Two New Small Cap Oil Gems
Dear Bottarelli Research Member,
Despite some early-week choppiness, our mid-April market bottom prediction remains on track. This is a good sign. But remember, we’re still in the heart of earnings season, so we must remain nimble. Some traders refer to earnings season as “gap season” because on any given morning, a pre-market earnings announcement from a bell-weather company could very easily push the major market averages higher or lower. Because of this, I fully expect to see continued volatility over the next few weeks. Once the smoke clears from all the earnings announcements, the true market test will occur – and I think the bulls will come out victorious. If investors and traders continue to have confidence in the Fed’s ability to kick-start the lagging housing and banking sectors, then we’ll be well on our way to strong returns. But if we fall back into “lip service” trap going into the November elections, then the great technical recovery off the 50-day moving average (that we witnessed last week) could get spoiled.
So while the major market averages continue to sort themselves out, we’re going to do something a little different this week and recommend two small-cap oil companies that could be sitting on a major new oil discovery in North Dakota, South Dakota, and Montana. In case you’re not familiar with this geographic region, it has experienced a tremendous amount of positive activity ever since EOG Resources (EOG – NYSE) made their massive Bakken Shale discovery. This single discovery has proven to be the catalyst for EOG’s incredible upside performance. See for yourself:
Based on what EOG has been pulling out of this geographic area, today’s alert contains time-sensitive information about two new projects that are set to begin in this same general region. Each of them could turn into world-class discoveries.
As it stands, both projects are in the first round of development – and that’s why we need to dip a toe in the water now. You see, the trick with these small-cap oil and gas plays is to get positioned before the next phase of drilling is complete, because that’s when news starts flowing and mainstream investors start piling in. By getting positioned prior to an outbreak of news, we’ll be able to achieve abnormal returns as these powerful discoveries unfold right before our eyes. And now that oil has broken out to highs never seen before, it’s imperative that small-cap investors like us ride this wave in the most lucrative way possible.
So on that note, here we go…
Company #1: Northern Oil & Gas (NOG – AMEX)
NOG controls nearly 22,000 net acres in Mountrail County, which represents the second-largest position within a fifteen mile radius of Parshall Field (where EOG has been on a tear). This little gem has situated itself perfectly in this area, and has joint ventured with some good-sized heavy hitters like Marathon Oil to develop this property. NOG has already drilled 5 wells, but here is what gets me so excited:
NOG’s acreage includes approximately 30 additional wells permitted to be drilled in 2008.
Nobody really knows the true amount of oil and gas that this property contains, but from everything I have poured over, it’s a massive amount. Many experts (including the North Dakota Geological Survey) believe the Middle Bakken resource to be the most important U.S. oil discovery outside Alaska in 30 years. If this is anywhere close to being accurate, owning NOG right now is one of my best small-cap ideas of the year.
Oil and gas plays with this type of potential come around once in a blue moon, so as the first small-cap play, let’s establish a new position in Northern Oil & Gas (NOG – AMEX) at or under $10.00 per share.
Company #2: Brigham Exploration (BEXP – NASDAQ)
Just like NOC, this is another company with tremendous potential – and I have followed their progress for quite a while. They have exploration operations in many areas, including the Onshore Gulf Coast, the Anadarko Basin, the Rocky Mountains, and western Texas. Every one of these areas is known to hold oil and gas, and that’s why further exploration in these areas will soon put this little gem on the map very quickly.
In fact, BEXP reminds me of a start-up company I was involved with called Ultra Petroleum. In the beginning stages, nobody knew anything about them. Some of my colleagues even told me I was nuts for throwing my money away. But I did my due diligence and held my course. And as it turns out (and Bryan can testify to this), Ultra Petroleum’s stock later caught on fire and was eventually bought out by Marathon Oil.
Why do I mention this? Because getting wind of situations like this can make you some serious money. If I’m right about these two new discoveries (and I’m extremely confident that I am), we’ll all be in a remarkable position to achieve incredible gains on these picks. This story is dynamic, and it’s just getting going, so please make sure you add these two gems to your small-cap ledger now. Brigham Exploration (BEXP – NASDAQ) is a buy under $10.00 as well. And if either of them pull back, don’t even hesitate – add to them. You’ll be happy that you did!
UPDATES
OceanFreight (OCNF – NASDAQ) & Star Bulk Carriers (SBLK – NASDAQ): These are our two small-cap shipping stocks, and both of them have been recovering very nicely. Shipping is becoming the world standard for moving goods around the globe, and we fully expect these stocks to pick up steam as the economy recovers. In fact, we are seeing the early stages of up-ticks on both right now – so the future remains bright. Not only that, but both OCNF and SLBK have attractive forward annual dividend yields of 13.40% and 11.10% respectively, and this sure beats a 4% CD at a sub-prime leveraged bank. If you have yet to own OCNF and SBLK, consider them both strong buys at current levels. Buy.
ISIS Pharmaceuticals (ISIS – NASDAQ): Once again, I urge you to make sure that you own some level of exposure to this small-cap biotech gem because I continue to feel that ISIS is the best takeover target in the entire sector. In fact, I will go on record saying that a takeover is going to happen this year, and it’ll be a major player that does it. This morning, shares dropped over 30% after ISIS (and their partner GENZ) announced that the FDA provided guidance regarding approval requirements for mipomersen. The FDA indicated that reduction of LDL-cholesterol is an acceptable surrogate endpoint for accelerated approval of mipomersen for use in patients with homozygous familial hypercholesterolemia (hoFH). The FDA will require data from two ongoing preclinical studies for carcinogenicity to be included in the hoFH filing, which is now anticipated to take place in 2010. I find it interesting that ISIS is selling off on this news because it’s not bad news whatsoever. This is how the FDA works. They’re simply telling ISIS what they need to see in order to move forward with their drug – and yet the shares are selling off in reaction to this FDA guidance. When I see things like this, it makes me think that the sell-off is being driven by those that do not understand the company. Therefore, I urge you to use this dip as a wonderful “add on” opportunity and pick up some additional ISIS shares now. Buy the dip.
Aixtron AG (AIXG – NASDAQ): This is our compound and organic semiconductor position, which we entered on December 3rd for $12.71 per share. And today, the stock has quietly traded up to a new 52-week high at $15.70, good for a 23.52% gain. Not many investors are aware of AIXG, and that’s why I like it so much. As the demand for solar continues to expand, AIXG will continue moving up. Hold.
Mercadolibre (MELI – NASDAQ): After a rocky start, MELI has recovered to hand us an 18.75% gain. With strong earnings news from Google (GOOG – NASDAQ) this week, we fully expect MELI (which we call the Google, eBay, & Amazon.com of Latin America) to continue moving towards its 52-week highs – and soon. If it does, that’ll hand us a sizeable return. If you bought on the lows (as we mentioned), then congratulations on a really nicely timed buy. MELI remains a hold.
Suntech Power Holdings (STP – NYSE) & Canadian Solar (CSIQ – NASDAQ): You should have taken half of your profits off the table on each of these positions, as both solar makers have handed us a very strong 50% return in a very short (and turbulent) market period. I see STP back between $70 and $80 per share by year’s end, so I would use any sizeable pullbacks (defined as a 10% down-move in one week) to buy back into your position. The same goes for CSIQ. Hold/Buy on dips over 10%.
On that note, have a great week, and be sure to give thanks for the abundance in your life.
Sincerely,
“America’s quest for oil independence may end in a small region that stretches Across North Dakota and Montana known as Bakken”
- Fox Business News, Saturday, April 19th 2008
To fully understand the potential of NOG and BEXP, we must begin with a discussion of the Bakken Formation.
Discovered by geologist J.W. Nordquist in 1953, Bakken as a significant oil reservoir that covers around 200,000 square miles covering much of North Dakota, eastern Montana, northwestern South Dakota, and southern Saskatchewan/Manitoba, Canada. Ever since its discovery, the low porosity of Bakken’s shale has made the oil very difficult to extract, thus frustrating wildcatter’s attempts so extract its massive reserves.
But nevertheless, the mind-boggling potential of this formation drew attention from the nation’s top geological experts. USGS geochemist Leigh Price, for example, spent much of his career studying the Bakken Formation. He submitted a research paper in 1999 that estimated the total amount of oil contained in the Bakken shale between 271 billion to 503 billion barrels. But unfortunately, he passed away in 2000 before his research could be peer-reviewed and published, so the massive reserve remained misunderstood and un-tapped for years.
But that all changed in 2007 when EOG Resources (EOG – NYSE) drilled a single well using a special horizontal drilling technique into an oil-rich layer of shale in Parshall, North Dakota. This single hole forecasted production of 700,000 barrels of oil! It was this one single discovery that fueled EOG’s incredible upside run (as Mark noted above), and it also shifted the attention in the Bakken region away from Montana and into North Dakota.
Based on this finding, the number of wells drilled in the North Dakota Bakken region increased from 300 in 2006 to 457 in 2007, and oil production in the region increased from 2.2 million barrels in 2006 to 7.4 million barrels in 2007. That’s a 329% production increase! But if you consider the enormous potential of this formation, all of this could only be the tip of the iceberg. Based on this powerful potential, North Dakota senator Byron Dorgan asked the USGS to conduct a study of the Bakken’s potentially recoverable oil – and they just recently released their findings. Hint: They were blockbuster.
On April 10th 2008, the USGS released their report, which estimated the amount of technically recoverable, undiscovered oil in the Bakken Formation at 3.0 to 4.3 billion barrels.
Can you say, “Bye-bye Saudi Arabia!?”
Maybe that’s a bit of a stretch. But nevertheless, these new estimates represent a 25-fold increase compared to their initial assessment in 1995. In fact, these new findings make Bakken the largest continuous oil accumulation ever assessed by the USGS.
Based on this news, the world is beginning to take notice of this world-class discovery. Fox News recently ran a series of reports, and a Google search spits out 237 news articles written on Bakken in just the last week.
And that’s where NOG and BEXP come into play…
Starting with Northern Oil & Gas (NOG – AMEX), they’re an oil and gas exploration and production company with operations located in – you guessed it – Montana and North Dakota. They own oil leases of 21,354 net acres in Sheridan County, Montana, 5,000 acres in Mountrail County, North Dakota, and an option to acquire 10,000 acres in Yates County, New York. But as you can imagine, their Bakken property is the big play.
They control approximately 70,000 gross and 22,000 net acres directly adjacent to EOG’s Bakken drilling program in Parshall Field, which is home to North Dakota’s highest producing Bakken wells. Many experts believe this formation is the most important U.S. oil discovery (outside Alaska) in the last 30 years! And on Wednesday, April 8th, NOG announced their 5th successful horizontal discovery in Bakken (and the second with Marathon Oil). They also have two successful Bakken discoveries with Brigham Exploration, which we’ll get to in a moment.
All told, these discoveries bring Northern’s net production to approximately 200 barrels per day – and this figure includes development of less than 1% of NOG’s acreage position. In other words, the potential here is massive.
Based on this tremendous potential, NOG is increasing its acreage to perform approximately 30 new drilling permits in 2008. Break that down, and we’re talking more than 2 new wells drilled each month! This should deliver plenty of news flow to excite NOG shareholders. In fact, according to Northern Oil & Gas Chairman and Chief Executive Officer Michael Reger, “Northern controls approximately 25 high working interest well units in close proximity to current development, providing an extensive inventory of drilling locations to be permitted in 2009 and beyond.”
With such a solid amount of news flow going forward, NOG looks like a very strong small-cap positon for all of 2008. In fact, over the last 52-weeks, NOG is up 150% compared to the S&P 500’s loss of 7.06%.
Recent technical events have seen the shares hit new highs on April 10th, 14th, and 16th, so the trend is certainly moving up. And since only one analst currently covers the stock (Energy Research and Capital Analyst Ray Kukreja from Fig Partners, LLC), shares will have plenty of upside potential. So let’s establish a position now!
In many respects, the investment thesis on Brigham Exploration (BEXP – NASDAQ) is the same as NOG. BEXP is also a United States-based oil and natural gas firm which owns property interests totaling over 306,000 net acres in Texas, southern Louisiana, Oklahoma, and North Dakota. According to their corporate presentation (dated April 2008) their holdings break down as follows:
- 240,000 net acres in the Williston Basin
- 88,000 net acres in Mountrail County
- 51,500 net acres west of Nesson Anticline in North Dakota
- 100,000 net acres in Montana (with multi-pay potential)
- 66,000 acres in the Powder River Basin
Their year-end 2007 results showed proven reserves of 140.2 billion cubic feet of natural gas equivalents, which they sell to intrastate pipeline purchasers, operators of processing plants, and marketing companies.
Just like NOG, shares of BEXP has been moving up nicely. The stock has gained 52.22% over the last 52 weeks, highlighted by new highs on April 21st and 22nd. Since then, they’ve pulled back a little, offering us a nice entry price. And what’s more, they have a scheduled earnings announcement on May 6th, and this could further spark an upside move.
CONCLUSION: The potential of the Bakken deposit is truly world-class, and therefore, small-cap investors like us need to be completely exposed to the emerging companies that could experience eye-popping returns if a drill hole hits pay dirt. By blanketing the entire Bakken area with investments in NOG and BEXP, we’re exposed to this oil rich area in the best possible way, putting ourselves in the very best position to catch the next EOG in the very early stages of growth. As a pure play on one of the most significant U.S. oil deposits in history, let’s establish a position in both NOG and BEXP now!
PLAY #1: Buy shares of Northern Oil & Gas (NOG – AMEX) at or under $10.00, good for the week.
PLAY #2: Buy shares of Brigham Exploration (BEXP – NASDAQ) at or under $10.00, good for the week.
Sincerely,
© 2012 CSR Group, LLC. All rights reserved. Published in USA.
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