tag:blogger.com,1999:blog-4815867514277794362.post4174733858794855828..comments2024-03-08T06:18:28.125+11:00Comments on Bronte Capital: Northern Oil and Gas: It's only a Northern SongJohn Hemptonhttp://www.blogger.com/profile/03766274392122783128noreply@blogger.comBlogger27125tag:blogger.com,1999:blog-4815867514277794362.post-64623332993735334252014-04-20T01:31:53.441+10:002014-04-20T01:31:53.441+10:00Prodigy oil and gas is accused of selling at least...<a href="http://www.bizjournals.com/boston/news/2012/12/06/galvin-oil-companies-uses.html" rel="nofollow"><b>Prodigy oil and gas</b></a> is accused of selling at least $463,768 in unregistered securities to a Massachusetts investor who was cold-called about investing in an oil well operation.Anonymoushttps://www.blogger.com/profile/05476661280952217040noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-3276438333663309332011-05-13T05:20:46.173+10:002011-05-13T05:20:46.173+10:00Some observations - note, I work in the industry f...Some observations - note, I work in the industry for a large company with substantial Bakken acreage, so this is not crackpot analysis.<br /><br />1) Ryder Scott is a reliable reserve engineering firm - along with Netherland Sewell and DeGolyer & McNaughton - sort of the "Big Three" of reserve engineering. There are other dodgy firms out there that would raise more of a red flag in my opinion.<br /><br />2) The economics in the Bakken are difficult, even with high oil prices, and especially if you are small and can't get the service crews you need to complete wells. The larger operators (XOM, Hess, Continental) can bully the service providers and slow smaller operators from completing their wells due to the intense competition. <br /><br />3) Bakken oil receives a substantial discount to WTI (~$10 a barrel) because the expensive logistics<br /><br />4) Weather issues hampered every operator in the region this winter and spring - imagine that, it snows heavily in North Dakota in the winter<br /><br />5) As a "non-operator", NOG has no control over its capital budget<br /><br />6) The decline rates are more harsh than any other field in the USA and the wells are more expensive than any other field in the USA<br /><br />7) As a % of sales, the depletion costs are comparable to Oasis Petroleum and other pure play Bakken companies<br /><br />8) The tax code and ability to expense intangible drilling costs make the analysis of E&Ps challenging - it could be possible that Petrobakken is aggressively expensing its IDCs while NOG's partners are more conservative with their costs. Remember, in E&P land, they actively manage the businesses to reduce their tax bills, increase cash flow and grow production. Most E&P companies are terrible long-term investments for these reasons, because they rarely return any capital to their shareholders.<br /><br />9) I also just noticed after reviewing their 10-Q is that NOG has hedged much of their production at rates well below the current market prices.<br /><br />So putting aside the fraud argument, there are 8 economical reasons to sell the stock.<br /><br />However, I would argue that having low depletion costs as a % of sales is actually a more conservative approach to oil and gas accounting.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-79730274352256296952011-03-30T06:29:23.663+11:002011-03-30T06:29:23.663+11:00Someone needs to seriously learn about how depleti...Someone needs to seriously learn about how depletion rates work in the industry. <br /><br />Reserves writedowns, which is disclosed annually by a company in their AIF, would be where one would look to see how original reserves bookings may be rerated due to higher than anticipated depletion of wells.<br /><br />Additionally, it is well known by investors that decline rates in tight oil plays are very large in the first years - it is the actual part of the decline where hyperbolic production moves to exponential that is important.<br /><br /><br />This blog post was completely and utterly inaccurate in the analysis (irrespective of the outcome recommendation), and the writer's understanding of oil and gas geology, engineering, and general industry knowledge is egregiously misleading.<br /><br />Shame.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-34514755888735336502011-03-29T04:04:52.962+11:002011-03-29T04:04:52.962+11:00John,
I am just curious as to why you would consi...John, <br />I am just curious as to why you would consider the 4th quarter depletion charge as "irregular"?<br /><br />It would increase Northerns depletion and depreciation as a % of gross revenue up to 28% on an annualized basis.Grahamhttps://www.blogger.com/profile/12631136816048603508noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-38329552080183842312011-03-29T00:28:30.737+11:002011-03-29T00:28:30.737+11:00well based on the comparisons they give in today&#...well based on the comparisons they give in today's press release of Oasis petrol and Brigham Exploration both use "successful efforts" method while NOG uses full cost. I really don't know what the effect would be if any but seems like it would be something to look into. maybe not. <br /><br /><br />The primary difference between these two methods is the treatment of exploratory dry hole costs. These costs are generally expensed under the successful efforts method when it is determined that measurable reserves do not exist. Geological and geophysical costs are also expensed under the successful efforts method. Under the full cost method, both dry hole costs and geological and geophysical costs are initially capitalized and classified as unevaluated properties pending determination of proved reserves. If no proved reserves are discovered, these costs are then amortized with all the costs in the full cost pool.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-39323143882377514292011-03-27T05:57:45.719+11:002011-03-27T05:57:45.719+11:00Interesting post. And definitely some smoke here....Interesting post. And definitely some smoke here.<br /><br />I have no dog in this fight and have moderate oil/gas knowledge on the buy side. <br /><br />My understanding of DD&A is that it is calculated as follows:<br />DD&A of oil and gas properties is calculated by multiplying the percentage of total proved reserve volumes produced during the year, by the “depletable base.” The depletable base represents our capitalized investment, net of accumulated DD&A and reductions of carrying value, plus future development costs related to proved undeveloped reserves. <br /><br />Ryder Scott does the reserve work for NOG and they are, I think, respectable. So any shenanigans on DD&A would have to come from the non-reserve side of the equation, no? (Or are you implicating Ryder Scott too?)<br /> <br />Also, capitalized investment should be roughly a given. So is your argument that the game playing is on the "future development costs assumption?"<br /><br />Is it possible that NOG's different model(don't they let others do most of the drilling) leads to the lower DD&A?<br /><br />Love to hear your responses as it seems there could be a great trade here.Robhttps://www.blogger.com/profile/06178057642007281378noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-58755618435252318452011-03-26T08:28:39.873+11:002011-03-26T08:28:39.873+11:00"Looks like NOG uses the full cost method of ..."Looks like NOG uses the full cost method of accounting versus petrobakkens successful efforts method... Is this what's causing the difference in depletion? "<br /><br />I haven't even downloaded the financials on this company yet, but what difference would that make for NOG if they have never claimed a dry well (according to the Street Sweeper story)?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-61168820164287089992011-03-25T15:16:55.540+11:002011-03-25T15:16:55.540+11:00Looks like NOG uses the full cost method of accoun...Looks like NOG uses the full cost method of accounting versus petrobakkens successful efforts method... Is this what's causing the difference in depletion?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-5645446696586549242011-03-25T09:21:52.220+11:002011-03-25T09:21:52.220+11:00One of the problems is that Slawson, so far as I k...One of the problems is that Slawson, so far as I know NOG's most important partner, is privately held. So there is no easy way to compare there at least.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-46736349721864599612011-03-25T05:05:30.148+11:002011-03-25T05:05:30.148+11:00Interesting story. A simple (but possibly not con...Interesting story. A simple (but possibly not conclusive) check might be to contrast the declines (or write-downs) of the operators of the NOG wells. NOG has no technical team, and must somewhat rely on the reserve reporting of the operators, so if they didn't match that may point to something. NOG is only booking a portion of each wells production, so one should in, in theory, be able to find the company booking the rest of the production and compare their write downs. After all, NOG is in no technical place to contradict the reservoir/exploitation team of the operator, right?Eriknoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-73233892429578461502011-03-25T03:59:54.771+11:002011-03-25T03:59:54.771+11:00You might want to take a look at the following ass...You might want to take a look at the following assesment of decline curves: http://www.oilandgasevaluationreport.com/2010/03/articles/oil-patch-economics/shale-economics-watch-the-curve/<br /> While not specifically focused on the Bakken, it shows decline curves of other plays in the US.<br />Steep decline curves are just a way of life for the E&P industry, which is why these stocks typically only work in a rising price environment.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-34817835984417246572011-03-25T00:21:31.896+11:002011-03-25T00:21:31.896+11:00you can argue decline rates but it's hard to a...you can argue decline rates but it's hard to argue with the shady and sometimes criminal past of key people in the company. <br /><br />this isn't a 100 mill co...it's 1.7 billion co, mgmt cashing out like crazy, small time auditor, etc. etc. <br /><br />maybe the decline rate is fine, but if I was a shareholder I would still be worried.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-46011638777168699152011-03-24T22:59:31.755+11:002011-03-24T22:59:31.755+11:00A spread gives you a false illusion of safety... ...A spread gives you a false illusion of safety... the spread is in my view irrationally wide... but so what...<br /><br />If I want to own Petrobakken I will own it as an independent solution...<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-41380726851462365632011-03-24T21:02:29.651+11:002011-03-24T21:02:29.651+11:00Why not play it as a spread between Petrobakken an...Why not play it as a spread between Petrobakken and NO?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-51850109439519825152011-03-24T15:10:14.928+11:002011-03-24T15:10:14.928+11:00Herb Greenberg used to talk about the "hostil...Herb Greenberg used to talk about the "hostile reactometer" when he published something negative on a stock. When reaction was really hostile he usually turned out to be right.<br /><br />The above post meets the really hostile test - but in fairness several comments I got via email argued in a gentle - and reasoned - way that I was wrong about some element or other of my analysis. I respectfully disagree with the basic tenet - which was that the decline rate does not matter.<br /><br />For these fields which are deep and tight it will wind up being the main thing that matters.<br /><br />I wish the more moderate comments were put on the blog. This stock is so expensive I have considerable margin of safety around the short.John Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-66549147367193151052011-03-24T13:35:38.284+11:002011-03-24T13:35:38.284+11:00John,
Your points are totally without merit as ar...John,<br /><br />Your points are totally without merit as are street sweepers! Although I hope you are investigated by the SEC, I hope your BS is bought by all of your cronies that are leaches for a few more days so that I can continue buying stock.<br /><br />You don't appear to know much about decline rates given the fact that you are comparing PetroBakken to NOG. Try looking at companies in the same state. Then dig a little deeper and educate yourself on decline curves in various counties in North Dakota.I will help you out...the state of North Dakota has a website where you can buy a subscription for about $100 to see every companies wells that have been drilled. You will be able to get monthly production by BOE/d for all of NOG's partners wells! <br /><br />Effectively you are saying companies like WLL, BEXP, EOG, CLR KOG, HE'S, XOM, WMB, QEP and Slawson are all frauds! Because that is who drills NOG's wells. Maybe once you have spent a little time doing some due diligence you will find yourself in short squeeze. I love making you guys sweat when everyone catches onto your antics.<br /><br />Your analogy to subprime is laughable! Feel free to keep it up, cause I love lighting you leaches up. <br /><br />Not sure how many shares you are short, but street sweeper short 50k is hysterical...small investors think this sounds like a lot to them when some only have the ability to buy/short a few hundred shares, but you are going to get lit up next week!<br /><br />Would love to debate you in person in a public forum!Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-2274311991720621092011-03-24T07:31:21.340+11:002011-03-24T07:31:21.340+11:00Going to add to some of the comments left earlier:...Going to add to some of the comments left earlier:<br />1) Contrary to the assertion in your article, depletion is a normal part of the E&P process and decline curves of 30% are relatively common in more mature regions such as the US. What matters more than depletion is the ultimate recovery of resource (UER) from the well. The rates of recovery do affect the IRR of the project, but numerous other factors come into play here.<br />2) Depletion curves are not linear, but asymptotic and wells may continue to produce for very long periods, albeit at fairly low rates.<br />3) The Bakken field is not homegenous, and the results from PBR wells which lie in a much thinner part of the play are in no way comparable to NOG or other players in the 'fairway' of the play.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-17337070342391811862011-03-24T04:23:39.490+11:002011-03-24T04:23:39.490+11:00I suggest you talk to NOG before assuming that the...I suggest you talk to NOG before assuming that the decline rates for their wells are similar to those of the large base of Petrobakken, who is in an entirely different part of the region, which is less prospective in reserve/well by the history, and not even in the formal Williston Basin to my understanding. Even within the Williston, there are regions w/ very different EUR's, decline curves and net effective depletion rates. I just think it is likely a leap to make the direct comparison. Further depletion rates are based on reserve and declined curves evaluated by reserve engineers, who are generally very conservative, and who know a lot more about reserve, decline curves, etc then we do. And as the last several years show in the Wiliston, the EUR's have been rising not falling short of the reserve enegineer estimates. Look at the well curves on the BEXP presentations, where the latest well have consitently performed better then the earlier wells, and better then the assume EUR for the reserve reprots. The instance in the industry of reserves being reduced outside of a large commodity price decline are rare in my experience. You can deny this about reserve engineers, but that suggest you have an agenda, and have not worked in the oil area very much. Finally, the whole premise that the decline rates are steep and not well understood or accounted for in the eocomics is a reach. We all know that the unconventional resource plays have steep decline curves, but despite this the paybacks remain very short and the IRR's very high (>100% in the Williston Bakken).Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-47824377675770785082011-03-23T15:35:12.241+11:002011-03-23T15:35:12.241+11:00Ooh, this looks like a fun one. I'm going to ...Ooh, this looks like a fun one. I'm going to have to dive into the annual report over the weekend.jimmy jamesnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-18622088128685486392011-03-23T15:33:17.146+11:002011-03-23T15:33:17.146+11:00Reason I used sales is this. The key variable is ...Reason I used sales is this. The key variable is how long these wells last. <br /><br />If the wells last a long long time then Northern is going to have lots of revenues in the future.<br /><br />If the wells slow dramatically in the first year and trickle in two then it is not a great for shareholders and current cash flow is NOT an indicator of future cash flow.<br /><br />Depletion is meant as an estimate of how "used up" the well is. It is "used up" by producing oil - ie revenue - so the depletion should be measured against revenue...<br /><br /><br />I know that depletion is an odd measure for an E&P explorer. This is a producer - it is sold on acreage and drilling and ... <br /><br />Decline curves are alas where it is at. Because if this revenue declines fast it is pretty hard to get 1.7 billion market cap out of 100 million annual revenue!<br /><br />JJohn Hemptonhttps://www.blogger.com/profile/03766274392122783128noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-4672038847755931922011-03-23T14:07:56.747+11:002011-03-23T14:07:56.747+11:00Great analysis John. Thanks.Great analysis John. Thanks.Vincenthttps://www.blogger.com/profile/12174885644090962285noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-8523779129399261112011-03-23T13:59:31.812+11:002011-03-23T13:59:31.812+11:00John,
Thanks for the post. Your blog is great.
...John,<br /><br />Thanks for the post. Your blog is great.<br /><br />However, on this post, you are looking in the wrong direction. If you're investing in junior oil E&P's, earnings and financial depletion rates are largely irrelevant. I've analyzed hundreds of juniors throughout my career and have never considered earnings (because they are meaningless). In fact, I can't think of any juniors with any "earnings". They don't operate for earnings and no management team would ever operate with earnings in mind. They operate to grow reserves and production to then sell themselves to an intermediate.<br /><br />What you have to look at is a sum-of-the-parts analysis based on acreage, reserves and production. A good place to start would be to look at comparable transactions. The best comp you could look at for NOG would be NuLoch Resources, which recently was acquired by Magnum Hunter. This deal marked non-operated ND Bakken / Three Forks acreage at ~$2,500 - $3,500 per acre. All-in, the company sold for $140,000 / boe/d and $35.50 / P+P boe.<br /><br />I have never analyzed NOG before, but if we apply these metrics ($140,000 / boe/d), we get an intrinsic value for NOG of $14.00 per share, 50% less than the current stock price. I agree NOG's valuation looks stretched.<br /><br />Also, your use of PBN's SE Saskatchewan wells as an analog for NOG's wells was way off. The Bakken at Taylorton is substantially thinner and produces at much lower rates than the formation at Williams or Mountrail. Just look at the wells - you see quite a few in ND producing >1,000 boe/d, but a Sask well at ~250 / boe/d would be rare. The type curve on Sask Bakken is more like IP30 of ~200 / boe/d. Wells in ND are much more productive, however they cost significantly more to drill and complete, so generally the economics are similar.<br /><br />Just some thoughts. Thanks for the short idea, it seems like a good one. Cheers!AIGswapnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-15525477961774280942011-03-23T12:23:09.383+11:002011-03-23T12:23:09.383+11:00john,
first, you have made me a bunch of money on...john,<br /><br />first, you have made me a bunch of money on CAGC, so i'm grateful. i dont know anything about the company that you are reporting on. i am in oil and gas private euity and we are doing a deal in ND right now. the only thing i wanted to point out is that the only way to get to ND from anywhere it seems in the us is minneapolis (via airplane). it makes sense that the company would turn to a minneapolis accting firm (from a geographical perspective), and thus the 1200 miles away part isnt the reason i would be suspicious. im not saying the accounting firm isnt crap, or the stock is a buy or anything like that, but i thought you'd benefit from the above knowledge--minor detail i know, but just wanted to pitch in. <br /><br />thanksAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-67882289335673410472011-03-23T12:12:13.499+11:002011-03-23T12:12:13.499+11:00Very informative post, as always. I have two point...Very informative post, as always. I have two points of contention that if you can answer, would cause me to join you on the short side:<br /><br />1) Do you have any reasonable rationale for using gross sales as the basis against which to index depletion expense? Why not gross property? I can think of many innocuous reasons why gross sales might diverge from depletion expense levels in any one year.<br /><br />2) Although the auditors sign the opinion, it is my understanding that they more or less 'rely' on the 3rd party reserve engineer's report for technical data regarding reserves, which would include or at least greatly influence determined depletion rates. Therefore, if one were to question the validity of the depletion expense levels, would it not be more appropriate to investigate the competence of the reserve engineering firm, rather than the auditors?<br /><br />Thanks!WSMhttps://www.blogger.com/profile/00131532131659441620noreply@blogger.comtag:blogger.com,1999:blog-4815867514277794362.post-77460044021148485602011-03-23T11:05:58.292+11:002011-03-23T11:05:58.292+11:00great stuff as always...this one's headed waaa...great stuff as always...this one's headed waaaaay down.<br /><br /><br />not that by itself it means a company is in bad shape, but for those you with Bloomberg... Just GPTR NOG. <br /><br />insiders selling 10's of thousands of shares at a clip the past year.Anonymousnoreply@blogger.com