My Top Value Play in Bakken Oil

The weakness in oil prices was pretty sudden and has changed the financial dynamics for many producers. Typically, weaker oil prices are slow to translate into lower prices at the pumps. 

Domestic junior oil stocks have been hot commodities until recently. Many of the market’s best growth stocks in this sector continue to be expensively priced and finding value has been a difficult endeavor. 

One company we’ve considered before in these pages is Northern Oil and Gas, Inc. (NOG). (See “My Favorite Bakken Oil Play.”) This outfit is based in Minnesota and operates in North Dakota and Montana. The stock is not expensively priced, and the company is back online with solid sequential growth in production. 

Northern has experienced infrastructure problems and weather-related issues that have hampered well completions, but the company’s latest quarter was a big success and full-year 2014 production guidance was upgraded to between 20% and 25% growth over 2013, compared to previous guidance of 15%. 

According to Northern, its 2014 second-quarter production grew 17% sequentially and 41% year-over-year to 1.4 million barrels of oil equivalent (boe), averaging 15,369 boe per day. 

The company’s total oil and gas sales in the second quarter of 2014 increased dramatically to $121 million, compared to $80.0 million in the second quarter of 2013. 

But management incurred a significant loss on the mark-to-market of a derivative instrument and on the settlement of a derivative instrument, which resulted in actual second-quarter revenues being knocked down to $74.6 million, compared to $96.0 million in the second quarter of 2013. 

As a result of the derivative loss (perhaps the reason why the stock is still a value), Northern incurred a second-quarter loss of $4.4 million, compared to earnings of $25.0 million in the same quarter last year. 

On an adjusted basis, net income in the second quarter of 2014 was $17.4 million compared to $14.6 million. 

Oil companies experience production and weather-related issues all the time. And in the case of Northern, financial engineering has been costly. 

But the good news for this company is its growing production and increased guidance for the year. One quarter of meaningful bottom-line earnings and this stock could easily take off. 

Kodiak Oil & Gas Corp. (KOG) is a highly liquid junior energy producer with a strong institutional following. 

The company recently accepted a friendly takeover offer from Whiting Petroleum Corporation (WLL) in a $6.0-billion deal, including debt. 

This stock was very expensively priced, but the company’s earnings were able to catch up to its share price and it’s now more reasonably valued and still a growing enterprise in the Bakken oil region. 

Even though spot oil recently retreated in a surprisingly swift manner, speculative portfolios can still consider junior energy producers. These stocks remain one of the top growth sectors in the equity market universe. 

Naturally, when dealing with junior resource-related companies, everything is derived from the spot price and they are 100% speculative securities. 

Where oil prices go from here is anyone’s guess. But the domestic growth story in oil production remains intact for now. Many of these companies have a bright future going into 2015. 

This article My Top Value Play in Bakken Oil was originally posted Profit Confidential