I’ve always been an advocate of having one large, integrated oil and gas company (or limited partnership) in a long-term equity market portfolio. There are good dividends to be had and solid prospects for long-term capital appreciation.
But the marketplace is dealing with declining production among the biggest companies, and this is why smaller, domestic producers are now doing much better on the stock market. As is always the case, oil production growth must be combined with spot price growth. When the two are moving commensurately, there’s good money to be made.
As I’ve mentioned a number of times in this column, Kodiak Oil & Gas Corp. (KOG) is a popular Bakken oil play that’s highly liquid and is an institutional favorite. This company boasts excellent potential going forward. However, Kodiak is a stock with a lot of high expectations priced into its share price. (See “My Two Favorite Picks in the Speculative Oil & Gas Sector.”)
One company that I think speculative resource investors should now be putting on their radar is Northern Oil and Gas, Inc. (NOG), which is another junior oil and natural gas producer that operates in Montana and North Dakota.
Northern has been going down steadily on the stock market, as the company has had difficulty growing its production due to infrastructure issues. Specifically, company management cited adverse weather and extended road restrictions as hampering well completions in the second quarter.
Every energy company experiences infrastructure issues, and with this stock trending steadily lower, a very attractive entry point should soon present itself. Like I say, resource stocks trade on production growth and rising spot prices. If Northern can work through its current delays in well completions (which management says it will), then the stock could offer real value for a Bakken oil play.
Recently, Northern lowered its 2013 full-year expectations to 36 net well completions with 4.3 million total barrels of oil equivalent (boe) production.
Total oil production in the second quarter of 2013 grew only one percent to 895,000 barrels, but natural gas and other liquids rose significantly to 579,346 cubic feet for a gain of 51%.
The company’s total revenues for the second quarter of 2013 fell to $96.2 million, down from $119.2 million. Earnings were $25.0 million, compared to $43.6 million in the second quarter of 2012. Diluted earnings per common share were $0.39 compared to $0.70.
But like any business, a quarter or two of stumbling can create an opportune time for investors to consider new positions. I think Northern Oil is worth putting on your watch list right now. However, I’d wait until third-quarter financial and production results are announced—or, more specifically, for what management says regarding well completions—before taking any action.
The oil and gas business is alive and well, particularly among smaller companies. It is a good time to be in this industry.