Shares of Northern Oil and Gas (NYSEMKT:NOG), which owns non-operator interests in onshore U.S. oil and natural gas projects, rose sharply at the start of trading on Sept. 11, jumping as much as 10% in the first few minutes of trading. The big news here came out after the close on Thursday.
Oil prices have been weak over the past few days, causing the broader energy sector to head lower after a period of relative stability. In fact, Brent Crude has again fallen below the psychologically important $40 per barrel level on news that tanker ships may again start getting used as floating storage containers. That suggests oil demand isn't growing quickly enough to whittle down the oversupply that's been restraining prices. That's bad news for sure, but Northern Oil and Gas isn't letting that stop it.
Northern Oil and Gas invests in oil producing properties, acting as a financial partner to exploration and production names. That hasn't saved the company from the pain being felt in the energy patch; second-quarter revenue fell dramatically year over year and its earnings were deep in the red. It is also planning a 1-for-10 reverse stock split later in September. None of these things are good signs. But, after the close on Thursday, the company announced that it had agreed to acquire its first non-operating interest in the Delaware Basin. Essentially, it is continuing to expand its business, despite the downturn. In fact, you could argue that it is even taking advantage of the near-term industry dislocations to buy on the cheap. It believes the investment will add to earnings in 2021. The company also increased the low end of its third-quarter 2020 production guidance by roughly 10%, which suggests that its properties are working back to normal production at a faster rate than previously expected. With the stock down some 75% or so in 2020, this update was enough to get investors into a buying mood in early trading. That's reasonable, since it was a pretty positive news release.
Northern Oil and Gas is still a highly leveraged (financial debt to equity sits at 2.7 times) and small player (its market cap is just $250 million or so) in the energy sector. Most investors looking for an oil stock would probably be better off focusing on larger names with stronger balance sheets, like Chevron. (For reference, Chevron's financial debt to equity is roughly 0.2 times and it has a market cap of $145 billion.) That said, there is one virtual certainty at Northern Oil and Gas: Price volatility is likely to remain high for the foreseeable future.