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Northern Oil and Gas, Inc. Message Board

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  • jackhiller@ymail.com jackhiller May 14, 2011 11:36 PM Flag

    Northern long term outlook

    THe point of the buy back announcement was to say that when they odel the best use of cash available for investment, buying back shares may increase the equity for remaining shareholders more than buying new property.

    Here is a simple, quick to read, made up example of the modeling using made up numbers. Each share owns X proportion of the estimated total equity value (V) of the company, which is mostly from its land, and that land is valued by current market transactions at $6000 for a four drilling site parcel. But lets say that the share trading price is so low, that the market is valuing each share, not at XV, but at 50% of XV. Thus remaining shareholders get a bargain price of current land inventory(very roughly) at a 50% discount for the $6000 parcel-- it cost only $3000 to get the property by buying back shares as compared to $6000 by buying new property from the market.

    I have also been readfing a distorted view of the company's financial stresses that is wrong. True that the company needs to pay its partial share costs for drilling, completion, and sales (hedging and transport, etc) as a non-discretionary draw on cash, but these costs are well under it cash on hand, which is growing from well production. Regarding the cost of buying new properties, that's completely discretionary action.

    THe company can be expected to buy only what it can afford without stress; that's where strato erred on his notion of burn rate being a problem. Furthermore, if the company finds a real bargain that might slip away if not seized, it might borrow for a while if not enough cash is in hand.

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    • Jack:

      Let's take your hypothetical, add some shareholders and follow through. Let's add to your scenario 100 shares issued and outstanding and the only asset is the $6,000 lease. Thus book value is $60/share but the market only values each share at $30. The company borrows $1500 at no interest to buy back 50 shares (50%). What's the net result?

      1. The company stills owns the $6,000 lease;

      2. The equity of the company is now only $4500 (assets -liabilities = equity);

      3. Book value/share is now $90;

      4. Market value of each share is now theoretically $45 ($30 original market value/share + $15 increase due to buyback? MAYBE; MAYBE NOT. The market is not necessarily rational.

      <<"it cost only $3000 to get the property by buying back shares as compared to $6000 by buying new property from the market.">>

      Therein lies the false assumption, namely that the market discounts the $6,000 lease by 50% to $3,000 and it would cost $6,000 to buy the same lease. The reason the market discounted the lease by 50% is because the market thought it was only worth $3,000. So, the company should be able to buy the same lease for the same 50% discounted market price. Of course I'm assuming a rational market which may be an erroneous assumption.

      Of course we've got 50 shareholders who should be happier than the 100 we had before but nothing really changed economically, only perception.

 
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