Mr. Richard Weber
Chairman, Board of Directors
Northern Oil and Gas, Inc.
315 Manitoba Avenue, Suite 200
Wayzata, MN 55391
As you know, I currently own 9.47% of the shares of Northern Oil and Gas, Inc., (“Northern” or the “Company”), and I am the second largest shareholder of the Company. We have discussed over the past several months the performance of the Northern’s stock price, and my strongly held view that the Company is greatly undervalued by the market. I have prepared the attached presentation to the Board that contains concrete actions that I believe will help to unlock the current value of Northern for all of its shareholders. I believe these actions are necessary for Northern to honor its obligations to its shareholders. I also am filing this letter publicly along with the presentation for consideration by all of Northern’s shareholders.
Among the necessary actions detailed in the presentation are the following:
|1)||Improve Communication to the Market|
The Company does not provide to the market sufficient information and detail for the market to adequately value the Company’s shares. The Company should immediately take the following actions to rectify this lack of communication:
|a)||Provide Detail on the Company’s Strategic Evaluation|
Northern announced it was undergoing a Strategic Evaluation in August 2016 and has not provided a substantial update since. Given the lack of clarity on what has transpired and what options are currently being considered, investors are waiting on the sideline until the process concludes. Furthermore, investors likely are factoring in the most dilutive and least desirable outcomes in their models when valuing the Company.
The Company should provide an update on the Strategic Evaluation, what has transpired, what the Company has evaluated, and what solutions the Company is considering.
|b)||Open up the “Black Box”|
Investors historically have described Northern as “a Black-Box.” Without a high degree of clarity on what the Company owns or how their asset will be developed, the market will default to overly conservative assumptions and undervalue the Company.
Northern should begin holding annual analyst days and provide a large, detailed asset overview presentation for the meeting. The Company should break its acreage into several development areas, and the presentation should detail the following by those areas: gross/net acreage, net locations, single well economic assumptions, type well returns at different price decks, rigs/frac spreads active, main operators, well performance vs. type curve, estimate of gross/net wells that Northern will participate in over fiscal year, and potential valuation catalysts.
The Company should provide monthly updates that detail by area: gross/net wells that will come online within 90 days, revised estimates of gross/net wells the Northern will participate in over the fiscal year, and updates on catalyst items presented during analyst day.
|c)||Increase Investor Interest in the Stock|
Despite significantly improved single well returns in the Bakken over the past twelve months, large long-only investors have sold their positions and only ~1% of the Company’s outstanding shares trades daily
The Company needs to deliver its story directly to investors by meeting with them to emphasize the Company’s value proposition and potential.
|2)||Address Liquidity Concerns and Leverage Profile|
Northern is over-levered and has liquidity concerns. To address those issues, the Company should:
|a)||Shore-up the RBL Facility|
Unless addressed, the Company’s RBL debt will become a current liability during 4Q17 and the facility itself will mature on 9/30/2018. Without the RBL as a source of liquidity, the Company will not be able to keep production flat at the current price deck based on its current cash position.
Northern should either i) have a new RBL facility in place or ii) extend its currently facility as soon as possible.
The Company’s only liquidity is its RBL Facility. The RBL Facility is subject to bi-quarterly borrowing base redeterminations which creates an uncertain liquidity situation for a highly levered company such as Northern.
Northern should actively sell non-core assets to boost its liquidity position.
|c)||Northern is Over-Leveraged|
Northern is ~5.9x levered. The Company’s leverage profile acts as an overhang on the stock
While trading near $2.00 per share limits the Company’s options, Northern can explore the following options when its stock begins to respond to better market communication and improvement in its liquidity: public equity issuances, converting notes into preferred instruments, “up-tiering” transactions, and private equity infusions.
|3)||Execute Growth Strategy|
As Northern improves its liquidity and stock price, it must execute on a growth strategy.
|a)||Ramp-Up Non-Op Consolidation in the Bakken|
With a public currency and existing scale, Northern is uniquely positioned to capitalize on the large inventory of non-operated Bakken opportunities currently being marketed.
|b)||Start Proposing Wells to Bring Value Forward|
Northern can propose wells in DSUs where it has a high working interest to increase its rate of development (and consequently, NAV). The Company will need a COO with experience drilling wells to pursue this strategy, which requires the capability to drill, frac, then operate wells in the event that a DSU’s current operator non-consents.
I would like to emphasize that I am exceedingly optimistic about the future of Northern. I believe that these actions, if executed without delay, will help to increase both the immediate stock price and future opportunities for the Company, to the substantial and collective benefit of all Northern shareholders.