Friday, April 1, 2011

Northern Oil's expanding share count

I had to double-take when I wrote this.  Over the past two years Northern Oil has had about 60 million dollars of revenue.  It has issued roughly three quarters of a billion dollars worth of stock at current prices.

Think about that for a while - then read the detail.

Details details details...

Here is the share count for Northern Oil for the last 8 quarters

2009 Q4     34,120,103
2009 Q1     34,392,103
2009 Q2     36,691,195
2009 Q3     36,769,195
2009 Q4     43,911,044
2010 Q1     44,932,331
2010 Q2     51,079,143
2010  Q3    51,596,849
2010 Q4     62,129,424

Shares outstanding have risen by 28 million which at current market prices is about three quarters of a billion dollars.  Share count has risen every quarter.

Regular issuance is dilutive of the interests Northern Oil shareholders.  It is hard to justify the current stock price if this issuance keeps up.

Many of these shares were sold to the market for cash.  However shares were also issued for lots of other purposes.

Warren Buffett observes that when a company issues shares it is selling a little bit of itself.  If it sells shares for acreage it is selling a little bit of the company in exchange for that acreage.  If the acreage is better-than-average it might be worth it.  But when a company is issuing shares at this rate the quality of assets acquired for those shares should be subject to scrutiny.

As noted - this company often buys acreage for shares.  The land manager (presumably someone important in making that decision) is a 23 year old.  He is probably on top of it.

However shareholders should keep abreast of the reasons management issue stock.  To help I have  (without further comment) reproduced below the section on stock issuance in the 10K.



John






NOTE 6     PREFERRED AND COMMON STOCK


The Company’s Articles of Incorporation authorize the issuance of up to 100,000,000 shares.  The shares are classified in two classes, consisting of 95,000,000 shares of common stock, par value $.001 per share, and 5,000,000 shares of preferred stock, par value $.001 per share. The Board of Directors is authorized to establish one or more series of preferred stock, setting forth the designation of each such series, and fixing the relative rights and preferences of each such series.  The Company has neither designated nor issued any shares of preferred stock.


In 2008 optionees exercised 260,000 stock options granted in 2006 and 2007, resulting in cash proceeds to the Company of $933,800.  A tax benefit of $425,000 related to fully vested stock option awards exercised was recorded as an increase to additional paid-in capital


In February 2009, the Company agreed to issue 92,000 shares of Common Stock to three employees of the company as compensation for their services.  The employees were fully vested in the shares on the date of the grant.  The fair value of the stock to be issued was $261,280 or $2.84 per share, the market value of a share of common stock on the date the stock was obligated to be issued.  The entire amount of this stock award was expensed in the year ended December 31, 2009.


On February 27, 2009, the Company closed on a revolving credit facility with CIT Capital USA, Inc. (“CIT”).  As part of obtaining this credit facility agreement the Company entered into an engagement with Cynergy Advisors, LLC (Cynergy).  As part of the compensation for the work performed on obtaining the financing, Cynergy received 180,000 shares of restricted Common Stock of the Company.  The fair value of the restricted stock was $475,200 or $2.64 per share, the market value of a share of Common Stock on the date the financing closed.  The fair value of this stock was capitalized as Debt Issuance Costs and is being amortized over the amended term of the financing.


On April 3, 2009, the Company acquired leasehold interests in North Dakota. The total consideration paid for this acreage was 49,092 shares of restricted common stock.  The fair value of the restricted stock was $224,879, or $4.58 per share, the market value of a share of Common Stock on the date the leasehold interests were acquired.


In June 2009, the Company completed a registered direct offering of 2,250,000 shares of common stock at a price of $6.00 per share for total gross proceeds of $13,500,000.  The Company incurred costs of $813,237 related to this offering.  These costs were netted against the proceeds of the offering through Additional Paid-In Capital.


On October 26, 2009, the Company deposited 41,989 shares of common stock in a specially-designated shareholder account that had been previously-created to hold shares of our common stock represented by certificates that appear in our stock transfer records but were known to have been cancelled and their underlying shares transferred between July of 1987 and August of 1999.  An aggregate of 58,268 shares of our common stock are held in the specially-designated shareholder account, which, following a substantial review of all available historical stock transfer records, the Company concluded represents the maximum number of shares of our common stock that could potentially be released to shareholders who may be able to establish a valid claim to such shares due to previously unrecognized issues with the Company’s stock transfer records.  These shares are considered issued and outstanding and are included in the total number of shares outstanding disclosed on the cover page of this report.


On November 4, 2009, the Company completed a registered direct offering of 6,500,000 shares of common stock at a price of $9.12 per share for total gross proceeds of $59,280,000.  The Company incurred costs of $2,972,027 related to the offering.  These costs were netted against the proceeds of the offering through Additional Paid-in Capital.


In November and December 2009, the issued 79,005 shares of common stock related to the purchase of leasehold interests in North Dakota. The fair value of the stock was $890,859, the market value of the Common Stock on the date the leasehold interests were acquired.


In November 2009, the Company issued 50,000 shares of Common Stock to two employees of the company as compensation for their services.  The employees were fully vested in the shares on the date of the grant.  The fair value of the stock issued was $457,500 or $9.15 per share, the market value of a share of common stock on the date the stock was issued.  The entire amount of this stock award was expensed in the year ended December 31, 2009.


In December 2009, the Company issued 100,000 shares of Common Stock to two executives of the company as compensation for their services.  The executives were fully vested in the shares on the date of the grant.  The fair value of the stock issued was $970,000 or $9.70 per share, the market value of a share of common stock on the date the stock was issued.  The entire amount of this stock award was expensed in the year ended December 31, 2009.


In December 2009, the Company issued 41,670 shares of Common Stock to the Company’s outside Directors as compensation for their services.  The Directors were fully vested in the shares on the date of the grant.  The fair value of the stock issued was $404,199 or $9.70 per share, the market value of a share of common stock on the date the stock was issued.  The entire amount of this stock award was expensed in the year ended December 31, 2009.


In December 2009, a Director of the Company exercised 100,000 stock options granted to him in 2007.  The exercise of these options was completed through a cashless exercise whereas the company repurchased 52,061 of common shares to issue the common shares related to this option exercise.


In January 2010, the Company agreed to issue an aggregate of 4,000 shares of Common Stock to two employees of the Company.  The shares were fully vested on the date of the grant.  The fair value of the stock issued was $50,280 or $12.57 per share, based upon the market value of one share of the Company’s common stock on the date the stock was obligated to be issued.  The entire amount of this stock award was expensed in the year ended December 31, 2010.


In January 2010, the Company agreed to issue 1,000 shares of Common Stock to a consultant of the Company.  The shares were fully vested on the date of the grant.  The fair value of the stock issued was $12,320 or $12.32 per share, based upon the market value of one share of common stock on the date the stock was obligated to be issued.  The entire amount of this stock award was expensed in the year ended December 31, 2010.


In March 2010, the Company issued 10,287 shares of Common Stock as part of an acquisition of leasehold interests in North Dakota. The fair value of the stock issued was $99,475 or $9.67 per share, based upon the market value of one share of common stock on the date the leasehold interests were acquired.


In March 2010, pursuant to employment agreements the Company issued an aggregate of 50,000 shares of Common Stock to executives of the Company.  The shares were fully vested on the date of the grant.  The fair value of the stock issued was $664,500 or $13.29 per share, based upon the market value of one share of common stock on the date the stock was obligated to be issued.  The Company expensed $307,331 in share-based compensation related to the issuance for the year ended December 31, 2010.  The remainder of the fair value was capitalized into the full cost pool.


In April 2010, the Company entered into an underwriting agreement to sell 5,750,000 shares of common stock at a price of $15.00 less an underwriting discount of $0.60 per share for total net proceeds of approximately $82.8 million, after deducting underwriters’ discounts.  The Company incurred costs of $300,000 related to this offering.  These costs were netted against the proceeds of the offering through Additional Paid-In Capital.


On June 14, 2010, the Company issued 382,645 shares of Common Stock as part of an acquisition of leasehold interests in North Dakota.  The fair value of the stock issued was $5,360,856 or $14.01 per share, based upon the market value of one share of common stock on the date the shares were registered with the SEC for resale, which is the date the leasehold interests were acquired.


On June 18, 2010, the Company granted 14,167 shares of Common Stock related to acquisitions of leasehold interests in North Dakota.  The fair value of the stock granted was $238,006 or $16.80 per share, based upon the market value of one share of common stock on the date the leasehold interests were acquired.


 On July 13, 2010, the Company granted 31,206 shares of Common Stock related to acquisitions of leasehold interests in North Dakota.  The fair value of the stock granted was $451,551 or $14.47 per share, based upon the market value of one share of common stock on the date the leasehold acquisitions were agreed upon.


On July 14, 2010, the Company granted 444,186 shares of Common Stock related to acquisitions of leasehold interests in North Dakota.  The fair value of the stock granted was $6,529,534 or $14.70 per share, based upon the market value of one share of common stock on the date the leasehold interests were acquired.


In July 2010, pursuant to an employment agreement the Company issued 5,000 shares of Common Stock to an employee of the Company.  The shares were fully vested on the date of the grant.  The fair value of the stock issued was $69,250 or $13.85 per share, based upon the market value of one share of common stock on the date the stock was obligated to be issued.  The entire amount of this stock award was expensed in the year ended December 31, 2010.


In November 2010, the Company entered into an underwriting agreement to sell 10,292,500 shares of common stock at a price of $20.25 less an underwriting discount of $0.81 per share for total net proceeds of approximately $200.1 million, after deducting underwriters’ discounts.  The Company incurred costs of $392,795 related to this offering.  These costs were netted against the proceeds of the offering through Additional Paid-In Capital.


In November 2010, the Company issued 153,075 fully vested shares of Common Stock to the executives and employees of the Company as compensation for their services.  The fair value of the stock issued was $3,497,764 or $22.85 per share, the market value of a share of common stock on the date the stock was issued.  The Company expensed $1,235,429 in share-based compensation related to the issuance for the year ended December 31, 2010.  The remainder of the fair value was capitalized into the full cost pool.


Restricted Stock Awards


During the years ended December 31, 2010, 2009, and 2008,the Company issued 1,058,000, 361,330 and 20,000, respectively, restricted shares of common stock as compensation to officers, employees, and directors of the Company. The restricted shares vest over various terms with all restricted shares vesting no later than December 31, 2013. As of December 31, 2010, there was approximately $13.2 million of total unrecognized compensation expense related to unvested restricted stock. This compensation expense will be recognized over the remaining vesting period of the grants. The Company has assumed a zero percent forfeiture rate for restricted stock. 

11 comments:

Miko said...

I don't know who is worse, this "management" team, or the brand-name institutional managers who look the other way b/c the chart is nice and the stock is going up. 50% dilution in a year...stock grants vest immediately...but shareholders are #1!!!

Anonymous said...

John, Where do you obtain shares outstanding. The 10-Q provide ave. diluted shares outstanding that differ from your numbers. thanks

Anonymous said...

John - What would you say are the 2 or 3 reasons why NOG is a short relative to several close comps (BEXP, KOG, OAS)? They all trade at similar valuations, whether you use EV/acre, EV/reserves, EV/production, are in the same geography, spend similar amounts on acreage and drilling, and issue stock repeatedly. Decline curves for these comps are readily available. While I like the idea, it is fairly weak if your main thesis is that 23 year olds are incompetent. Perhaps they are all shorts?

Nick said...

Great work on Logitech BTW John. You got a shout out on FT Alphaville today...

Anonymous said...

Time to take the "gloves off". I assume there is more then depletion and nepotism/management issues. Maybe time to show what biz these guys are really in.

http://blogs.wsj.com/marketbeat/2011/03/29/northern-oil-gas-and-friends-punch-back/?mod=yahoo_hs

John Hempton said...

Re where I get the information. All of this is from the balance sheets in the Qs.

--

Re NOG vs oters. Well some counties are good. I have initial and some later flow data for BEXP. Almost all initial flows are 4000BOPD for BEXP. they decline fast.

Initial flows for NOG are a full scatter. NOG owns large acreage in poorer counties in Montana. Talk to oil men. They say if they are buying there it is a nonsense... later posts...

Only problem - I worry about boring my readers on a narrow topic like this.


John

Anonymous said...

John,

Don't worry about boring your readers. This is great fun, and I don't even have a position.

Anonymous said...

"I worry about boring my readers on a narrow topic like this."

Come on John - don't sell us short (pun intended). I do get the feeling you're toying with us (and NOG) and hope the knockout punch will be delivered with gusto.

Anonymous said...

I agree. If you do a deep dive on the background of these big NOGgin heads you will see they are in the shell and phantom stock creation biz. There must be some big money in the long side since even the WSJ is protecting these fools.

kNOGck em out

Anonymous said...

If these con-artists were chinamen, not U.S.-born crooks, the stock would already trade sub $1 and on the pink sheets. But hey one day the stock price will catch up to reality. Only worry is, these guys could go on and play these games in fact for years before the full truth will get exposed.

new york baby said...

thanks john.

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