Will Work for Shares: A Small Cap Scraps Salaries

When I first encountered Northern Oil & Gas (AMEX: NOG) in late 2007, it was a bulletin-board listed small fry with no cash flow. Normally, this is the kind of stock that would lead me to run the other direction, holding my nose. Yet there was a comment during one of the firm's early presentations that led me to rate the company an "outperform" in Motley Fool CAPS.

Chairman and CEO Michael Reger, a fourth-generation oilman, explained that management, unsalaried at the time, weren't going to pay themselves with shareholders' money before cash started coming in the front door. This approach to compensation, combined with the firm's highly prospective acreage and conservative approach to capital allocation, was enough to win me over.

I closed my outperform call after the stock doubled in a few months' time, but the company has grabbed my attention once again. With the shares sagging, all of management has opted to receive shares in lieu of cash salaries for the next two years. Amid countless companies that lean toward "Pay for Pulse" rather than "Pay for Performance," I applaud the team for aligning themselves with shareholders to this degree.

Northern Oil is a fairly ubiquitous outfit in the North Dakota Bakken oil play. Taking a 3% interest here and a 6.25% interest there, the company takes small working interests in wells drilled by the likes of Marathon Oil (NYSE: MRO), Hess (NYSE: HES), and Continental Resources (NYSE: CLR). This limits the firm's upside, but also spreads risk and capital around. All the while, Northern learns more about the extent of the play and the value of its undeveloped acreage.

In a play where additional sweet spots like EOG Resources' (NYSE: EOG) Parshall field may yet be discovered, I think this strategy suits a small firm like Northern very nicely. The lower overhead enabled by share-based compensation stretches the marginal dollar that much further. For believers in triple-digit oil for the long term, Northern is one to investigate further.

Disagree with me, and think this one's a dud? Weigh in with your own call on the stock right here.

Related Foolishness:

• Have you heard about this Bakken bruiser?
• Consistency's key for EOG.
• Here's a company taking a different approach to onshore oil.