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

by: Michael Filloon

The first quarter has turned out to be much better than expected in the Bakken. Most operators spent time drilling from pads, which was a good thing as the winter lasted longer with more snow than originally expected. Pad drilling requires that all the wells be drilled before completion work begins. Batch drilling saves time and money. Zipper fracs allow multiple wells to be fracced at the same time, which also lowers costs. The larger percentage of drilling vs. completion work means less production began in the first quarter. This did lower revenues, but more importantly, is the beginning of a new dynamic in the Bakken and at other basins in the United States. Completing multiple wells with in a short time frame means production will be very high at those times. This means some quarters will have high revenues and EPS while others could be very low. This lumpy production will provide buying opportunities in the first and second quarters of the year. In parts one and two of this series, I discussed how the Bakken operators continue to benefit. Part 3 also touches on these points, but more importantly, starts with Oasis (NYSE:OAS), which blew the doors off estimates.

Oasis had a great first quarter. It had an EPS of $.56 vs. analyst estimates of $.51. Oasis reported revenues of $248.3 million vs. the Street's $222 million. It has beat analyst EPS estimates for four quarters in a row. It accomplished this in one of the longest winters in recent memory. Oasis produced at the top of its range for the quarter. Full year guidance was increased to 31000-34000 Boe/d. Well costs have reduced to an average of $8.4 million. This is down from $10.5 million in the first half of last year. Oasis projects well costs below $8 million by year-end. In 2013, it saw costs drop $400000/well. Of this, only 25% was decreased service costs, with the remaining 75% from efficiencies. Oasis estimates well costs will decrease another 5% in 2014. Keep in mind, there is a significant difference in well design throughout Oasis' acreage. In northwest Mountrail and western Williams, the play is shallow, decreasing costs. There are lower pressures as well, which decreases the need for ceramic proppant. In the center of the Basin, its Indian Hills prospect has well costs of $9 million. Oasis uses 60% ceramic proppant in these wells with EURs of 650 MBoe. In the shallow areas, well costs are $7.2 million. EURs are 450 MBoe. It continues to change amounts of sand and ceramics in wells. It has used 100% sand in Red Bank.

Like Triangle Petroleum (NYSEMKT:TPLM), Oasis has its own pressure pumping business. If we include the cost savings, well costs reduce to $8.1 million. Oasis will add 2.4 net wells to its current budget. It currently has a spud to rig release of 23 days. More important is its rig release to rig down. It was 5 to 8 days, but pad drilling requires only one. In 2013, it will spend $100 million versus $211 million in 2012. Oasis has done a much better job than expected on its infrastructure. 90% of its wells are hooked up for natural gas. 85% of gross oil volumes are piped, and 55% of its produced water travels by pipeline to its own disposal wells.

Oasis is still down spacing its acreage. It is experiencing no communication between wells in the middle Bakken or upper Three Forks with 160 acre spacing. Oasis is currently down spacing to six wells in both source rocks. In 2013, 60% to 70% of its wells will be drilled from well pads. Improvements have been made to well design that will decrease costs by 5% to 10% year over year. It plans to drill 128 wells this year and 145 in 2014. Bakken/WTI differentials were the tightest in history for Oasis. It was at 1%, which is better than the 1.5% realized in the fourth quarter of 2012. Oasis believes this spread will widen in the second quarter. I could be wrong, but I do not believe the WTI/Bakken differential will widen until midyear.

Now that a good portion of Bakken crude is being sent to the east and west coasts, we could see a differential of $5 as a bottom. This could be a great opportunity to start a position in the refiners. The differential should rebound at this time to the $12-$14 range. In the first quarter, Oasis realized synergies from the formation of its wholly-owned subsidiary, Oasis Midstream Services. This increased costs, but also allows Oasis to realize third party revenues in its SWD and other midstream assets. Oasis also made some interesting remarks about Montana. Acreage north of Elm Coulee and south of Brockton-Froid is much like its North Dakota acreage. I am pretty sure this was meant to be focused on western Williams County, as I have found this to be true from my research as well. It is important to note, Oasis has quietly beat estimates for four straight quarters. I believe its full year guidance is too conservative, but this company would rather under promise and over deliver. Oasis does plan to ramp pad drilling in the second half of the year, which should increase estimates through December.

ConocoPhillips (NYSE:COP) sees a very small percentage of production coming from the Bakken. It is not its focus when compared to other U.S. unconventional plays, either. The Bakken averaged 29000 Boe/d in the first quarter. This compares to 101000 Boe/d in the Eagle Ford and 52000 Boe/d in the Permian. Bakken production was 21% higher than in the fourth quarter. Cash margins in these plays are improving. Now the Eagle Ford, Permian, and Bakken have higher margins than the average of all of Conoco's production combined. This shows the economics of shale liquids are very good. Conoco's WTI/Bakken differentials are minus $5, and the Eagle Ford is plus $5. Even with well cost improvements in the Bakken, the Eagle Ford continues to be a better overall play.

Occidental Petroleum (NYSE:OXY) has a Permian focus. The majority of U.S. unconventional dollars are focused on Texas and California, but the Bakken has seen improvements. Occidental has not accumulated acreage in the best areas of North Dakota, but has focused on central and western Dunn County. The middle Bakken is not at its thickest here, but the Three Forks is quite good. Further south, it is focusing on the Pronghorn. Occidental is realizing improved well costs throughout all of its U.S. acreage. From 2012 to 2013, the Williston Basin has seen a 32% decrease. This was the best percentage of all U.S. plays for Occidental. Its drilling program is now planned months in advance. This not only decreases costs associated with downtime, but it has been able to decrease the number of hours needed to complete the wells. It has decreased the number of strings of casing. It has switched its cemented liners for slotted liners. Occidental is optimizing water usage, by using flow back-end or produced water on completions. Stimulation contracted costs are also headed lower. Four months ago, Occidental Bakken well costs averaged $10 million. Today the average is $8.2 million with a goal of $7.5 million. In 2013, it will run 6 to 7 rigs.

Marathon (NYSE:MRO) is realizing better prices for its Bakken crude. Production is also improving. Marathon has increased its 2013 production guidance to 40000 Boe/d from its 400000 net acres. Its core acreage is on the reservation, with additional acres in central Dunn and western Williams. In the first quarter, it averaged 37000 Boe/d. Marathon has planned 65 to 70 net wells in 2013. 45% of production is being railed. Well costs are $8.7 million. In the first quarter, it drilled 18 Bakken wells and converted 22 to sales.

As with parts one and two, we continue to see well costs pull back significantly. Costs are decreasing from 20%% to 30% on average. This is not isolated to one variable, but all aspects of drilling and completing wells are getting cheaper. Completion crews are cheaper by the hour, and zipper fracs allow for a group of wells to be stimulated at once. Batch drilling allows for specific focus on drilling, which decreases time needed. Some operators are using less ceramic proppant, but costs are down across the board as Russian and Chinese proppant is sold in larger quantities. Keep in mind, some company well costs are lower due to the area the wells are in. The middle Bakken can be more that a couple thousand feet more shallow. These areas are over a million dollars cheaper to drill. Initial production is also getting better, as companies garner more crude per well. This coupled with lower costs is making the Bakken a better environment for investment. Look for this to continue through 2013. Price realizations are also better as differentials have tightened. Even if these widen some, I do not expect the average to be much more than $12 to $13. I continue to like Kodiak (NYSE:KOG) going forward. I also expect Oasis to continue its run as well.

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