Is Northern Oil & Gas a Buy?

Much has been made of QEP Resources' (NYS: QEP) recent deal to buy 27,600 net acres in the Williston Basin for $1.38 billion. While the deal looks expensive on a per-acre basis, it starts looking a lot more reasonable if you look at other metrics. For example, proved and probable reserves are about 125 MMBOE, and if you look at total resource potential, that number goes even higher.

I was already looking into stocks operating in the Williston Basin in search of oil-focused stocks to see if any values were left, but the recent M&A activity has encouraged me to leave no stones unturned. One of the stocks that has come across my radar from time to time has been Northern Oil & Gas (ASE: NOG) , which is a non-operated producer focused on the Bakken and Three Forks formations.

As a non-operator, Northern relies on its partners to operate the acreage. The company has high-quality partners such as privately owned Slawson, EOG Resources (NYS: EOG) , and Hess (NYS: HES) . These three players operate almost half of Northern's net wells alone, but the entire list is a diversified who's-who of Bakken operators.

Digging deeper
The company has 180,000 net acres in the Bakken and Three Forks. That works out to about 140.6 different sections of 1,280 acres, each of which contains about three Bakken wells and three Three Forks wells. Allowing for the fractional unit to stand, that implies 843.6 drilling locations. That squares with the company's number of roughly 842. Assuming 842 drilling locations, that implies one well per roughly 214 acres under leasehold.

However, as of 2011, 52,219 acres had already been developed. Also, another 22.5 net wells have been spud so far in the first half of 2012. Assuming the 214 spacing from above, that's 4,815 net acres that are about to be developed, depending on the timing of the well completions. So we have 57,034 net acres that have been developed, meaning 122,966 acres remain undeveloped. About 576 drilling locations remain on that acreage, and at about 400 MBOE per well, that's about 230.4 MMBOE of total resource still to eventually be recovered from the ground (is your head spinning yet?).

As of the end of 2011, Northern had about 15.7 MMBOE of proved, developed reserves. Add the 9 MMBOE from the 4,815 net acres I backed out in the last paragraph and the 230.4 MMBOE of total untapped resource potential and you get 255.1 MMBOE of resource. Factoring in the enterprise value at yesterday's close of $1.29 billion, we pay about $5.06 per BOE of total resource, mostly oil.

That's certainly a good price, but it's comparable to the recent analysis I did of Kodiak Oil & Gas (NYS: KOG) , which also trades at about $5 per BOE of resource. While Kodiak certainly looks more expensive on almost any valuation multiple, both companies actually trade at a similar level of total resource potential. Given the choice, I personally prefer Kodiak out of the two, given that it operates its acreage and can choose to really put its foot on the accelerator.

Foolish bottom line
Despite the ramping up of Bakken activity in recent years, Northern's still trading at a pretty good valuation. However, it also seems like there are comparable bargains among its competitors, one of which is Kodiak. Given the embarrassment of riches scattered across the energy sector, I will place this company on my watchlist and hope for a better price. Given the macroeconomic uncertainty these days, I just might get my wish.

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Paul Chi is an analyst on the Fool's Alpha service. He owns no shares of any companies mentioned.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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