Friday, March 25, 2011

Northern Oil and Gas – the source of the strange auditor

There are lots of things that I do not know about Northern Oil and Gas.  The thing I would most like to know are the flow rates on their wells at initial, six month, twelve months, eighteen months and twenty four months.  The decline rates of the wells are the key to the economics of the Bakken and will tell you whether any or all the stocks are buys or even shorts.  The decline data I have suggests a decline rate of over 2 percent per day but only includes the front-end of the decline curve.

My first post had one question that left me pondering.  The question was how did Northern Oil and later Voyager Oil choose an auditor that nobody has ever heard of in Salt Lake City over twelve hundred miles from their office?

Moreover it wasn't any ordinary auditor – it was Mantyla McReynolds, an auditor with an almost unblemished record of auditing penny stocks that later collapsed.

Well I have the answer – at least in the case of Northern Oil.  The auditor came with the initial shell company into which Northern Oil was merged.  Mantyla McReynolds was the auditor both before and after the reverse take over.

The initial shell company was called Kentex Petroleum and it was controlled by Duane S Jensen.  The initial shareholders received 6 percent of Northern Oil for just a listing.

Duane (and his children) have a long record with penny-stocks using the same Salt Lake City auditor.  Indeed a few Jensen (sometimes Jenson) specials were mentioned in the first Northern Oil blog post.  However Bikini Team International Inc stands out.  This is their business description:

Our initial operations consisted of a "bikini team" comprised of women clad in bikinis who were engaged through us to appear for a fee. Some of the events that the bikini team appeared at were: an NFL super bowl party at the Roadhouse Grill in Evanston, Wyoming; as "ring" girls from May 2001 to September 2002 for the Wendover Boxing Series; the 24th of July Rodeo at the Delta Center Salt Lake City, Utah in 2001 and 2002; and the 2002 Winter Olympics, which were held in Salt Lake City, Utah, where they worked for Budweiser as the snow angels and hosted several pre-Olympic parties with Budweiser. They also appeared at several charity events, primarily in held in the State of Utah, like the X-Mas box foundation, the Cancer foundation, Christmas toy drive, Ron Boone golf classic at Thanksgiving Point, Downs Charity, Make a Wish foundation and the Ride for Hope With Harley Davidson in May 2001 and 2002. They also hosted bands at concerts, such as Lifehouse and 3 Doors Down and appeared on the Salt Lake City Fox 13 television morning show and sports segment "Rungee Time" for 15 months.

I really wanted to find photos of the Swedish Bikini Team – but all I found is Duane's (sometime Dwayne's)  more colourful record going back to the 1970s including SEC sanction and rougher...

If readers want to dig they will find plenty that is amusing.  I still chortling at a listed superbowl party.



John

7 comments:

Amphimedon said...

John,

Can we get some 3-year Mantyla McReynolds client price charts for the next post? I look forward to being entertained

-CAGC short, YONG short, Contemplating NOG short

Anonymous said...

I have no position in NOG btw.

Be careful RE: decline rates. For multi-stage frac wells you commonly get an 80% decline in about 2 years. That's a common type curve for areas like the SK Bakken, Lower Shaunavon, Cardium, Viking, etc. It's the drilling tech. Also keep in mind you can reuse the existing equip and do the same thing again and again in a relatively narrow area (incl primary, secondary and waterflooding + note that a historical drill map of these areas are very dense, vertical and now horizontal). The cost per well varies, say $2MM a pop but a lot of that is expenses (labour, frac fluid, power, explosives, etc.) versus capital costs that are depreciated (not a comment on NOG policy appropriateness, I have no idea there). Unless the land is non-productive then I guess you write it off.

Also keep in mind that PBN had generally crappy acquisitions at high cost vs. a generally recognized Bakken success story like CPG (Toronto listed).

my 2c

Anonymous said...

Wouldn't Ryder Scott, their petro consultants, have a say in determining their decline rates?

Zimmer said...

John,

I think most of the information you would need to calculate flow rates/decline rates are available in NOG’s 10K. You should be able to more or less back into the value of each well by looking at the Ryder Scott report attached to the 10K as Exhibit 99.1, and by looking at Item 2. Properties in the 10K (BTW, there is probably no more reputable petroleum engineering firm than Ryder Scott).

It has been years since I spent time in the oil and gas industry and my knowledge of oil of gas accounting is a little rusty, but here is my estimate of per well economics.

At 12/31, NOG had 26 net producing wells. Per the Ryder Scott report, they had proved reserves on those producing wells of roughly 4,857,000 barrels, or on average about 187,000 barrels per net well.

NOG was realizing about $89 per barrel in February (probably a couple of dollars higher today), so future net revenues for each well was about $16.6 million, less roughly 20% in lease operating expenses and taxes, or about $13.3 million per well, compared to their estimated cost of $6.3 million to drill each well.

You can look at the difference between the future net income from the producing wells and the future net income discounted at 10% in the Ryder Scott report to estimate decline rates. I will let you do that calculation. As a point of reference, NOG claimed 5,200 barrels per day of production at 12/31 and Ryder Scott estimated proved reserves from the producing wells of 4,857,000.

It seems clear to me that the economics of each individual well are pretty good. You can see it in the numbers and there are a lot of quality O&G companies drilling a lot of wells. NOG of course doesn’t drill any wells themselves.

The question for NOG isn’t the economics of each well. The real issue is that they only have 26 net producing wells at 12/31, and the total pre-tax PV10 of their proved reserves (using $89/barrel) was $418 million compared to a market cap of $1.7 billion. So, even if you give NOG the benefit of the doubt on their existing wells (and I agree that there are a lot of reasons to be skeptical), the market is valuing the undeveloped acreage at over $1.3 billion.

The real question is what is the value of their undeveloped acreage. They claim to have the potential for 876 net wells. If they drilled them all and the economics of each well were similar to those drilled to date, and they drilled them all in the next couple of years, the stock is cheap.

I would bet, however, that they never drill anywhere near 876 net wells on their current acreage. They only drilled 25 net wells in 2010 and they have guided to 36 net wells for 2011. At that pace, it will take 20+ years to drill them all, which would of course reduce the present value of those wells substantially. In addition, most of the leases on their acreage will expire if they don’t have production by the end of 2013.
They are going to need a lot more drilling rigs, probably more than exist in the US.

I suspect you have identified a great short, but not for the reasons you suggested. It is not the decline rates, it is value of the undeveloped acreage.

Anonymous said...

Zimmer,

You are spot on. Also we can look at comparable undeveloped acreage and see that it's not worth the 1B. I think NOG can maybe drill 50+ well a year but it will be a decade to get them all and they will lose many to lease expiration. It should be a good short but others need to dig in more. I see $15 range as a backstop and not $5 as sum surmise.

Jenna said...

Isn't the $15 range is a bit of over evaluation? I'll go with the $10 range.

Anonymous said...

Zimmer,

good stuff. However, there are 2 categories of proved reserves. Proved developed reserves are what you get out of existing wells without doing anything except spending minor amounts of money for maintenance etc (OPEX). Proved undeveloped reserves are what is estimated that can be additionally produced economically spending CAPEX (for drilling wells, doing fracs). It seems highly unlikely to me that the 4,857,000 barrels are all proved developed and would therefore be producible by those 26 existing wells. I rather believe that some of those planned wells are aimed at converting proved undeveloped reserves into proved developed reserves.

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.