Shares of independent oil and gas producer Northern Oil & Gas (NYSEMKT:NOG) surged as high as 11% today and are up 8.2% as of 1 p.m. EDT. The stock-price move comes after management announced an acquisition, as well as an update to its production guidance before earnings.
Northern Oil & Gas announced today that it will acquire a working interest in 10,600 net acres of land in North Dakota, which is currently producing 6,750 barrels of oil equivalent per day (BOE/D). Northern will pay $100 million in cash and 56.37 million shares of common stock to private equity company W Energy Partners. Management noted that it was the largest acquisition in Northern's history.
Management also announced in today's press release its preliminary second-quarter operating results. Total oil production for the quarter came in at 21,000 BOE/D. At the beginning of the year, Northern was estimating 2018 production at 17,200-17,800 BOE/D.
Northern Oil & Gas is a unique production company. It doesn't operate any of the wells it owns, but instead has a non-operator working interest in several thousand wells across the Bakken region. So it's better to think of Northern Oil & Gas as a specialty finance company that specializes in Bakken wells.
With the higher than expected production levels and these new assets, management estimates that Northern will generate "substantial" free cash flow and will end 2018 with over $100 million in cash. That's a vast improvement over a company which, as recently as February, had to exchange a substantial amount of its debt for equity.
While today's news is a promising sign that Northern Oil & Gas is improving, the company has a spotty history of generating returns for investors. Until it has a more consistent track record of producing returns on its holdings in the Bakken, this is probably a stock to avoid.