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

Includes: BTE, EOG, NOG, QEP, SSN
by: Michael Filloon

Operations in the Bakken continue to evolve. 2013 is not different from any of the prior years, as it continues to see increased production, decreased costs and technology improvements. This is no different from other US unconventional liquids plays, as all are seeing better results on the top and bottom lines. In parts one, two and three, I have done a general overview of fifteen Bakken operators and what we should expect to see over the next three quarters.

Well costs continue to head lower. Most operators are reporting well costs decreasing 20% to 30% year-over-year. The unusually late winter in North Dakota forced some to put off completion work until the second quarter and just focus on getting wells drilled. This is much more convenient now that pads production looks to increase exponentially over 2012. Companies like Kodiak (NYSE:KOG) put its mobile rigs to work punching holes. Since there was little to no completion crews to worry about, Kodiak didn't have to worry about time frames and how that would affect fraccing. Once the drilling is completed, the completion crew will zipper frac the wells. This can decrease times by a third. This coupled with lower oil service costs across the board, increase rates of return to levels that are much more economic. Drilling in the first quarter threw analyst projections off as costs were higher as more drilling work got done, but very few wells were put to sales. I am expecting some very big top and bottom line numbers in the third quarter of this year. This will see the bulk of pad drilling production, and this will be very difficult to model given the large number of completed wells. Differentials could be the biggest story. Bakken crude is hitting the rails as refiners in the east and west coast have little by the way of pipeline capacity. Due to the large increase, Bakken differentials have pulled in much tighter to WTI pricing. I wouldn't get too excited about this, as there is much less room for these differentials to widen, but still it will be a marked improvement over the past couple of years.

I do not own EOG Resources (NYSE:EOG), but recommend it as the best way to play large cap unconventional oil. It has some of the best management and guys on the ground in the business. It will continue to outperform and will someday be part of one of the big three. Its flag ship continues to be Gonzales County in the Eagle Ford, but it recently made the Bakken its number two play. Now that it is dumping more dollars into North Dakota, we should see a general improvement as it extends its technologies in the play.

EOG's second bench of the Three Forks result was better than I expected. The River View 3-3130H had an IP rate of 3150 barrels of oil per day. This does not include gas or natural gas liquids, and I should point out its Antelope Prospect has a higher GOR than Parshall Field. It also had a first bench result in the Antelope. West Clark 101-2425H had an IP rate of 2205 Bo/d. EOG has stated that it believes the second bench could be better than the first or Bakken in this area. Craig Cooper has stated this in several occasions in comments over the past year, and it would seem he was and is correct. The 160 acre down spacing test in Parshall Field is going better than planned. It brought two wells to sales. Van Hook 20-107H and 127-107H had IP rates of 2,375 and 2,170 barrels of oil per day. This is important as we could be getting some communication between wells from other current producers. This should bring EURs down, but in Parshall Field this is not a worry as this area is the home of some of the best Bakken wells in history. Also keep in mind EOG continues to test its new frac technologies used in the Eagle Ford and Permian. Management states this has improved Bakken rates of return close to that of the Eagle Ford. EOG's Bakken crude continues to receive LLS pricing, as does its Eagle Ford and some of its Permian. It received a $12.23/bbl premium over WTI in the first quarter.

QEP Resources (NYSE:QEP) has built a position in the Bakken to increase oil production. Some believe it spent too much to get the Helis acreage in northeast McKenzie County. My guess is it wasn't just purchasing the acreage, but also the know-how behind some of the best Three Forks wells in North Dakota. It closed the purchase in September of 2012. At the beginning of this, it began pad development. It has 4 rigs here, and plans a 5th by year end. It plans to stick with 8 wells per 1280 acre spacing. 4 wells will target the middle Bakken and 4 the upper Three Forks. QEP reported much lower crude production than expected in the first quarter. It spent the first three months of the year drilling pad wells in the Bakken. All of the wells must be drilled before completion work starts. This will push the majority of production into upcoming quarters. QEP only turned one South Antelope well to sales in the first quarter. The IP rate was not great at 1,397 Boe/d, but at the end of the first day of production this increased to 3100 Boe/d. I don't like mentioning peak rates for production, but it is meaningful because the peak was at the end of the day and not the beginning. Well costs have decreased to $11 million in South Antelope.

QEP completed 11 Fort Berthold wells in the first quarter. 6 were middle Bakken and the other 5 in the upper Three Forks. The average IP rates were 2190 Boe/d in this area. In Skunk Creek it completed 5 wells with an average IP rate of 2479 Boe/d. A third party produced water gathering system is now completed, it saves QEP $5/barrel. Bakken crude sold for 96% the price of WTI or $90.81/bbl in the quarter. This compares to 88% the price of WTI in the first quarter of 2012. On the reservation, well costs are $10.8 million. it believes under $10 million as a target cost/well is possible by the end of this year. Decreased costs will be seen through pad drilling, fracs with more sand and using ceramic tails, but decreased drilling and completion times. Three rigs are running here. QEP has several pads under development. The most important is the Independence pad in Fort Berthold. It consists of 10 wells. One is being drilled with four waiting on completion. There are two additional four well pads on the reservation. In South Antelope, QEP has two four-well pads and one two-well pad. One of the four well pads has one drilling and three awaiting completion.

Baytex (NYSE:BTE) drilled 7 gross wells and frac stimulated 5 in North Dakota. It plans 13 additional wells in 2013. The Bakken is not the emphasis of this company, as the majority of its business is Canadian heavy oil. Only 6% of its production is generated in the U.S. It is currently producing 2800 Bbl/day. The majority of its acreage is in Divide County. These wells do not produce big IP rates, as the area is lower pressured. The shallow depth decreases costs, as it currently spends $7 million/well. Average 30-Day IP rates are 420 Boe/d, with EURs of 420 MBoe. Development costs are just $16.30/bbl. It has moved to 30 stage fracs. Keep in mind, Baytex is developing the Three Forks. The middle Bakken is not as good in this area.

Northern Oil and Gas (NYSEMKT:NOG) may be one of the better ways to play Bakken oil. As a non-operator, it has acreage all over North Dakota and Montana. It also participates in well done by a large number of operators. Its results generally follow the play as a whole. It added 130 gross or 10 net wells to production in the first quarter. This is not a bad number considering the amount of snow in late winter. January was the worst as it only completed 2 net wells. It plans a total of 44 in 2013. There are 190 rigs in North Dakota. It is participating in 152 gross or 12.2 net wells that are in different stages of drilling and completing. This year, Northern has incurred its largest production increases in Mountrail County working with Slawson and EOG. Pad drilling is decreasing costs and Northern expects well costs between $8.4 and $8.8 million for 2013. Water hauling continues to be the top expense. This cost increases in the early months of the year due to road restrictions. These should be lifted in May, but there is no guaranty. It is optimistic the second half of 2013, like many of the operators already covered in this series. Northern added 6000 acres in the first quarter at an average of $1000/acre. Production of the first quarter was up 29% year-over-year and 2% quarter-over-quarter. It averaged 11115 Boe/d.

Realized oil prices improved. Although WTI prices were lower compared to the first quarter of 2012, Bakken/WTI differentials tightened up. Last year, this differential was $14.09/bbl, compared to $3.62/bbl in the first quarter of 2013. Averaged realized oil price was $82.78 vs. $77.16 in the first quarter of 2012. Production expenses decreased 12% over the fourth quarter of 2012. Northern had 3300 net acres expire last quarter. 1000 net acres were in Richland County, while the rest were spread out through the play. It could lose up to 15800 total net acres this year. About half of it is in Richland County. Mr. Reger seemed confident the majority of this acreage will not expire due to activity in those areas. The majority of working interest is in pad wells. Most of the activity in the Bakken has moved this direction, with most doing 4 or more per pad. Spud to spud cycle times are improving from 30 days to 20.

Samson (NYSEMKT:SSN) has continued to add acreage to its Bakken leasehold. It has initiated a 6 well 160-acre infill program in its North Stockyard Prospect. There is potential for up to 14 wells. Its Rainbow Prospect effectively doubled its core Bakken acreage. This holds 16 total locations. These two prospects represent 2450 net acres in Williams County. These estimates only account for the middle Bakken and upper Three Forks. It is possible the lower benches could add locations going forward. The Rainbow Prospect acreage is not as good as in North Stockyard. The latter is about 15 or 20 miles north of the south central border of Williams County. Rainbow is much farther north. It is 9 miles south of Divide County. Its Bakken well costs are $8.1 million and EURs are 440 MBoe. Its Roosevelt County acreage is in Montana. It has approximately 30000 net acres in this prospect. Two gross wells have been drilled to date with poor results. The most interesting of its North Dakota/Montana acreage is in Renville and Ward counties. In South Prairie, Samson is targeting the Mission Canyon source rock. It has 6260 net acres. This is a shallow, low cost area.

In conclusion, the first quarter was difficult for operators in the Bakken. The late snow slowed completion work, as focus on drilling was the best conservative way to move forward under these conditions. Costs were still incurred while few wells were turned to sales. Tight differentials helped to improved realized crude prices which did help the top and bottom lines. Expectations are for a slow second quarter, which could provide a buying opportunity. Most of the operators have a large number of pad wells that will turn to sales in the third quarter. This lumpy production could provide a catalyst for the Bakken names starting in the third quarter. Production improvements by EOG are proof this play has the geology to rival the Eagle Ford. These very good production results coupled with three separate layers of source rock, should produce excellent rates of return in 10-well pads. Differentials will widen this year, but will still be better than in 2012.

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