NOG: Putting a Pretty Face on an Ugly Deal?

by Melissa Davis - 9/13/2011 6:18:47 PM

Now that Northern Oil and Gas (AMEX: NOG) has finally hired a respected “Big Four” auditor to review its books – blessed internally by an audit chair who reportedly overlooked Enron’s massive fraud – the company could find itself with a lot of explaining to do. The possible questions range from obvious ones, like those covering the decline rates and depletion expenses for NOG’s gushing Bakken wells, to bizarre ones like this: If NOG has accumulated such a valuable portfolio of acreage out in North Dakota, the most attractive region in the oil-soaked Bakken shale, then why has the company sold rights to wells on more than 15% of its North Dakota leases to a mysterious firm established by a young cosmetologist – but officially led by one of its largest original shareholders -- while booking nominal proceeds, at best, from those potential related-party deals?

NOG has spent years loudly promoting its frenetic acquisitions in the oil-rich Bakken region, pushing its market capitalization above $2 billion at its peak, but the company has never even mentioned the pile of assets it sold along the way. All told, state records show, NOG has purchased approximately 400 leases in North Dakota during its breathless shopping spree. Meanwhile, that database reveals, NOG has sold roughly 80 North Dakota assets – the vast majority to an obscure firm that’s struck only a handful of deals with other sellers in the state – and, in some cases, has recorded no apparent proceeds from those transactions at all.

NOG transferred its interest in at least 70 North Dakota oil wells to an outfit known as Ashwood Resources, records indicate, a firm that operates out of a post office box in the same tiny Minnesota suburb that the company itself calls home. Notably, records show, Ashwood currently lists Brittany Regerthe wife of NOG Chief Michael Reger – as the official contact person for the firm.

Even so, when questioned by TheStreetSweeper, NOG portrayed the Ashwood deals as immaterial ones involving an unrelated party with the best interests of its own shareholders in mind. Interestingly, NOG inserted a brand-new disclosure in its latest quarterly report – filed on Tuesday – that almost mirrors the response it sent to TheStreetSweeper over the weekend with one notable exception: It never mentions Ashwood, as the buyer of these assets, by name. (NOG also announced a $150 million stock-buyback program on Tuesday, potentially softening the blow of a major earnings miss, even though the company has less than $100 million in the bank and is currently burning through cash to fund its operations.) In a nutshell, and as covered in more detail below, NOG has basically indicated that it could not make its divested assets pay off but that a strange upstart – without its own experience in the Bakken – somehow could.

Ashwood surfaced out of nowhere less than two years ago, records show, when a future cosmetologist suddenly “organized” the firm a week before graduating from a nearby beauty school. Barely old enough to order a cocktail at the time, records show, Isabel Esbensen was still polishing up her manicure and hair-styling skills when she inexplicably branched out into the oil-and-gas business. She looked ill-equipped for that second career, records indicate, armed with little more than a general education diploma (GED) and a future cosmetology license that would lead to her current day job as a beautician at a salon about seven miles from NOG’s corporate base.

Esbensen now works at Mask Hair Designs and Day Spa, where TheStreetSweeper called her last week seeking comments for this story. She said she was too busy to discuss her role at Ashwood, however, and quickly hung up before TheStreetSweeper could arrange a more convenient time for an interview.

TheStreetSweeper then tried to reach Ashwood’s “chief manager” Jacob P. Schaffer – once listed as the second-largest NOG shareholder outside of its officers and directors -- but he never returned a message requesting information about his firm. TheStreetSweeper also left messages for all three members of NOG’s audit committee, including its chair Lisa Meier, who failed to respond to inquiries about the Ashwood deals as well.

Meier is no stranger to accounting scandals, a past story by BusinessWeek reveals, since she served on the finance team charged with reviewing the related-party deals at Enron that ultimately destroyed the entire company.

“We knew we were progressive and pushing the envelope,” Meier told BusinessWeek in a “comeback” story on her post-Enron career five years ago. “Everyone was surprised by what was going on … (But) you didn’t want to be the one saying, ‘I don’t get it.’”

All in the Family?

NOG’s deals with Ashwood don’t make very much sense, either. Even though NOG tried to justify the transactions, when questioned by TheStreetSweeper, the company could not overcome the power of reported numbers – found in its own corporate filings – that worked to undercut its claims.

NOG emphasized that the sales represented the equivalent of 23% of a single oil well, with its average working interest in those properties (pegged at 0.25%) implying that the company transferred its stake in more than 90 wells to Ashwood under those deals. Based on past company forecasts and standard industry models, experts calculate, NOG should have received more than $2 million for those assets. Instead, filings show, NOG booked a small fraction of that sum – less than $300,000 – for all of its asset sales during the past two years combined.  

NOG further indicated that it had simply discarded the assets because the company’s tiny working interest in those leases could not justify the costs involved with holding onto those claims. But NOG arguably saw some value in taking such a miniscule stake in those leases, logic suggests, or the company wouldn’t have spent the money doing just that – and so many times – in the first place.

To outsiders, at least, the potential explanations look rather weak at best and downright scary at worst. 

Mickey Thompson, former president of the Oklahoma Independent Petroleum Association, reviewed the details from just one well sold by NOG to Ashwood – a productive gusher in this case – and saw potential reason for alarm.

“The transactions between NOG and Ashwood may be absolutely arm’s length,” admitted Thompson, whose home state of Oklahoma has produced one of the biggest players – Continental Resources (NYSE: CLR) – in the Bakken arena. “If so, there will be an accounting and reporting trail by NOG at least tying the production volumes, the ownership interests and the value received by NOG.

“Obviously, public companies must go the extra mile in avoiding any appearance of a shell game in transactions with non-public entities,” he added, “especially if those companies are somehow related.”

Austin, We Have a Problem …

NOG has actually provided enough details about the well reviewed by Thompson, known as the “Austin 23-32H,” to provide some basis for determining the possible value of that asset. 

Back in 2008, records show, NOG repeatedly indicated that it controlled a 3% working interest in that oil well. That figure held steady throughout the permitting process, records indicate, but mysteriously plunged to 0.5% just before Ashwood officially arrived on the scene.

NOG reported that smaller stake in April of 2009, records show, with the Austin 23-32H set to begin pumping out oil – around the same time Ashwood surfaced – barely four months later. NOG then walked away from the Austin 23-32H entirely in October of 2010, records show, transferring its leftover stake to Ashwood even though the well had been producing about 20,000 barrels of oil a month up to that point.

Based on conservative estimates, experts calculate, NOG should have received at least $135,000 (and possibly far more) for even its remaining 0.5% interest in that oil well. Based on its own corporate filings, however, NOG collected less than half that sum for all of the leases and wells -- including the Austin 23-32H – that it sold in the fourth quarter of 2010 combined.

As the buyer, records show, Ashwood looks like the obvious winner of that deal. As a firm managed by one of NOG’s largest early shareholders – and now relying on the wife of NOG’s top executive to handle its incoming calls – Ashwood looks like a related-party operation as well.

Before Schaffer launched Ashwood with the help of a young beautician (who counts the wife of NOG’s finance chief among her Facebook friends), records show, he ranked as one of the biggest outside investors in NOG itself. In fact, records indicate, Schaffer used to own more NOG stock than any other outside shareholder except for one – a future convict who is currently serving a 42-month prison term for white-collar crimes.

Like Esbensen, records indicate, Schaffer worked outside the energy sector (as a Minneapolis realtor) before expanding into the oil business with a new firm that would soon claim dozens of NOG oil wells as its own. NOG did sell a handful of North Dakota assets to other firms in recent years, records show, but even one of those looks like a possible related party as well.

Let’s Make a Deal

The day before NOG sold its remaining stake in the Austin 23-32H to Ashwood, records show, NOG assigned one-third of its working interest in a North Dakota lease to O’Toole Oil (and the rest to another firm). O’Toole Oil shares a small-town Montana address with the O’Toole law firm, records show, where Loren O’Toole – a member of NOG’s board – works as an attorney catering to the oil and gas sector. Classified by NOG as an “independent” director, corporate filings show, O’Toole serves on the company’s audit committee – alongside Meier – which must look out for potential conflicts in related-party deals.

Like Ashwood, records indicate, O’Toole Oil landed quite a bargain when it wound up with its new asset. By using a below-market oil price of just $75 a barrel and applying it to a typical NOG lease, experts calculate, O’Toole Oil can expect to generate more than $650,000 from its share of that asset – potentially worth more than $2 million in total – over the course of its lifespan. NOG transferred that lease on the final day of the third quarter of 2010, records show, but it booked absolutely no proceeds from the sale of oil and gas properties for that same period.

As a member of NOG’s audit committee, filings show, O’Toole is charged with reviewing and – when fair – approving any material related-party transactions involving insiders at the company. NOG has classified even relatively small deals valued below $25,000 as “material” in the past, filings show, so this lease clearly looks as though it should fall into that category.

However, filings show, NOG has never even mentioned this transaction at all. As a result, critics feel, NOG has failed its shareholders in one of two ways. Either NOG concealed a material related-party deal, they say, or the company went a step further – rendering the transaction immaterial – by simply giving that oil lease away.

For NOG, even the most favorable reasons behind these potential related-party deals – particularly the dozens involving Ashwood -- seem to raise more questions than they answer. 

In fairness, NOG could have chosen to offload those Bakken oil wells to raise money for more promising projects within its vast portfolio. If the assets looked that unattractive, however, why did the company purchase them – and in such large numbers – in the first place? Why did NOG sell so many of them to an obscure firm with apparent ties to the company instead of an established player, such as Brigham Exploration (Nasdaq: BEXP), that seemed to pay good money for some of its properties in the past? Finally, and perhaps most importantly, why did NOG walk away from those transactions with so little to show for the deals?

NOG reported almost $470,000 in proceeds from the sale of oil and gas properties in 2008, records show, when it sold just four leases three of them to Brigham – in North Dakota. Unless NOG raised a lot of money selling leases in nearby Montana, where acreage tends to fetch substantially less, the company pocketed an average of more than $100,000 for those 2008 deals. (To be fair, records indicate, NOG sold major stakes in its leases under those transactions.)

NOG fared considerably worse, records indicate, once it started dealing almost exclusively with brand-new Ashwood the following year. NOG documented about 30 asset transfers to Ashwood in 2009, records show, but posted absolutely no proceeds from asset sales that year at all. The company then registered at least 40 additional deals with Ashwood in 2010, records show, actually booking about $300,000 worth of proceeds -- still less than the sum realized from its modest activity in 2008 -- this time around.

Meanwhile, records show, NOG insiders hit the jackpot. The more deals NOG struck with Ashwood, records indicate, the more stock NOG insiders – including those charged with overseeing the company’s numbers – seemed to sell along the way. 

The Color of Money

Meier pocketed more than $400,000 in stock-related gains last August, records show, dumping shares within weeks of both the Austin 23-32H and the O’Toole Oil deals. She then followed up with another six-figure gain this March, records show, exercising remarkable timing by selling the stock on its way to an all-time peak.

Meier had plenty of company the second time around. CFO Chad Winter actually collected a much bigger pay-out, records show, raking in $1.6 million from stock sales shortly after the shares hit their record high. Originally the vice president of operations at NOG, records show, Winter assumed control of the company’s finances in March of 2010 – with no sign of holding even a basic accounting degree – and quickly scored a $4 million compensation package as a reward for his services. 

NOG appointed a new “land manager” shortly after that, records indicate, who actually looks somewhat more qualified for the CFO job than for the crucial post he now fills. Kruise Kemp graduated with a business finance degree from Montana State University in the spring of 2010, records show, and found himself in charge of NOG’s core businesslease acquisitions – just a few months later. Kemp appears to enjoy strong family ties to at least one NOG director, a local obituary shows, since O’Toole (or the son who shares his name) served as an honorary pallbearer at the 2004 funeral for Kemp’s grandfather.

Like Esbensen, as well as the NOG staffer (and Esbensen Twitter follower) who notarized the NOG-Ashwood deals, Kemp currently appears to be under 25 years old. Nevertheless, records indicate, he has already managed to secure one of the most important jobs at a $1.3 billion corporation focused exclusively on buying and exploiting oil leases.

That said, records show, NOG has excluded Kemp from some potentially telling transactions. While NOG routinely depends on Kemp to sign documents for the leases it acquires, state records indicate, the company has relied on its young in-house notaryand its own CEOto sign off on the mysterious Ashwood deals instead.

No crusty veteran himself, records show, NOG’s 35-year-old CEO has made an outright fortune – accumulating more wealth than many executives see in a lifetime – since the young company went public just four short years ago. Reger initiated a relentless stock-selling spree in late 2009, records show, around the same time that brand-new Ashwood began purchasing the first in a long string of oil leases from the company. He scored $2.5 million from stock sales that December, records show, pocketing another $2.6 million the following March – the same month that NOG placed Winter in charge of its finances – and has gone on to sell more stock, like clockwork, every month since that time.

Those early seven-figure gains now look like mere pocket change, however, compared to the massive proceeds Reger generated during a three-day span this spring. He raked in almost $23 million – by dumping 20% of his entire stake in the company – this March, records show, cashing in a big portion of that right after TheStreetSweeper contacted NOG seeking information for a looming two-part investigative report on the company.

NOG shares have shed about one-quarter of their value since Reger executed those well-timed sales, records show, with the stock – once a $30 highflier – now fighting to stay above the $20 mark, as it hovers near its lowest levels of the year.

NOG has lost the enthusiastic support of a powerful fan, Jim Cramer of “Mad Money” fame, along the way. Cramer originally liked NOG because of its status as a Bakken play, records show, but recently backed away from the stock – citing TheStreetSweeper’s past coverage as a key reason – and has, by now, clearly cooled on the name.

“I am less sure of myself,” Cramer admitted when asked about NOG on his show last week. “It doesn’t mean it doesn’t have value. But I clearly have been jarred by the accounting issues and feel like, right now, the momentum has left this stock.” 

NOG shares, already down sharply from their $33.98 high at that point, have slipped another 4.18% to $21.32 since that time.

* Important Disclosure: Prior to the publication of this article, TheStreetSweeper (through its members) effected a “short sale” of 38,500 shares of the stock of NOG on May 9, 2011, at a price of $21.23 a share, with the intent of profiting from decreases in the price of the stock. It covered 18,900 shares at $20.25 a share on May 12 and the remaining 19,600 shares at $19.95 on May 16. TheStreetSweeper may choose to establish a new short position in NOG and will fully disclose the details of that investment if and when it occurs. 

New Update: TheStreetSweeper began establishing a new short position in NOG on Aug. 30, when it sold 2,000 shares of the company's stock short at $20.90 a share. It covered that position on Sept. 2 at $19.22 a share. TheStreetSweeper sold 3,000 shares of NOG stock short on Sept. 8 at $20.35 a share and then covered that position by repurchasing the stock on Sept. 9 at $19.21 a share. It established a new short position in NOG on Sept. 13, when it sold 2,000 shares of the company's stock short at $20.74 a share. TheStreetSweeper may choose to adjust the size of this position going forward and will fully disclose the details of any future transactions as they occur. 

New Update: TheStreetSweeper established a new short position in NOG on Dec. 26, when it sold 4,000 shares of the company's stock short at $24.40 a share. It covered that position on Dec. 27 at $23.89 a share. It then established another short position in NOG on Jan. 3, selling 8,100 shares at $24.86 a share. It shorted an additional 4,500 shares on Jan. 4 at $25.33 a share and has now sold a total of 12,600 shares of NOG short at an average price of $25.03 a share. TheStreetSweeper covered 4,500 of those shares on Jan. 5 at $24.81 a share, reducing its short position to 8,100 shares at this time. It covered the remaining 8,100 shares on Jan. 6 at $24.79 and no long has a position in the stock.

* New Update: TheStreetSweeper established a new short position in NOG on Jan. 10, when it sold 6,400 shares of the company's stock short at $25.39 a share. It covered all 6,400 shares on Jan. 12 at $24.58 a share and no longer has a position in the stock at this time.

As a matter of policy, Melissa Davis – the editor of this website and the author of this story – will never take a financial position (short or long) in any of the stocks that she covers. To contact Ms. Davis, please send an email to


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