Northern Oil & Gas Delivers Once Again

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Northern Oil & Gas's (ASE: NOG) strategy is working out. Its second-quarter results have just shown that. Being a non-operating participant in the Bakken reserves is proving to be a strategy worth pursuing.

Solid operations
Oil and gas sales grew a breathtaking 204% in the second quarter compared to the year-ago quarter. At $35.5 million, this also represents a 31% increase from the first quarter. The company has been growing in leaps and bounds. While favorable market conditions (through higher oil-price realizations) definitely contributed to this increase, fundamental operational growth played a significant part, too.

Total production has increased by an impressive 132% in 12 months. This is what I'm looking for. While price realizations fluctuate, the stock's intrinsic value will grow only if the company's fundamentals are sound. And this is what I'm seeing right now.

Northern has working interests in 166 wells spread across North Dakota and Montana, and this strategy of minimizing risk through diversification is intriguing. Since the Bakken is a shale play that involves considerable risk, having a finger in every pie is a good way to mitigate losses.

The future looks exciting
Being a non-operating participant in the Bakken and Three Forks regions is a pretty unusual strategy for someone in this lucrative shale play. Nonetheless, this has proven very effective. With the operating partners being major E&P players, including Hess (NYS: HES) , ConocoPhillips (NYS: COP) and Denbury Resources (NYS: DNR) , the future looks exciting.

With more acquisitions in the pipeline, Northern should see a further increase in production in the next few quarters. But the road ahead may not be entirely smooth.

Some issues to be sorted out
Drilling expenditures are expected to be around $260 million, which might be a problem, given that the company's available cash balance is only $77 million. Also, the winter months could pose a hindrance to further well developments toward the end of the year.

Foolish bottom line
The overall prospects look promising. Management seems to have found a great formula. Further growth looks imminent. The Bakken seems to have produced yet another winner.

At the time this article was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Denbury Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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