By all accounts, Northern Oil & Gas, Inc. (NYSEMKT:NOG) shows no signs of an ailing company. When you look at its operational and financial metrics the company is performing admirably. So why has its share price fallen 20% while the S&P 500 is up more than 20% in the last year?
What’s even more interesting is that this Williston Basin-focused producer has underperformed virtually all of its peers. Given its unique business model, which we will get to in a moment, you’d think Northern would keep pace with or even perform better than its peers. Instead, over the past year the company’s relative performance has looked like this:
As I hinted at earlier, Northern Oil & Gas, Inc. (NYSEMKT:NOG)’s business model is unique. Instead of drilling its own operated wells in the Basin, the company takes small non-operated positions in Bakken wells. The company’s risk is spread across several operators enabling it to leverage the technical and operating staffs of its partners which keeps its costs downs. That’s delivered tremendous growth over the past few years.
The company is very diversified across operating partners with no partner more than 22.5% of its net wells. It partners with top operators in the play like Continental Resources, Inc. (NYSE:CLR), which is 12.5% of its net wells, and Whiting Petroleum Corp (NYSE:WLL), which is 5.5% of its net wells, are two of the top producers in the play. Continental also happens to be one of the lowest-cost producers as well as one of the top leaseholders in the play, while Whiting is a top producer in the play and has a large inventory of future drilling locations. By partnering with these two giants Northern can leverage the expertise as both grow production over the long term.
Not only is Northern Oil & Gas, Inc. (NYSEMKT:NOG) partnered with the current top operators, but it has teamed up with some of the fastest-growing operators as well. It counts Continental Resources, Inc. (NYSE:CLR), with 4.4% of net wells, and Kodiak Oil & Gas Corp (USA) (NYSE:KOG), which accounts for less than 2% of its net wells, among its many other smaller partners. Both companies are aggressively growing production out of the Williston Basin, with Kodiak’s production projected to double this year, while Oasis has grown its production 71% year over year. In order to keep up the torrid production growth pace both are investing heavily this year with Kodiak and are planning to spend $740 million to drill 75 wells. Oasis plans to spend just under $900 million to drill about 105 wells. These aggressive capital programs are leveraged thanks to Northern Oil & Gas, Inc. (NYSEMKT:NOG)’s vital capital participation as a non-operated partner in newly drilled wells.
