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Michael Filloon, Split Rock (379 clicks)
Oil & gas, small-cap, research analyst, growth at reasonable price
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In January of 2013, I thought Bakken operators were expensive. Although these stocks did not appreciate like operators in other plays, I had hoped we would get a pull-back. I had stated the top ways to play this pull back was with Kodiak (KOG) and Triangle (TPLM).

Triangle missed analyst estimates from the first quarter badly. Expectations were an EPS of 0 cents, but Triangle lost 19 cents per share. This was after it had to delay its earnings announcement due to accounting issues. These issues had to do with the realization of revenues from its pressure pumping business. Although Triangle seemed unprepared for questions on how it would handle this going forward, it would seem a separation would benefit Triangle's balance sheet. Triangle continues to grow fast, as it had revenues of $9 million in 2011. 2013 estimates are for $300 million. The recent sell-off was excessive, look for the stock to head to $7 in the upcoming months.

Kodiak also reported earnings below analyst expectations. It reported 7 cents per share vs. expectations of 14 cents. It missed on the top line reporting $165.1 million vs. expectations of $174.53. This was an interesting quarter, and one that benefits the investor. Kodiak increased oil and gas sales by 26% from the last quarter. This increased to 107% year over year. It has seven operated rigs with one being released on May 13th. Even with the revenue miss, Kodiak still kept its current production guidance for this year. In the first quarter, its Bakken crude sold at a $3.50 differential to WTI. This is excellent, but my estimates have this widening in 2013. More importantly, Kodiak states with WTI selling between $90 and $95, it has margins of $50 to $60/Boe.

The first quarter of 2013 has started what looks to be a new trend for Kodiak. I would not be surprised if this is adopted by other smaller players in North Dakota as well. Kodiak has decided to slow down development in January. Due to the adverse weather and significant amounts of snow Kodiak, used just one completion crew and completed 14.5 net operated wells. It expects to complete 23 net wells in the second quarter and utilize a second crew. June should be the best month, but most of the production growth will be realized in the third quarter. The January slow down did affect the top line, but Kodiak states a large improvement will be seen in the second and third quarters.

The bottom line was affected in the first quarter as well. One-third of the 2013 capex was spent in the first quarter. Some of this is weather related, but also because all of its rigs are on four well pads. Kodiak estimates third quarter costs will decrease as one less rig is needed. Five of its drilling rig contracts will be renegotiated this year, and it expects its costs to decrease. Due to the high price of oil, Kodiak does plan to drill and complete an additional 6 to 8 wells this year. This did increase first quarter costs, but given the high price of Bakken crude it seems to be a good decision.

Exxon (XOM) reported an increase in operated production by 75%. Some of this was due to the acquisition of Denbury's (DNR). It has 10 operated rigs. Exxon is beginning to allocate more funds to unconventional liquids plays. It specifically mentioned the Bakken and Woodford Ardmore. The reasons are improved performance and completions. Not only are initial production rates improving, but also extended rates. Exxon plans to continue this and will divert money that would be used in unconventional gas as long as those prices remain depressed.

QEP Resources (QEP) has been riding the Bakken and Powder River Basin to increase oil production. It will spend over half of its cap ex on the Williston Basin in 2013. Its South Antelope prospect is developing well since its acquisition from Helis. It is running four rigs here and has a fifth to arrive by midyear. It has 3 rigs on the reservation. As with Kodiak, QEPs production will be inconsistent. Pad wells must all be drilled before the completions begin, so production will come in big chunks. This will prove to be important as the Bakken players will probably beat big some quarters and miss big in others. This will happen at least until analysts get a feel for how this will progress going forward. QEP is now saving $5/bbl on the reservation now that water infrastructure is in place. It now has access to more areas to market its crude. In the first quarter it realized 96% of the WTI price. This compares to 88% in the first quarter of last year. All in well costs are $10.8 million, but QEP expects this below $10 million by year end.

WPX Energy (WPX) will increase overall oil production by 21% in 2013. Bakken oil production will increase 25% to 30% over that same time frame. Like QEP, WPX is compelled to drive liquids volumes. It put 12 wells on sale in the first quarter, which is quite good considering the poor weather in North Dakota. Its middle Bakken and upper Three Forks wells have performed well with IP rates. Bakken wells are performing better, but not as much as seen in other parts of the play. WPX reports a decrease in time needed to drill and complete wells. Most importantly is the use of zipper fracs, as completion times have been cut significantly. Costs are down 10% to 20% year over year and continue downward. Last year WPX had some of the highest well costs in the Basin at $12.5 to $13 million. This is now down to around $11 million.

In conclusion, we are seeing the same dynamics from different operators in the Bakken's first quarter. Well costs continue lower and most are expecting further discounts in 2013. Pad drilling has decreased times, while zipper fracs are the most affective. Weather in the first quarter slowed times and hurt the bottom line for most of the producers. Operators were prepared for this and focused on first quarter drilling, leaving the majority of completions work to the second and third quarters of this year. Production numbers dragged in the first quarter, but a lot of work got done. The bulk of completions on pad wells will be done in the second and third quarters. This is important as I believe operators will have very good numbers going through the rest of the year. If I am correct, this will be coupled with strong oil prices and increased production. Kodiak may be the best way to play this in the Bakken, even after a nice pop over the past few days.

Source: Bakken Update: Investment Trends In The Bakken's First Quarter Of 2013