1,983
KOSTELECKY 31-6H
FIDELITY
STARK, ND
3.60%
1,343
PROWLER #2-16
SLAWSON
MOUNTRAIL, ND
3.44%
1,145
HODENFIELD #15-23H
AMERICAN
WILLIAMS, ND
2.38%
1,400
EN-TRINITY #154-93-2833H-1
HESS
MOUNTRAIL, ND
2.28%
750
MCD #11-29H
FIDELITY
MOUNTRAIL, ND
2.08%
430
PAYARA # 2-21H
SLAWSON
MOUNTRAIL, ND
2.03%
1,148
MUIR #1-7H
CONTINENTAL
DIVIDE, ND
1.75%
671
MICHAEL STATE 31X-16
XTO
WILLIAMS, ND
1.19%
271
OUKROP #34-34H
FIDELITY
STARK, ND
1.17%
262
CLEARWATER #23-3025H
EOG
MOUNTRAIL, ND
1.08%
250
LYNN #19-20-29H
FIDELITY
MOUNTRAIL, ND
0.81%
1,251
SATTERTHWAITE #43-1H
WHITING
MOUNTRAIL, ND
0.70%
1,478
EN-WILL TRUST B #157-94-2635H-3
HESS
MOUNTRAIL, ND
0.54%
320
FORT BERTHHOLD #152-94-13B-24-1H
PETRO HUNT
MCKENZIE, ND
0.52%
1,135
_____________


There are a bunch of things to notice.  Every single well is in North Dakota.  That is not surprising - the "sweet spot" in the Bakken is in North Dakota.  We know that Northern has been buying its large acreage in Montana and buying small plots in North Dakota - but all the drilling is on those small plots.  (The large Montana acreage might one day be valuable but they paid not very much for it - and as far as the current drilling is concerned the Montana positions only pad the acreage numbers.)

The second thing to note is how variable these wells are.  Only three wells have an initial flow of above 2000 barrels per day.  Ten wells have an initial flow below 500 barrels per day.

The third thing to note is that - as per all Northern releases - no decline data is given.

Lets contrast this to Brigham Exploration (BEXP) who have published a summary of their Williston Basin North Dakota results.  BEXP averages greater than 2850 barrels per day initial flow.  The average of Brigham is above the highest achieved by Northern Oil.  Brigham has multiple wells that flowed above 5000 barrels per day initially.

Moreover Brigham does not have a single well with an initial flow below 1000 barrels per day.

Further Brigham published flow rates averaged over the first 30 days and the first 60 days.  Declines are massive.  Initial flows averaged 2858 barrels per day. Average of the first 60 days is 826 barrels of oil per day and those averages include very high initial flows.

Whatever: it is clear that Brigham's results are much much better than Northern and that Brigham deserves a premium valuation.  All things equal these results suggest that Northern's acreage position is inferior to Brigham despite Northern being entirely focussed on acreage.

Decline rates are massive at Brigham - albeit from high initial flows.  We do not know the decline rates at Northern but the initial flows are much lower.



John

9 comments:

Anonymous said...

Another great piece of analysis exposing this scam for what it is.
Your hard work and diligence has broken this stock. I guess the only real question is where does it stop falling?

$15? $10?

Anonymous said...

nice job

Anonymous said...

Keep digging on the Northern Oil team. The mgm't are a couple of daddy's boys from Wall Street that know squat about oil or exploration. More like snake oil salesman. surprised they did not get into uranium like the Vancouver crowd

G said...

NOG is an especially good short for me because I am otherwise heavy into oil, in particular major Canadian cos given the lower political and environmental risk.

Thank you for these posts.

Anonymous said...

John,

you need to talk with oil and gas ppl before posting comments on the "results" of oil and gas companies. The only statistic that counts for these operators is their 3 month cumulative production.

Initial production numbers can be exaggerated very easily. First reporting numbers too early can include down hole frac fluids, not all production oil. To complete a multistage frac you need 800-1200 tonnes of fluid (5 years ago, an 80 ton frac was large) this fluid is pumped into the reservoir at a pressure greater than the normal pressure of the reservoir. therefore when you produce the wells most of the initial production is frac fluids mixed with oil. this can take several months to be completely clean.

Bringham is not more advanced than every operator, because they are using the same equipment, granted they may have a better team, but my guess is they are gaming their results.

from a long investment perspective there are few competitive advantages in oil and gas companies. probably the biggest one is land base and how much they paid for it. you can hire good services companies with the best technologies to complete wells or drill wells. you can JV with good management teams, to better exploit the land base, but it is impossible to recreate a cheap land base. Look at Cenovus in Alberta, they have an 80 year RLI. Most companies are lucky to have 13-15. So their massive resource base was acquired very cheaply many years ago.

I don't own northern or brigham, but i don't think your hypothesis of comparing some crappy stats numbers makes you a good hedge fund manager.

Now your comments on bad management is probably your single best point. but i would look at their F&D #s, and opex numbers, before looking at IP numbers.

As a capitalist if i could run a big operation, lowering my capital requirements and keep SG&A low that would be great. But if management is self enriching, then it will be a bad investment.

anyways enough said...
PD

Anonymous said...

read your other posts, they are self dealing. they buy the acreage themselves and then sell it to corporation at bigger prices, issue stock for land along the way.

i don't mind the model, not the best, but when you do it through dilutive share issues, texting mssging (wtf?) and supposedly the most capitalistic 23 year old (according to his sister), not so sure you make money in the end. Most plays are non homogeneous, meaning all land is not created equal.

In oil and gas, if it is cheap like dirt, it is dirt. If these guys had bought the rights in say 1950, or even 2004, then i would buy it more, but if you think you are making suckers of people who are in teh game right now. nope. maybe on a couple transactions. remember the scene in "there will be blood", when the preacher revisits daniel day lewis to sell him more land. he beats him with a bowling pin cause the land was worthless...

Yomgui said...

NOG operational skills are non-existents.

It's more like a holding company, they buy acreage at market price and then have it managed by third parties.

NOG "fair" value is probably equal to the replacement cost of all their acreage.



Unless of course you put a premium on the management team ability to buy land at discounted prices.

To buy NOG is just a very leveraged bet on oil prices. Coupled with a specific company risk due to the less than impressive management team.

Brian said...

http://news.google.com/news/url?sa=t&fd=R&usg=AFQjCNFBETmo22kb4NUHKK2ANKAOni6mkQ&url=http://online.wsj.com/article/SB10001424052748704487904576267690277252796.html

Maybe none of them will be worth anything!

Figuring It All Out said...

John,
I am interested by your response to NOG hiring Deloitte as their auditor. Timing is convenient, as Deloitte won't have to sign off on a 10-K for nearly a year. I guess there are two ways to look at it: either they are legitimate and want an auditor to reflect their new-found size/status, or they are a fraud and are opportunistically hiring a big name who won't end up signing off on their accounts, but in the meantime Deloitte's brand will support the stock price until that date arrives (playing from the Chinese RTO handbook).

http://www.prnewswire.com/news-releases/northern-oil-and-gas-inc-announces-appointment-of-deloitte--touche-llp-as-independent-registered-public-accounting-firm-120850689.html

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