What's in Store for Northern Oil and Gas?

There's been a divergence of outcomes in the oil and gas market here in the U.S. While the oil-focused companies have done quite well due to oil's high price, natural gas producers have suffered. One area in the U.S. known for its prolific oil production is the Williston Basin, home to the Bakken and Three Forks plays. An up-and-comer here is Northern Oil and Gas (ASE: NOG) , a non-operated player in this space.

Source: S&P Capital IQ.

The first thing that's immediately clear is that despite being a small-cap oil and gas producer, Northern has a clean balance sheet. By developing its oil-rich Williston Basin acreage and relying on the occasional equity raise, Northern has avoided debt financing. That can be good or bad, depending on how one looks at it, but one good thing is that the company will not be facing any onerous debt maturities anytime soon.

In the third quarter, Northern's average production was about 5,700 barrels per day, a 32% increase over second-quarter production and a 100% year-over-year increase. The company expects a further increase of 25% to 35% in the fourth quarter. That production comes from 525 gross wells (43 net) to the company. However, with 200 gross wells (22.8 net) in the drilling or completion stage, the company expects to increase production significantly as they come online.

As a non-operator, Northern has worked with many of the major players in the Williston Basin. Its largest partners as measured by gross wells are privately-owned Slawson Exploration, EOG, Continental, Hess, and Marathon. In other words, many of its partners are quite well-established operators. Northern's drilling success rate has been 100% over 725 gross wells, so the strategy has worked well thus far.

Looking forward
In 2012, Northern expects to spud about 44 net wells and spend about $325 million in drilling capex. That should add significant production to the 43 net producing wells and the 22.8 net wells currently being drilled or completed. As far as production goes, the company expects to continue ramping up. In 2012, Northern expects to produce double the number of barrels it produced in 2011. In 2013, the company expects a further 50% increase over the number of barrels produced in 2012.

As far as its acreage goes, Northern has no material expirations in 2012. Those don't come until 2013, by which time the company expects to have almost 100% of its acreage held by production. At that point, the company hopes to experiment with downspacing, which should maximize the recovery of oil on a per-acre basis.

Foolish bottom line
With its high drilling success rate in the Williston Basin, Northern should be poised for big increases in oil production in the coming years. As long as the price of oil stays at a reasonable level, the company should be greatly increasing its cash flow in the years to come.

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At the time thisarticle was published Paul Chi is an analyst on the Fool's Alpha and Duke Street services. You canfollow him on Twitterto stay up-to-date on his latest market commentary. Paul and Matt Argersinger co-manage theStreet Fighterportfolio, where they look for cheap, unloved stocks with home run potential. Paul owns no shares in any of the companies mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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