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Bakken the Hunt for New Oil
06/16/2008 12:00 am EST
Tobin Smith, founder and chief investment officer of ChangeWave Investing, finds a new way to play the energy riches of the vast Bakken shale formation in the Northern Plains.
At this point, you should all be believers in the immense wealth-generating potential of the Bakken shale formation [in Montana, North Dakota, and Saskatchewan].
This time I have a small player in mind, but one that is almost 100% focused on the Bakken region: Northern Oil and Gas (NYSE: NOG).
The US Geological Survey (USGS) placed the recoverable reserves at 4.3 billion barrels of oil using current technology. However, using new technology, that figure will be much closer to the 413-billion barrel estimate of the USGS's Leigh Price, who died in 2000.
Unlike the tar from the Canadian oil sands, the Bakken oil is light (like gasoline) and sweet (low in sulfur).
So far, the big winners in the Bakken story have been Brigham Exploration (Nasdaq: BEXP) and EOG Resources (NYSE: EOG), a company that was once a subsidiary of the notorious energy trader Enron.
EOG has eight rigs running on 320,000 acres in the Bakken region and reports that the area has the highest return of all the places it drills—including Texas's Barnett Shale, the Gulf of Mexico coast and the Permian Basin of New Mexico.
Northern Oil has a field adjacent to EOG's productive Parshall Field, which is the site of the largest reservoir found in the Bakken area thus far.
NOG trades its leases for participation with larger exploration and production companies, and its business model doesn't eat up a lot of cash. It raised $15 million in a private placement in September 2007 and another $5 million in warrants. This means it has enough cash to complete all of its participations in Bakken wells for 2008 and 2009.
Northern Oil recently completed its sixth Bakken well, which means it will have 10% interest in hundreds of millions [of dollars] in cash flow as these wells start pumping out tens of thousand of barrels of oil a day.
NOG also has a very promising Bakken Shale play in Montana's Red River basin with Brigham Exploration (BEXP). It also has 10,000 drillable acres in the Marcellus shale in lower New York state—another hot area of the US shale boom.
What we get in Northern Oil is a company with low cash burn, high rates of return on wells drilled, and a very experienced Bakken shale player with hundreds of drillable sites in the most exciting new oil find in the world.
We also get a company that at $90- to $100-per-barrel oil will soon have reserves in excess of $1 billion—with a market capitalization that should reach this level, too.
Let's get our NOG shares while the market cap is under $500 million and hang on for another double! Buy Northern Oil and Gas under $14 with $28 target. (The stock closed above $13 Friday—Editor.)