Usually when a company’s quarterly earnings miss Wall Street estimates, the stock price bears the brunt of investors’ disappointment. Not so with Northern Oil and Gas (AMEX:NOG). Although NOG reported net income of $20.4 million this week, that was without factoring in oil hedges. With those adjustments, quarterly earnings were $7.7 million (earnings per share of 12 cents — well below the 19-cent EPS analysts expected). But NOG’s closing price of $19.78 on Thursday is more than 49% higher than its pre-earnings release price of $13.25 on Monday.
So, what happened? Sure, it’s been a weird week in the stock market, but that’s hardly the reason for Northern’s big bounce. The real story is NOG’s revenue increased by 31% in the second quarter, with oil and gas sales rising a whopping 204% compared to the $11.7 million in sales during the same quarter in 2010.
Add to those numbers a little more good news: Northern set record production volumes of 400,928 barrels in the second quarter — that’s 132% higher than the same quarter last year and 12.5% more than in the first quarter of this year. Those are strong positive trends — particularly since the company has increased its oil and gas production in each of the past 14 quarters.
Still, before we get too far along in our cheerleading dance moves for this stock, it’s wise to take heed of a few market realities. First, oil and gas exploration and production is by nature a speculative business, so stocks like this are not the best match for the conservative income investor. Second, NOG has missed analysts’ estimates in each of the past four quarters. While analysts can — and do — miss the mark, a pattern of missed expectations is worth a closer look. Third, the price of oil has slipped back into the $80s, potentially dampening future profits.
At $19.78, Northern is trading more than 49% above its 52-week low last August. With a market cap of $1.22 billion, NOG has a very attractive price/earnings-to-growth (PEG) ratio of 0.86, indicating the stock is undervalued. While the company’s return on equity is a -0.6%, quarterly revenue growth is 249.6%. NOG has total cash of $124.57 million and no debt.
Bottom Line: Northern Oil and Gas is a solid company that’s well focused and investing heavily in its future. NOG is aggressively developing its Bakken and Three Forks shale fields in North Dakota — the company currently has 187 rigs drilling in that area today. Northern also is acquiring additional acreage at “prices significantly below levels indicated in recent publicly-announced transactions conducted by other industry participants,” company CEO Michael Reger said this week.
But aggressive investment in land — even at a good price — is an expense. And NOG did pay out more than two-and-a-half times as much money in 2010 ($194 million) than it brought in ($73 million). That makes Northern Oil and Gas a better play for growth investors who don’t mind a walk on the wild side.
As of this writing, Susan J. Aluise did not hold a position in any of the shares mentioned here.
