Why Northern Oil and Gas Has Impressive Earnings
Sometimes the market can react funnily to earnings releases. Minnesota-based Northern Oil and Gas (ASE: NOG) saw its shares plunge 15% in a day after the company announced third-quarter results.
An opportunity where others fear to tread
But, as fellow Fool Travis Hoium points out, there isn't any reason to be overly concerned about an earnings miss for this growth company. This raises the question: Should this decline in share prices be seen as a buying opportunity for Foolish investors? Let's find out.
Revenues from oil and gas sales rose to $43.7 million, which clocks in as 181% growth over last year's third quarter. Now, this excludes any gains from derivatives and hedging activities. Adjusted net income, which reflects earnings from core operations, stood at $11.9 million, or $0.19 per share. While analysts' estimates of $0.22 per share weren't met, the profits recorded were nevertheless high. That's why I'm not too nervous.
What really matters
Total production grew a solid 111% compared with the year-ago quarter. This is exactly what I'm looking for. For companies operating in the oil and gas industry, I wouldn't want to give a lot of weight to analysts' estimates, unless the variations are huge. Strictly speaking, oil is a commodity whose price is extremely unpredictable and fluctuations can have a pretty wide variation. While upstream companies have hedges to protect them, to accurately estimate the exact hedged prices -- and therefore, the forward earnings per share -- is stretching a bit too far.
The third quarter saw lower commodity prices compared with the second quarter this year, which is why I wonder whether falling short of expectations has anything to do with production setbacks. After all, actual earnings missed estimates by just $0.03.
A unique strategy
Northern's unconventional business model seems to be working just fine. The company is the non-operating participant in the Bakken shale play, which is a pretty unusual strategy to adopt. Instead, it has interests spread across 527 wells over the entire region. These wells -- operated by the likes of Continental Resources (NYS: CLR) , Hess (NYS: HES) , and EOG Resources (NYS: EOG) -- have ensured that Northern isn't left out from any of the major sweet spots in North Dakota.
Northern's investors should breathe easy since the operating rights are with reputable companies. Additionally, access to almost the entire lucrative North Dakota oil play is definitely a competitive advantage over peers.
In fact, preemptive measures to lower risks by having a spread over the entire Williston Basin are actually working. The company is yet to hit a dry well in the Bakken reserves. In short, it has witnessed 100% success in drilling so far.
Northern has a long way to go in terms of growth. With only 37% of its total Bakken and Three Forks acreage position developed, I'm pretty excited about the future. To say that Mr. Market had factored in the advantages a little too much -- so that share prices should see a 15% drop -- is absurd. I don't see any reason to be nervous about growth. That's why this sharp decline in share prices might be a fantastic buying opportunity.
In the meantime, The Motley Fool can help you keep a track of this company for the latest news and analysis. All you need to do is add it to your watchlist. It's free.
At the time this article was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. 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.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.