Triangle Petroleum (NYSEMKT:TPLM) offers an interesting investment opportunity. I have been covering this stock since February 2, of 2011. For a company this size, it is well managed. It is unique offering exposure to midstream and pressure pumping services. Management continues its operated program, producing synergies to control costs and improve its business model. This company is a very good operator. It has watched other companies, and used its success as a guideline in drilling and completion methods. Its acreage is outside the best Bakken acreage, but it has established a good, economic leasehold. It is the only small, vertically integrated Bakken oil company. This should help to control costs, in one of the highest cost oil plays in the country. It has a large speculative acreage in Montana that adds upside. Much of its acreage will support large well pads, optimizing EURs. Triangle is already one of the better Bakken operators. I would guess it will only improve from here. Triangle is third on my list of top Bakken stock for 2013. Northern Tier (NYSE:NTI) and Kodiak Oil and Gas (NYSE:KOG) are my first two, but Triangle could have more upside.
Triangle's Q3 of 2012 results were a miss but it was the first profitable quarter in company history. The production miss had more to do with timing than poor drilling and completion work. Well down time on its pad operations were a little longer than expected. I estimate this will improve in the short term as Triangle gets more comfortable in the play. G&A and LOE were higher than expected, but this is the norm with new operators. The number should pull back as a percentage in upcoming quarters.
Triangle's comments on acreage quality are interesting. Most believe the best acreage in the Williston Basin is in Mountrail County. This includes Sanish, Parshall and Alger Fields. This geology has a higher percentage of oil and most of the best 20 middle Bakken wells completed to date. Many are in Parshall Field and operated by EOG Resources (NYSE:EOG). Helis results in Grail Field of northeast McKenzie County were the best in the county. The higher percentage of natural gas inflates IP rates and decreases overall economics. Triangle asserts its acreage has better overall shale thickness, which should produce a larger number of locations. Triangle has reduced spacing to 600 feet with no well communication. It has been concentrating on the middle Bakken, but this is a story about the Three Forks. There are four benches. The upper Three Forks is consistent and has been developed throughout the play. The second bench is much like the first, and both Continental (NYSE:CLR) and ConocoPhillips (NYSE:COP) have successful completions. There is little info on the third and fourth benches. It is thought these can be fracced as one, but it will take time to prove this assumption. The fourth bench is not consistent and I am unsure of its economics. At the Three Forks, thickest intervals, Continental believes it can complete 14 wells per pad. This is a 4/3/4/3 design with 4 middle Bakken, 3 upper Three Forks, 4 second bench and 3 third bench wells. The picture below is a Three Forks isopach. It shows Three Forks thickness. Its thickest point is approximately 250 feet. As a comparison, the middle Bakken is around 90 ft, although estimates vary. Kodiak has plans for a 12 well pad in its Smokey Prospect. This is on the north side of the area highlighted in orange on the map. Triangle's acreage is in an area of thickness still above 200 feet.
In the longer term, Rockpile and Caliber will reduce costs through vertical integration. Rockpile will provide service to both its own and other operator wells. Of the 14 planned and expected completions in 2013, only 2 are with outside operators. It recently completed its eighth successful Triangle well. We should be getting information on four additional wells this month. In my opinion, Caliber is a more important asset. Companies like Kodiak and Oasis (NYSE:OAS) had big misses in previous quarters related to water costs. This has improved for both companies in the short term, as they have put more pipe in the ground. Triangle will not have to wait for midstream work, as this is still difficult in the Bakken. Labor is still tight for this type of work, making this an important asset. Triangle's produced water will be piped to Caliber owned disposal wells. Look for low water costs in upcoming quarters. As Rockpile and Caliber mature as companies, it could be spun off for additional capital.
Triangle's acquisition of the Station Prospect was early and inexpensive. There was little interest in that specific area. It has three and a half years left on its lease, so it can take its time in development. Other operators had accumulated acreage to the south, while Triangle focused on areas nearer to the Poplar Dome. This leasehold is prospective several pay zones. Initial wells have tested the middle Bakken, but the Three Forks and Nisku are also targets. In July of 2012, Apache made a very large purchase in Daniels County. This was a low cost acquisition of 300000 net acres. Look for other big purchases to increase Station Prospect's value.
Triangle has done a very good job of operating its North Dakota leasehold. It currently is drilling 4 middle Bakken wells per 1280 spacing with no communication. Triangle believes it can go to 500 feet or five wells. Current upper Three Forks spacing is 2 wells, but it has done little de-risking of this source rock. My estimates support 600 foot spacing.
Triangle's average well cost is $9 million. This differs some depending on area and well design. It will use 100% ceramic in McKenzie County and a mix in Williams. Triangle reduces well costs by $600,000 to $700000 using this blend. Its Williams County wells model to an EUR of 500 MBoe. McKenzie County wells average between 550 and 600 MBoe. Triangle operated wells are shown in the table below:
These are Triangle's first 8 wells. The well design is quite good. It keeps the majority of its stages below 300 feet. Some operators have moved to 39 stage fracs on 10000 foot laterals. I have not seen consistent data proving a significant improvement, but these are newer wells. As these wells continue to produce we will be able to calculate depletion. Triangle is using more water and proppant than many of its competitors. I believe 80000 barrels of water and 4 million pounds of proppant with a 9000 foot lateral has produced good results throughout the middle Bakken. Although Triangle is using less on average, it is still using a sound design. Below is a table of how these wells produced.
The above results are listed in barrels of oil and seem to fit within company EURs. These are not great results, but very good for the area. I would expect these results to improve significantly in the upcoming quarters. The tables below provides a comparison to Triangle producers.
Hess and Brigham both use a large number of stages. Brigham's results are better, but it also uses significantly more proppant. It uses large volumes of water. Brigham's well design has not changed much over the past year, but Hess has upped its stages and water volumes. Denbury's well design continues to be inadequate. It uses a very low number of stages and shorter laterals, but feet per stage is almost 400 in well 21324. Inadequate stimulation of the source rock produced a low 90-Day IP rate. Whiting used an average number of stages, but water and proppant are under utilized. This well was the worst performer of the group. Triangle's results are in line with Hess and Brigham. Brigham's success is not only due to its water and proppant usage, but a more effective stimulation of the source rock. By using less feet per stage, the hydraulic horsepower is more effective in creating fractures in the shale. The greater the fractures, the more proppant needed to fill in and hold open the cracks. More water is also needed to push the proppant into the source rock. The propped fractures continue to produce oil as long as it remains open.
In summary, Triangle is well placed in 2013. The Q3 of 2012 miss has provided a buying opportunity. It had more to do with production timing than poor well results. Although its acreage in McKenzie County does not produce the EURs of areas like Parshall Field, it has good thickness in the Three Forks benches. This will produce more locations per 1280 acre spacing. In my opinion this area will support 12 well pads. EURs in Triangle's McKenzie County wells are improving. Currently new wells model to 600 MBoe, but these numbers will increase as Triangle improves its well design. Williams County is 500 MBoe, but well costs are approximately $700000 less in proppant. The source rock is not as deep. The 800 foot difference lowers drilling costs. Station Prospect provides significant upside. It is prospective the middle Bakken, Three Forks and Nisku. There is a chance this area could also be prospective the Red River, which is 300 feet thick. As this area is de-risked, its value will increase. Triangle can choose to develop the prospect or sell it to fund development or add future North Dakota acreage.
Look for a Q4 beat on earnings, at 6 cents/share. Analyst estimates are 4 cents/share. I believe production for Q4 will average in the 2900 to 3000 Boe/d. Q3 production averaged 1389 Boe/d. Q4 oil and gas revenues will more than double from Q3 at $21 million. I expect Rockpile revenues to be comparable to the third quarter. I have total revenues in the $33 to $35 million range. Costs will increase, but net income still improves to $2.7 million. Analysts estimate Triangle's full year price target at $9.33. Given the company's growth prospects, it should be able to beat full year estimates.
Disclosure: I am long NTI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This is not a buy recommendation. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results, do not take in consideration commissions, margin interest and other costs, and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. For more articles like this check out my website at shaleexperts.com. Michael Filloon is a Director at Fracwater Solutions L.L.C. We engage in industrial water solutions for oil and gas companies in North Dakota. This includes constructing water depots, pipelines, and disposal wells. We also provide contracting services for al types of construction at well sites. Other services include soil remediation.