St. Anthony: Northern Oil and Gas might be target

  • Article by: NEAL ST. ANTHONY , Star Tribune
  • Updated: October 7, 2012 - 7:13 PM

The maturing Wayzata company is trading at a significant discount.

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Michael Reger, chairman and CEO of Northern Oil and Gas Inc.

Even with strong financial prospects and a recent management overhaul, Northern Oil and Gas Co.'s stock is trading at a significant discount to its peers rushing to extract black gold on the North Dakota and Montana plains.

Analysts intimate that a sale may be the ultimate endgame.

Northern, known best for its young, highly paid CEO, is located on Lake Minnetonka's Wayzata Bay, hundreds of miles from the gritty fields of the Bakken oil fields, where its business lies.

For five years, CEO Michael Reger, 36, has run the company with President Ryan Gilbertson, 36, a pal and former high-ranking Piper Jaffray securities trader.

Gilbertson, who has sold several million in Northern shares over the past couple of years, said in an interview Friday that the thrill of a start-up was gone after raising hundreds of millions in debt and equity capital. He wanted out of the limelight to focus on family, his charitable foundation and lower-profile business ventures.

"Northern is at a mature stage," Gilbertson said. "It doesn't need more capital. The oil is there and will get produced. I'm not out to be with a public company again. I have no plans to decrease my stake in Northern and have the utmost confidence in the existing team to continue to unlock value."

Northern is not replacing Gilbertson as president. A spokesman said Gilbertson was critical to Northern's raising $300 million in debt financing and expanding bank credit arrangements in recent months.

Over the past 18 months, 20-employee Northern has replaced its accounting firm, added a new chief financial officer and a new general counsel with experience in securities and corporate law, and beefed up its accounting and engineering departments.

Most of the changes came after sharp criticism of the company's accounting practices, $20 million in insider stock sales, mostly by Reger in early 2011 when the stock was at historically high prices, and past transactions involving Reger and relatives.

The company's detractors, including CNBC's Herb Greenberg and writers who once worked together at the TheStreet.com, helped drive down the stock price after Reger and Gilbertson sold about $20 million at $18 to $33 per share in the spring of 2011.

Reger, a fourth-generation land-and-oil speculator, has remained confident, admitted few mistakes and maintains that company performance will vindicate him. He and Gilbertson, while not paid salaries, each got a $1.45 million bonus and stock worth $9.2 million last year.

The stock has traded under $16.50 per share in recent days.

Several analysts who follow the company have a consensus target price of $27 per share over the next 12 months. John Gerdes, a supportive analyst at investment banker Canaccord Genuity in Canada, recently upgraded his target price to $33 per share based on Northern's performance.

Northern is not an oil field operator, but it buys minority interests in fields and lets production companies do the drilling. Northern pays its proportionate share of the drilling costs and gets its share of the proceeds from the sale of oil and gas.

But Northern's shares sell at a significant discount to those of operating companies such as larger Continental Resources, Kodiak Oil, EOG Resources and QEP Resources.

"The stock has been disappointing since the 'shorts' attacked it," said Steve Zachritz, a former analyst who follows Northern on www. zmansenergybrain.com.

"Those attacks were mostly about character," Zachritz said, alluding to the concerns about accounting and stock sales.

But Zachritz, in an interview last week, noted that new auditor Deloitte & Touche signed off on Northern's' 2011 financial reports, and the company's oil reserves are audited by a respected engineering firm.

"The knock now on Northern is ... they don't control the timing of the exploration," he added.

Yet Northern's operating earnings are just as high as those of production companies like Oasis Petroleum or Kodiak Oil and Gas, he said.

"Northern has more acreage than Kodiak, but one-third the market value," Zachritz said.

Northern is considering switching from a corporate structure, which pays corporate income taxes, to a master limited partnership, in which profits flow to owners who pay taxes at their personal rate. The partnership units are traded like stocks.

There also is industry talk about an eventual acquisition of Northern by a larger player in the oil trade. Neither Northern executives nor analysts would comment publicly about such speculation.

Neal St. Anthony • 612-673-7144 • nstanthony@startribune.com

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