We asked energy-focused investment advisors to identify takeover candidates, based on undervalued assets in hot oilfields. Two names bubbled up: Northern Oil & Gas (ticker: NOG) and Approach Resources (AREX).
Northern Oil & Gas
Northern Oil & Gas, focused on the oil-rich Bakken Shale, has a passive business model: It has minority interests in wells, and gets a cut from partners drilling on its acreage in North Dakota and Montana. This year, the U.S. Geological Survey doubled its estimate for undiscovered oil volume in the Bakken and Three Forks formations, where Northern also operates.
A buyer could pay up for Northern's cash flow, broad acreage holdings, and its knowledge of multiple operators in the basin, says Art Smith, senior portfolio manager at energy-focused Triple Double Advisors in Houston. He thinks shares could double in a takeover. Assuming no deal, they could offer 35% upside in the next year, he says. Short interest totals about 25% of outstanding shares as of Oct. 31. The stock closed Thursday at $15.40.
Using Northern's enterprise value (market value plus debt) of about $1.5 billion, it trades at about just 5.4 times trailing earnings before interest, taxes depreciation and amortization. Larger peers in the Bakken are trading at about nine times trailing Ebitda.
Moreover, Northern may be positive cash flow in 2014, says Smith. Northern was the target of short sellers in 2011, the result of an accounting controversy. Today's discount, despite disappointing third-quarter production, is unwarranted.
Have you been on the KOG site? I think that article has just been made laughable. I don't own any NOG but I own a LOT of KOG and, like you, we are in a spin cycle--not very refreshing. It is time to see our over-exposure for what it is and prepare to come in from the cold.
I loved the writers quote saying NOG "has a passive business model". This is exactly what most of us have been saying as we watch this stock fall behind other Bakken companies. I would hope that Reger considers this article as another slap in his face and he does something aggressive to boost the stock price. Yes including selling.