Bakken Update: Investment Trends In The Bakken's First Quarter Of 2013, Part II

Includes: HES, HK, MDU, NFX, SM
by: Michael Filloon

In the first part of this series I highlighted what operators are accomplishing so far in 2013. The market seemed prepared for poor earnings, but did not foresee the strong Bakken crude differential to WTI. This seems to be motivated by railing Bakken crude all over the country, freeing up pipe and bringing down transport costs. The question is, is it sustainable? I believe it is in the short term, or at least throughout the rest of the year. In January of this year, I thought the Bakken names would pull back in the second quarter. We got the pullback, which was better than I had expected. For those who got in at these levels, I would recommend holding a little longer into the year. This is the first time in a while I have had a buy rating on many of the better stocks in US unconventional oil. Hopefully I am correct and we will have ample opportunities to turn a profit this year.

There are many variables driving what could be a run on Bakken stocks (and others). The first is pad drilling. This not only decreases drilling costs and time, but most importantly allows zipper fracs. Without going into a great amount of detail, it essentially means the completion crew can complete several wells at the same time. For some operators, three completions can be done in the same amount of time as doing just one completion on a single well. Other costs are decreasing, such as proppant and frac fluids. All said, costs are down 20% from 2012 and look to drop another 10% to 20% by 2013 year end. Pipe continues to be put in the ground providing for clean water to the well site. It also allows for crude, produced water and gas to leave the well site without using trucks. Bidding jobs have become easier as wait times have decreased to a manageable level. Not only can operators choose the least expensive, but also have the option to pay a little more for a Haliburton (NYSE:HAL) crew for a little more to make sure things get done right. Kodiak (NYSE:KOG), which I own, is still my top pick. But there are a few other names that look good like EOG Resources (NYSE:EOG), Triangle (NYSEMKT:TPLM), Bonanza Creek (NYSE:BCEI), Synergy (NYSEMKT:SYRG), Diamondback (NASDAQ:FANG) and Oasis (NYSE:OAS).

Halcon (NYSE:HK) is a very interesting way to play the Bakken. It initially bought into the Bakken with the purchase of GeoResources. Halcon got this on the cheap as it isn't a real sexy part of the basin. This western Williams County acreage has lower IP rates due to a shallow depth on lower pressures. These wells have much lower well costs, but still have EURs in the 400 MBoe to 500 MBoe range. It added to this acreage with a purchase of Petro Hunts western Williams, northeast McKenzie and southwestern Mountrail acreage. The reservation has some of the best acreage in play and is now Halcon's core Bakken prospect.

Halcon bought into the Bakken as it saw an opportunity to create efficiencies that brought value to the area. The nice thing about Halcon is its transparency. It is more than happy to tell investors what it is doing and why. Most of the other operators are doing much of the same, but here are a few ways Halcon will decrease costs and time in developing the Bakken. Batch drilling is used on several wells with similar configuration to increase efficiency. Halcon estimates it will save 25 days and $1.3325 million in costs on four vs. one well. It also is increasing proppant and stages to increase production. Halcon expects to have little to no flaring of natural gas by early 2014. It did report some increased costs with its move to pad drilling. This should be a one time charge that I did not expect. This move will pay for itself in a short time. Halcon traded down as much as 15% after earnings. This was excessive, as it missed on EPS, but was in line with revenue expectations.

SM Energy (NYSE:SM) continues to work the Bakken, with a focus on the Eagle Ford. Condensate prices are higher than WTI, creating motivation to plow more cap ex into this play. Bakken production grew just 3% from the fourth quarter of 2012. It plans to swap two of its four rigs in the second quarter. These will be walking rigs, used for pad drilling. SM sees costs pulling back in the Bakken, and is optimistic its bottom line will improve. In my opinion, the Bakken will get lost in the shuffle for this operator. Not only is it focusing on the Eagle Ford, but it has had some very good wells out of the Powder. These wells are deeper, very expensive and have a lot of pressure. SM has one well that models over 1000 MBoe.

Hess (NYSE:HES) is one of the biggest Bakken players. It averaged 65000 Boe/d in the Bakken first quarter. This is an increase of 55% year over year. Production will average 64000 to 70000 Boe/d for the full year. Well costs average $8.6 million which is a year over year decrease of 36%. Average well costs were $13.4 million in the first quarter of 2012. Hess believes it can increase production to 120000 Boe/d by 2015. Bakken production will be flat in the second quarter, due to the first quarter drilling of pad wells. These wells must all be drilled before completions start, so watch this in the second quarter as we could get some stock pullback as there could be a hefty production miss. This is the consistent theme in the Bakken for 2013.

Hess made a surprising comment during earnings. It stated 10 of the top 25 wells in the North Dakota Bakken were Hess wells. My research had shown Hess lagged other operators in North Dakota consistently with respect to initial production rates from the first day to as far as a year out. I am not saying Hess made a false comment, just that I should look into these 2012 wells. Its well costs in 2012 are very low. If this is coupled with superior production, a well analysis may be needed. It brought 30 wells to production in the first quarter. Of this, 21 were middle Bakken. Hess will bring 175 wells on line for the full year with two-thirds being middle Bakken. Hess EURs continue to improve as well. Of the 30 wells brought on in the first quarter, the average was in the low 600MBoe range.

Newfield (NYSE:NFX) has had some of the best producing wells in the Bakken. As an operator, it seems to have a better well design which produces excellent IP rates in the short and longer term. Although its results were very good, Newfield pulled back its development in the Bakken for the Uinta Basin as costs in North Dakota had gotten too high. So far in 2013, Newfield has continued to have very nice results with 30 day IP rates from the middle Bakken averaging 1000 Boe/d and 900 Boe/d in the upper Three Forks. As other operators have noted, costs continue to pull back. All in well costs have averaged $9.8 million. It is important to note that the $9.8 million includes facilities and artificial lift costs of $900000. Many of the Bakken producers do not include this in its estimates, so it gives an idea of why one company's costs would be much higher. It expects to grow Williston Basin oil volumes by 25% in 2013, which is up from the original estimate of 15%. Newfield expects 25% growth in 2014 as well. It has 4 rigs drilling and all are on pads. It plans to drill 35 operated middle Bakken and 7 in the upper Three Forks in 2013. Keep in mind that Newfield has always been very good with respect to getting oil out of the ground. Its northeast McKenzie County middle Bakken wells model as high as 950 MBoe and its upper Three Forks 800 MBoe. These are excellent results, but costs have always dogged the company. Right now it looks like those costs are heading lower.

MDU (NYSE:MDU) operates in the Bakken as Fidelity. I have always thought MDU would benefit from doing an IPO, or at least unlock some value. During the Bakken land grab, MDU did a good job of getting good acreage as a reasonable cost. It continues to operate in those areas. It has five operated rigs, three of which are in its core acreage. Bakken production is up 63% year over year. It has one operated rig in Stark County prospective, the Pronghorn Sands. This is an important area, one that Whiting (NYSE:WLL) has done a great job developing. On a side note, MDU is working with Calumet (NASDAQ:CLMT) on the Dakota Prairie Refinery project. It is the first greenfield refinery to break ground on US soil since 1976. It will source its own Bakken feedstock.

As more earnings announcements are released, we continue to see better well results at lower costs. Some have to do with pad drilling, but that is only part of the equation. Across the board, operators are now able to cut costs at lower contracted prices, and still get jobs done quicker. This should continue, and it may hurt oil service more than anyone. Completion jobs used to take forever in the Bakken, and costs were very high. Now that multiple jobs can be fracced at once, costs have moved down and there are too many crews. Bakken producers are drilling the same amount of wells doing batch drilling, and then following with zipper fracs. As well pads get bigger and more wells are drilled per location, this will further decrease drilling and completion costs/foot. I believe we will continue to see bigger and better wells going forward and this will only improve margins in one of the best liquids basins in the United States.

Disclosure: I am long KOG. 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 Fracwater Solutions L.L.C. engages in industrial water solutions for oil and gas companies in North Dakota. This includes constructing water depots, pipelines and disposal wells. It also provides contracting services for all types of construction at well sites. Other services include soil remediation. Please contact me via email if you are interested in working with us. More of my articles and other pertinent information on the oil and gas sector, go to