Expansion Into Appalachia Will Strengthen Operations But May Bring Earnings Volatility

Key Takeaways

• Strategic focus on spud schedule and longer laterals in Uinta Basin expected to improve production and revenue growth.
  
• Expansion in Appalachia and M&A activities position NOG for potential inorganic growth, supporting revenue and earnings sustainability.
  
• Disruptions and reliance on joint ventures create unpredictable earnings and operational delays, while external factors like tariffs threaten to squeeze margins further.

Catalysts

An independent energy company, engages in the acquisition, exploration, exploitation, development, and production of crude oil and natural gas properties in the United States.

• NOG's strategic decision to increase its spud schedule and focus on longer, optimally spaced laterals in the Uinta Basin is anticipated to lead to improved long-term production and returns, likely impacting future revenue growth favorably.
  
• Plans to expand NOG’s presence in Appalachia through drilling partnerships, along with ongoing M&A opportunities, position the company for potential inorganic growth, which should bolster both revenue and earnings sustainability.
  
• The non-operator model, which diversifies risk across multiple basins and operators, helps stabilize NOG's business profile and could lead to stronger margins and earnings performance over time.
  
• Investments in corporate infrastructure, including expanding capabilities in geology, engineering, data science, and financial management, are expected to drive operational efficiencies and, consequently, improved net margins and earnings.
  
• NOG's focus on maintaining a strong return on capital employed through disciplined capital allocation strategies, including potential share repurchases and dividend growth, is expected to enhance shareholder value and elevate future earnings per share (EPS).

Northern Oil and Gas Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Northern Oil and Gas's revenue will grow by 6.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 25.9% today to 20.2% in 3 years time.
• Analysts expect earnings to reach $490.4 million (and earnings per share of $4.76) by about March 2028, down from $520.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.7x on those 2028 earnings, up from 5.7x today. This future PE is lower than the current PE for the US Oil and Gas industry at 12.7x.
• Analysts expect the number of shares outstanding to decline by 1.97% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.03%, as per the Simply Wall St company report.

Northern Oil and Gas Future Earnings Per Share Growth

Risks

• The recent confluence of disruptive events, including forest fires, refinery outages, freeze-offs, and shut-ins, has materially affected NOG's oil volumes, impacting projected revenue streams and creating a less predictable earnings profile for the short term.
  
• NOG's capital program for 2025 will require a portion of spending to address disruptions and delayed projects, potentially affecting net margins and cash flow by necessitating higher upfront capital costs for catching up on production.
  
• Heavy reliance on non-operator strategies and joint ventures means the company may face timing issues and operational delays, causing lumpiness in quarter-to-quarter earnings and creating challenges for accurate financial forecasting.
  
• Uncertainty regarding the renewal of partnerships and JV agreements, such as the Appalachian drilling venture, might limit long-term production growth potential and generate earnings volatility.
  
• Potential impacts from external factors such as steel tariffs on OCTG costs could lead to increased operating expenses, potentially squeezing margins if cost adjustments are not effectively managed.

Valuation

• The analysts have a consensus price target of $44.208 for Northern Oil and Gas based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $58.0, and the most bearish reporting a price target of just $17.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.4 billion, earnings will come to $490.4 million, and it would be trading on a PE ratio of 10.7x, assuming you use a discount rate of 9.0%.
• Given the current share price of $29.93, the analyst price target of $44.21 is 32.3% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.