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NOG |
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Northern Oil and Gas is a non-operating oil and gas company. They accumulate oil and gas royalties on acreage in the major US shale and natural gas deposits. Ther business model is to own a minority interest in wells that produce or in the future will become producing wells. It is a low overhead way to participate in the exploration of oil and gas. To keep their business model one that has low overhead and low risk, they customarily sell their future production by opportunistically hedging their future production usually 6 to 9 months out. Ideally when the price of their commodities enjoy a spike up in price (wars and low inventory situations) are ideal for this to lock in a price that is often above the market price of physical delivery pricing.
Lower leverage and lower risk are very attractive aspects of the often volatile commodity swings in both oil and natural gas and natural gas liquids. When the commodity prices are above the average hedge price they receive, it results in a mark to market cashless adjustment /loss for the quarter. This often confuses the new stockholders and frankly is a bit scary. With several quarters of ownership in their stock, you'll learn that the dividend is a function of the cash flow of the portfolio. The dividends are historically very solid and reliable. None the less, the stock price is often depressed resulting in a dividend yield offering 9-11 percent dividend yields. NOG is the oldest and largest example of a "NON-operating" oil company. Management is very conservative and are large owners of the company's shares. The dividend is a qualified dividend and offers a lower tax rate then personal income or interest income. I've lived in Texas since 1981 and have met many wealthy Texans who have large generational investments in land royalties. In fact several of them make very large land purchases and then sell the land in smaller parcels, but always hold onto the land's oil and mineral royalties. This type of "Asset Light" oil company is very tax efficient and provides a low taxed income. The company will look for small participation ownership in wells that will provide a return that satisfies their "hurdle rate of return. The selectivity of potential wells is a key to thheir productivity and success. Often an individual wild cat opreator who wants to retire will sell their wells to the nonoperator and enjot the dividends provided out into the future. These transactions will often be stock for stock swaps. Recently NOG has entered into buying ownership of the pipelines that serve the areas of their wells. I like this approach, as it locks in a stable income regardless of the commodity's price - it is a subtle way to further diversify and hedge their total revenue. Lastly the shale deposits they participate in will often define their productivity. NOG has acreage in all of the US major shale deposits and in addition they participate in the Marcelus gas fields - another form of diversification that offers a long-term growth aspect in so far as LNG is becoming a large e export product. I encourag all investors to add a small part of your potfolio into this high yield dividend payer.
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