Bakken Update: Triangle Beats On Better Well Performance And Its Integrated Model

Sep.18.13 | About: Triangle Petroleum (TPLM)

Triangle (NYSEMKT:TPLM) had an excellent Q2, as it continued to do a good job of controlling costs.

In September of last year, I had reported what looked to be a turnaround for Triangle. By starting oil service and midstream companies it has developed synergies improving the bottom line. Because of this I made it one of my top 2013 stock picks. Triangle's top line number was $50.39 million, beating by $180,000. The bottom line was much better at $0.19/share versus the Street's $0.15/share. The growth numbers have been excellent. Year over year quarterly sales volumes increased 277%. For the same time frame, consolidated sales were up 391%. E&P revenues increased 64% quarter over quarter and 358% year over year. Rockpile revenues were up 65% from Q1 and 445% year over year. Caliber's sequential growth was 21%. During the quarter, 58% of operated producers were hooked up to gas. This compares to 0% in Q1. By Q4, it plans to monetize the gas on all operated wells. This will provide a 15% to 20% increase to the top line. It drilled 5.2 net operated wells and has three rigs running. 1.4 net non-operated wells were also completed in Q2. Rockpile completed 8 Triangle wells and 10 third-party wells for a total of 57 stages. It has a backlog of 14 wells, with 8 being Triangle wells. Caliber delivered fresh water to all 8 fracs this past quarter. This will decrease costs significantly. Rockpile provided a $10.2 million reduction in expenditures for the quarter. Caliber reduced expenditures by $1.3 million.

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Triangle seems to be far ahead of estimates in 2013. Current production is approximately 6500 barrels a day for the past 21 days. This has ramped up quickly, with production at 5600 barrels just a month earlier. This outperformance is due to a slower depletion rate than anticipated. Triangle's acquired wells are also doing better. It seems focused on the details and this continues to drive numbers.

Spud to spud cycle times are improving as are completion techniques. Rockpile has expanded into the pump rental business, which offers pressure pumping services, pressure testing services, and cased-hole wireline services. Rockpile may be the most exciting part of the Triangle business. Its innovations continue to provide Triangle with top notch well results. When we take into consideration these results versus how long it has been in business, I believe there is still significant upside in the short term. Caliber continues to deliver fresh water for Triangle frac jobs. In forming this midstream business, it helps to curb one of the biggest costs in the Bakken. Water delivery costs whether fresh or produced can hit Bakken operators hard. It continues to hook Triangle wells to crude and gas lines. All of this is important, and I cannot stress enough that this business model works. Keep in mind, Triangle costs are much lower due to both businesses. This allows it to not only get jobs done on time, but use high end well designs without the burden of some of those costs. This is why Triangle is on track to meet full year guidance and budget. It is also the reason it produced $0.43/share in cash flow for the quarter.

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Going forward Triangle's integrated model will continue to benefit the company, but there is possible upside. It does have the option to spin off these businesses, but keep in mind that would be a ways down the road. In the mean time Rockpile and Caliber are saving Triangle 13% to 15%. It sees these savings increasing up to 20% in the future. Spud to spud times are 15% to 20% better year over year as well. Triangle also continues to outperform with respect to production. Its wells have been coming in ahead of schedule, and is currently testing 46 stage laterals. This is important, as these are some of the tightest stages in the Bakken.

EOG Resources (NYSE:EOG) is another operator experimenting with stages much shorter than the 300-foot average. It has found this to produce very well, but other operators have stayed away given the well costs involved. EOG has managed costs through several ways including self-sourced sand. Even with these completion improvements, it has AFEs of $10.5 million currently, with a $10 million target before the benefit of Rockpile and Caliber. Triangle is able to save 15% per well through its integrated model. This allows it to use a better well design without breaking the bank in the process. This increased production has it running ahead of its full year production guidance. So while EURs are increasing, well costs are heading lower. It currently has 30 days of production on its first 46 stage hybrid. Triangle does not have enough data to model this completion design. Also, its 600 foot downspacing tests of the middle Bakken have shown no communication, even with its complex frac jobs. At 600 foot spacing, Triangle is able to do 8.8 wells per section.

We haven't seen very many operators drilling this tight, but there is a very good reason why it's possible. I have mentioned the lower Bakken silt in earlier articles. This was first mentioned by Whiting (NYSE:WLL) earlier this year. This is a 25 foot thick interval that is very difficult to drill. Operators have begun drilling extra middle Bakken wells lower in the middle Bakken and fracking into the lower silt. It is very possible this interval will allow for an additional 4 middle Bakken wells per unit. The recent major acquisitions around Triangle's acreage are due to this interval. If the middle Bakken alone can provide 8 locations per section, the acreage is worth significantly more. This number quickly increases if the upper Three Forks can also provide 8. If the second and third bench provide another 4 wells apiece, the wells will be on 220-foot spacing. Triangle refers to this as the lower Bakken dolomite.

Looking forward, Triangle has 7 gross wells to be completed in the next 45 days. Two of these wells are located on one of Triangle's best units. Triangle has finally began to talk about developing its Station Prospect in Montana. Next year it plans to drill vertical wells focusing on deeper formations. It didn't specifically mention the Red River, but there is a good chance this will be the initial target. When it drills these vertical wells, it plans to core the Bakken and Three Forks. Triangle plans to spend $10 million of its 2014 budget on Montana verticals.

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Well performance has been a key for Triangle. While other operators have had excellent results from slickwater fracs, Triangle continues to use a standard well design. Below is a list of all Triangle wells to date.

Well Field Stages Water Proppant

IP 30

IP 90 IP 180
23775 Ragged Butte 31 71974 3561229 515 407
23777 Ragged Butte 31 74275 3826324 497 421
23432 Antelope Creek 25 51026 3108051 334 260 206
23812 Antelope Creek 31 68430 3854806 593 406 321
22625 Antelope Creek 31 83196 4209224 517 376 302
22627 Antelope Creek 31 81835 4164503 416 317
24027 Antelope Creek 31 77002 3253844 376 319
24664 Antelope Creek 31 73028 3892538 534
24665 Antelope Creek 31 76908 3942852 476
22297 Otter 28 69062 3569288 231 188 170
22296 Otter 31 63234 4093148 370 244 238
23114 Buffalo Wallow 31 79644 3863719 479 338 261
22096 Ellsworth 31 77328 3903588 347 239 194
22097 Ellsworth 31 78326 3923541 491 356 279
21632 Ellsworth 31 76601 3731458 665 437 354
21452 Pronghorn 31 70982 3272518 430 364 275
21825 Rawson 31 67640 3956579 349 279 273
21827 Rawson 31 64443 3605222 395 334 312
23160 Rosebud 31 62739 3787154 579 391 302
22558 Rosebud 31 63753 3803450 560 415 342
Average 30.6 71571 3761652 458 338 274
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The above wells were all drilled and operated by Triangle Petroleum. It currently owns two other wells, but those were completed by Tri-C Resources and Zenergy. Those were not included in the above table. All of the above fields except for Otter and Rosebud are located in McKenzie County. Currently, it is believed the lower Bakken silt is located only in its McKenzie County acreage. This should mean more locations in McKenzie, but I am uncertain as to how this will affect recoveries per location. It is difficult to know exactly how good these results are without a comparison. Below I have compiled data from the fields Triangle operates. I am limiting the results to those completed in 2012 and 2013, as this is when Triangle has completed all of its wells. I am starting with Ragged Butte Field. Keep in mind, Triangle operates in other fields, but those wells are still in confidential status.

Well Operator Stages Water Proppant IP 30 IP 90 IP 180
21105 (NYSE:STO) 33 78631 3669780 653 415 333
21106 STO 35 75477 4325662 718 465 354
22511TF STO 38 95722 3298464 298 149
22512TF STO 32 97529 3826754 244
21876 STO 40 82467 4082170 562
21875 STO 39 78781 3810822 674
22585TF STO 31 82953 2719106 329 252
22586 STO 40 87444 3618340 859 624 459
22587 STO 39 92489 3883780 813 472
23775 STO 31 71974 3561229 515 407
23777 STO 31 74275 3826324 497 421
21431 STO 39 84092 3776960 658 388 303
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The above wells are excellent and provides significant upside for Triangle. Statoil has drilled significantly more wells, and as a general rule has been ahead of the curve with respect to well design. Keep in mind, Statoil uses a low resistive choke. So this does inflate IP rates, and it is difficult to know how much. Conservative estimates place a leveling of production at 90 days, but from what I have seen it could be closer to six months. Statoil does not cut corners. It uses tight stages, and believes 40 stages to a 10000 foot lateral is optimal. It also uses large volumes of water and proppant. Although Antelope Creek has been a good field for Triangle, there is little development by other operators. Hess (NYSE:HES) has operated wells in this field from its Tracker acquisition.

Well Operator Stages Water Proppant IP 30 IP 90 IP 180
20461 HES 38 111333 5337464 674 424 304
20312 HES 38 74540 3323820 605 321 253
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The Hess wells are very good as well. When these two wells are compared, a 17% production increase was seen from a 37% to 38% increase in water and proppant. In Otter Field, Halcon (NYSE:HK) owns several wells from its Petro-Hunt acreage acquisition.

Well Operator Stages Water Bbls. Proppant Lbs. IP 30 IP 90 IP 180
21870 HK 25 68949 2859275 203 158 125
21703 HK 28 74700 2745574 205 243 184
21207 HK 27 67385 2696290 202 179 146
20992 HK 25 66389 2463358 235 167 153
22589 HK 25 73025 2943902 252 182 141
20065 HK 26 99886 N/A 370 272 217
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The above wells were all drilled and completed by Petro-Hunt. It had poor results which is probably the reason it sold this leasehold. Halcon has made several improvements and is seeing much better returns since acquiring Petro-Hunt's acreage. Ellsworth Field has had significant development outside of Triangle's recent completions. Both Hess and Whiting are active in this area.

Well Operator Stages Water Proppant IP 30 IP 90 IP 180
21737 HES 38 62822 1655560 619 409 298
22146 HES 34 47799 1586928 682 438 317
21738 HES 34 53280 1604520 482 338 242
22389 HES 30 32888 1347858 538 342
22159 HES 34 60476 1915855 666 428 248
22425 WLL 39 38653 3066900 608 379 286
22947 WLL 27 33411 2323460 583 405 301
20654 WLL 30 29302 2139520 437 350 265
22405 WLL 29 39766 1424270 531
21722 HES 30 38820 1336287 372
21723 HES 21 25875 1288999 418
21167 HES 38 91693 3125260 688 484 365
21260 WLL 24 36931 2297330 489 350 260
22116 WLL 30 32386 1812800 177 125 105
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These are very good, consistent results in Ellsworth Field. This is important as these wells use lower volumes of water and proppant. Even with an inadequate design, production is still quite good.

Pronghorn Field has had a recent new entry. Liberty was purchased by Kodiak (NYSE:KOG), and it has drilled and completed several 2012 and 2013 wells. Every one of these wells are slickwater fracs. This is becoming more popular, as this area has produced better with this design. More importantly, slickwater fracs tend to have lower depletion rates. Those results are listed below.

Well Operator Stages Water Proppant IP 30 IP 90 IP 180
23651 KOG 30 218769 3392938 603 425
23535 KOG 25 254671 3983121 685 524
23534 KOG 35 254635 4050833 661 426
21680 KOG 35 252788 3906420 666 626 402
21421 KOG 35 226370 3382989 545 427 323
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Triangle is the only non-private name working Rawson but Rosebud has a few different operators with recent completions. Statoil currently has four wells here on confidential status.

Well Operator Stages Water Proppant IP 30 IP 90 IP 180
23422 47 110957 9554750 614 464
23728 (NYSE:CLR) 14 20963 1210780 157
21498 STO 38 81424 3933476 544 352 256
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EOG Resources' well uses its new completion design. This is a fantastic result, given the well is in Williams County. After 90 days of production, well 23422 had produced over 100 barrels of oil than the Statoil well. The Continental well result is a little misleading as it looks like there were completion problems.

Triangle's Montana acreage could be more important to its results than in North Dakota. This does not mean I believe the Station Prospect is better acreage, but there is more upside.

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The above map, shows several different operators targeting around Station Prospect. There have been little by the way of good results, but there has been a lot of interest. The area is prospective to the Bakken/Three Forks, but the Red River is probably a better interval.

In summary, Triangle is now firing on all cylinders. Its integrated model is proving successful and should continue to improve the bottom line going forward. All three segments of the business are growing fast. Triangle's well design continues to improve and at the end of Q3 we should know more about the performance of its hybrid designs. These wells should be much better than those listed here, as it is more complex than other operators have drilled and completed. I would also expect further downspacing to the middle Bakken in McKenzie County. I think we will continue to see this acreage increase in value throughout 2013. With the recent jump in stock price, I think Triangle may be a little ahead of itself. I recently took some profits, but think Triangle will continue to outperform in the longer term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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 into 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 our website at shaleexperts.com. 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. For more of my articles and other pertinent information on the oil and gas sector, go to shaleexperts.com.