In the last couple of years the activity in the Bakken oil formation has completely exploded. As Mark Papa, CEO of EOG (NYSE:EOG), said in a presentation last year, "... there are only two meaningful oil plays in the United States." Those two plays are the Bakken and the Eagle Ford. Even though the first Bakken well was drilled in Montana, it has been North Dakota steaming forward with the Bakken development. North Dakota is now not only the second-largest oil producer in the U.S. after Texas, but it even overtook the OPEC member Ecuador in oil output.
America is producing more than 7 million barrels of oil a day, the highest volume since 1992, according to figures released by the U.S. Energy Information Administration. It's another sign of the transformation of American energy, as the nation is forecast to overtake Saudi Arabia as the world's top oil producer in just a few years. Texas and North Dakota are the dominant states behind the increase in oil production, with crude from the Bakken formation of North Dakota transforming the state and allowing it to pass Alaska as the nation's second leading oil producer.
The Bakken Petroleum System is a giant, unconventional oil resource and was deposited during the Devonian and Mississippian periods. It is a self-sourcing petroleum resource that can have up to 35% organic content. The Bakken extends from the eastern edge of the Williston Basin in North Dakota to the Bakken Fairway in northwest Montana and north into Alberta, Canada. The western boundary of the Bakken is defined by the Rocky Mountain Thrust Belt. The Bakken Formation remains remarkably consistent from the eastern edge of the Williston Basin to the western boundary in northwest Montana during this depositional marine environment.
In the Williston Basin wells, the Bakken typically has thicker Upper and Lower Shale members of 20-60' in thickness, with a thinner porous Middle Member averaging 10' in thickness. The Bakken in northwest Montana is characterized as having thinner upper and lower shales averaging 20', but a larger average middle member often exceeding 20' in thickness and up to 40'. The middle member is the important key to Bakken production acting as a reservoir and a conduit for horizontal production legs. Based on solely the middle Bakken, which is currently the driving force for the Bakken Oil Boom, the area in Northwest Montana might even be superior in quality and potential.
The electric logs of existing wells and data collected from Shell Oil Company, Arco, and Suncor in Lewis and Clark country show the similarities of the wells in the Bakken Fairway of Northwest Montana and well-developed Bakken wells in the Williston Basin.
Characteristics of Northwest Montana and Williston Basin Bakken:
- Same upper, middle, and lower members.
- Same critical middle member porosity.
- Same depositional period/environment.
- Same resistivity range in oil generating shale members.
- Same thermal maturity zones.
- Same lodgepole and three forks deposits.
- Same potential production.
The Williston Basin of North Dakota and eastern Montana has been the heart and soul of the development in the past. Everybody was rushing into the area and lease prices were going through the roof. When Williams Companies (WMP) purchased 85,800 acres in October 2010 for $10,780/acre, Enerplus Corp. (NYSE:ERF) purchased 46,500 acres in September 2010 for $9,800/acre, Linn Energy LLC (NASDAQ:LINE) purchased 12,000 acres in December 2010 for $17,000/acre, and even the small and unknown player Kodiak Oil & Gas (NYSE:KOG) purchased 14,494 acres in October 2010 for $7,600/acre, it was obvious that something major was happening. The Bakken oil boom hit the Williston Basin full steam and nobody ever looked back. It is actually getting crazier by the day, with the most recent example being QEP Resources (NYSE:QEP) purchasing 27,000 acres in the Williston Basin for an estimated $40,000 per undeveloped acre. This is a new record and it only happened at the end of last year.
In addition to the lease acquisition frenzy, another trend is also very important to notice. First, it is the smaller companies that start the exploration followed by the medium to larger companies moving in. Companies like Whiting Petroleum (NYSE:WLL), Oasis Petroleum (NYSE:OAS), Northern Oil & Gas (NYSEMKT:NOG), Continental Resources (NYSE:CLR), etc. are smaller players becoming takeover targets based on their cheap evaluations. Then, the big boys step in:
The Signs Are Very Clear
- Lease prices are exploding.
- The Williston Basin is leased out.
- Majors are moving in.
- Takeovers, mergers, and sales are happening.
All of these companies that had the vision to move into the Williston Basin and the Bakken have to go somewhere. All this money through sales in the Williston Basin has to be invested, and the natural fit and the most rational conclusion is Bakken Fairway in western central Montana. If you compare the geology of existing wells, existing technical data, and hundreds of existing seismic lines in central western Montana, you can clearly see that the Bakken is here and might even be better. The whole area is ready to be developed and somebody will take the lead in this area. The comparison to the Williston Basin is astonishing.
It's like Kodiak Oil & Gas did as recently as 2009, when it was totally unknown and its capital expenditures for drilling were only $40 million for the whole year. It had the vision to start drilling in the Bakken. Now look at its capital expenditures for last year (2012): A company that was considered a penny stock in 2009 spent $595 million on capital expenditures in 2012. Kodiak Oil & Gas was trading at $0.19 a share at the bottom of the 2009 market, and now the stock and the company are headed toward becoming a very substantial energy company in just over three years. Tripling its output in 2011 was just one of its stepping stones. Now its market cap is over $2 billion.
Norstra Energy (OTC:NORX) might just be the up and coming Kodiak story in the new Williston Basin. It seems to be the most advanced company in the area; its management evaluated the data over the last few years and now has the clear vision to drill its first well in the summer. The company is off to the races and its market cap is just over $20 million -- sounds like an awfully familiar story. Although investments in micro-cap companies often come with increased risk and forward-looking statements, the payout when finding a hidden gem could be enormous. An investment in Kodiak Oil & Gas in 2009 would have returned an approximate 3,825% gain today. Norstra Energy looks to be following the same route as Kodiak and might just be the next small company to blossom into an attractive takeover target. Productive leases combined with low valuations make the Bakken formation an oil takeover hotspot.