American company Northern Oil received a share price boost of 12%, to $12.48, after announcing the successful completion of three wells in the North Dakota Bakken play. Northern holds a working interest in fourteen wells in the area and is included in almost 70 permitted or docketed-for-permit drilling locations.
Such small cap successes are typical of a region dependant on local operatives. But smaller companies must re-invest heavily to ensure future stability. To aid this re-investment, on June 30th Northern called for conversion on its existing outstanding warrants, issued in 2007. By today, all the warrants were exercised, i.e. all warrant holders paid to exchange their warrants for shares, raising approximately $14.5mn in capital for the company.
Exercising warrants is a fast way of raising capital in the short term but investors should understand there are mid to long term risks. With shares, the company has no obligation to pay dividends and can hold back profits for re-investmen, not so with warrants. If the company goes bankrupt, warrant holders are higher on the ladder for receiving compensation than shareholders. If the share price rises, however, shareholders fare far better than warrant holders.
Investors who exercised their warrants must have expected strong growth in the share price, and the 12% boost is certainly vindicating. But they should remember that Northern’s highest share price was $16.40, only $4 higher than the current price.
Northern is optimistic and enthusiastic about re-investment, “The conversion of the outstanding warrants provides an influx of capital that will allow us to… opportunistically grow our leasehold position as we did last month with the acquisition of an additional 24,000 net acres in Dunn County, North Dakota”, said a company spokesman. But investors should remember that re-investment now means less money left over to pay dividends to shareholders, and Northern’s heavy acquisition strategy could suffer if a property bubble develops.
Small cap companies offer high risk, high reward opportunities. For those looking to invest in the Bakken basin, companies like Northern Oil should be used to complement a balanced portfolio of long term assets.
