Why Shorts Think Northern Oil Can Go Lower

Northern Oil and Gas had been a hot play on the Bakken shale, but its stock has plummeted nearly 40 percent over the past six weeks after a number of controversial reports.

Even with Northern Oil's stock [NOG  19.91    -0.15  (-0.75%)   ] stumble, shorts (and there are a lot of them, with nearly half its outstanding shares sold short) think it can go lower.

Among the reasons:

—Northern Oil is a reverse merger, and reverse mergers (doesn’t matter if they’re Chinese or American) are always a red flag.

—Questions about aggressive accounting. In his blog, for example, John Hempton of Bronte Capital points out that Northern Oil’s depletion allowance—an estimate number tied to the amount of oil reserves used up—is much less than a bigger peer’s.

—For most of its life Northern Oil has used the same dinky Salt Lake City accounting firm that represented the shell it merged into. They call themselves a "local CPA firm." Only now, with the year ending December 31, is it switching to a big four firm—Deloitte.

Source: CNBC Stock Blog

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