The oil and gas renaissance occurring in the United States has provided a unique investment opportunity. It is less difficult to choose large-cap oil and gas names but may provide less growth and return on investment. Smaller operators can provide better returns, but it is likely and investor would shoulder more risk. Everyone is looking for the lottery ticket type investment, when in reality the chances of finding it are quite low. It is also important to note that these fast growing stocks are generally a short-term investment and not a stock one could hold on to over a matter of years. I don't generally recommend smaller operators as it is possible one could lose the majority of an investment.
There are several variables to look for in a viable small cap oil and gas investment. The first and most important is acreage. One must be careful in speculating on the geology of new plays without completions to prove economics. Operator experience is also important. Not only does the play have to produce, but the operators\ needs to validate itself as well. Emerald (EOX) is a very good example. We already knew this operator's acreage was good in McKenzie County as other operators had completions in the area. I have listed other operator completions near Emerald's acreage.
24-Hour IP Boe/d
|30-Day IP Boe/d|
|Zavanna||Larsen 32-29 1H||1381||678|
At the time, there was very little said about this area as most of the results were from private companies. The above results are not great, but still has value. Below are Emerald's well results from the same area.
|Well||24-Hour IP Boe/d||30-Day IP Boe/d|
|Arsenal Federal 1-17-20H||1638||768|
As you can see, Emerald's results were excellent. Three of these were better than Triangle's well, and this was considered to be the best result from that area to date. Emerald is also a good example of a great operator with some questions with respect to management. The top line is very important, but new operators usually have difficulties with costs. Emerald has to prove it can perform on the top and bottom lines.
Growth is the next factor I look for, as vertical and non-producers grow exponentially when beginning horizontal development. This has worked out well for other names I cover like Synergy (SYRG), Athlon (ATHL) and Diamondback (FANG).
American Eagle (AMZG) may turn out to be a quality Bakken name that fits these parameters. I first covered American Eagle in July of 2011. It is up over 85% since the article, and more importantly has made some big changes. Looking at Q3 earnings, it beat analyst estimates by 75%, posting $.07/share versus $.03. American produced 1362 Boe/d in Q3. Production grew 6% quarter over quarter and 232% year over year. Quarterly oil sales increased 12% quarter over quarter and 305% year over year. This growth is attributed to its 7.94 net operated Spyglass Prospect wells. These wells are a combination of the middle Bakken and upper Three Forks. Oil is 99.5% of revenues and 98.4% of production. Adjusted EBITDA is up 12% sequentially and 464% over Q3 of 2012. Adjusted EBITDA was driven by a 6% increase in production and 6% increase in realized prices sequentially. In Q3, American Eagle added 5 gross or 1.53 net operated wells. Of these wells, four targeted the Three Forks. I have listed the results of those four wells below.
|Well||Formation||IP 30 Boe/d||Lateral Feet|
|Elbert State 16-36N||TF1||344||5419|
As of September, American Eagle has two rigs running. It will continue to operate two rigs until the end of Q1 next year. Over the course of 2014, it will use one or two rigs. The number will depend on economics, such as oil price, etc. During the second half of 2013, American Eagle will have drilled a total of 15 gross wells. Five will be middle Bakken wells that are part of the five well carry agreements with its JV partner. An additional six wells will be three middle Bakken and three upper Three Forks. This is part of its six well farm-out agreement with its JV partner. The final three wells are two middle Bakken and one upper Three Forks. Cap ex for the above wells will total $19 million. $8.7 million was spent in Q3, with $10.3 being spent in Q4. In 2014, American plans to drill and complete 18 gross wells at an estimated cost of $65 million. It estimates a long lateral will cost $6.8 million. The Q4 production guidance is 2100 Boe/d. This includes the acquisition, which closed in October, of 9,700 net acres which included production of 750 Boe/d.
When looking at American's acreage, it is outside the core with respect to the Three Forks. It is to the northwest of the Brockton-Froid fault zone. It does have decent thickness of 150+ feet. This is half some of the best areas, but should still support decent well spacing of four to six wells/section.
The Bakken Isopach above shows middle Bakken thickness in Divide County. As you can see, Divide has surprisingly good shale thickness. American's acreage is on the cusp of the 90 to 100 foot thickness seen in the rest of the county. This provides a total thickness of 250+ feet, more than enough to be a solid stacked play on pad drilling. The middle Bakken may have issues though. It is very shallow and in what is considered to be immature. Early middle Bakken results have not been real good, but there has been some development in the area. Going a little deeper into this area with respect to locations per mile, we see much of this area has already been tested. We already see up to 3 and 4 wells per section currently. Although American has little by the way of results, other operators are currently active. Magnum Hunter (MHR) and SM Energy (SM) have completions nearby. Magnum Hunter has focused on the Three Forks and believes this area is a sweet spot. The table below provides Magnum Hunter's results.
|Well||IP 30 Boe/d|
|Judith Olson 27||776|
|Judith Olson 22||575|
|Border Farms 2H||587|
|Burton Olson 1XP||661|
|Bailard Karen 1H||558|
|Bailard William 1H||658|
|Almos Farms 2H||525|
|Border Farms 5H||383|
|J Olson 2DM||644|
|J Olson 2XM||608|
The above wells are about five to ten miles to the east of American's Colgan Field completions. SM Energy has been active in Colgan. Its locations provide a much better idea of how good American's wells can be, but I would guess the economics are similar. Keep in mind these locations are very cheap to drill, so the economics are better. Payback is one of the most important factors an oil and gas company looks for. The well results below will give us a better idea of this.
SM Energy Colgan Field Results
|Well||Choke||Lateral Ft.||Stages||Water||Proppant||IP 30||IP 90||IP 360|
All of the above wells targeted the Three Forks. This formation has outproduced the middle Bakken, as it has higher well pressures leading to better results. That is not to say the middle Bakken is not economic, just that it has less upside in comparison. It will get interesting when operators begin to test the second bench of the Three Forks. Continental (CLR) has commented that the second bench is much like the first throughout its acreage. If this proves correct, we could see up to 12 wells per section in Colgan, but keep in mind this is speculation on my part. These wells have some interesting differences. 21768 did have some issues. It was suppose to be a 16 stage lateral, but due to frac port failure only 8 stages produced. Most of the above wells produce decent numbers after a year of production. Of the six wells with 360 days of production we see a high of 105,120 barrels of oil produced to a low of 64,440 barrels. Using $80/bbl Bakken light pricing, well 22516 produces one year revenues of over $8.4 million. Well 22717 was at the low end of the wells with over one year of production and it had revenues of over $5.1 million. This does not include natural gas and NGL production, so there is additional upside.
American Eagle also has completions in Colgan Field.
American Eagle Colgan Field Results
|Well||Choke||Lateral Ft.||Stages||Water||Proppant||IP 30||IP 90||IP 360|
SM Energy has produced better results in Colgan. Keep in mind, American has used on average a shorter lateral length. On a production per foot basis, its results are better, but SM still outperforms. This area has only seen spotty development, so there isn't the number of well files seen in northeast McKenzie or southwest Mountrail counties. As more wells are completed, operators will perform better and produce larger IP rates. Of the wells American operated in Colgan Field that have 360 days of production, there was an average total production of just under 76,000 barrels of oil. This is just slightly lower than the wells completed by SM.
To give it an idea of how it compares to other areas, I am providing well results from other non-core fields in North Dakota.
Continental's 2012 Oliver and Lone Tree Lake Field Well Design
|Well||Lateral Ft.||Stages Ft.||Water Bbls.||Proppant Lbs.||IP 30||IP 90||IP 180|
The above data provides results from Continental in western Williams. The 30 and 90 day rates are much higher than in northern Divide, but many of these wells deplete below 300 Bo/d by 180 days of production. The table below contains wells Kodiak (KOG) purchased from Liberty in western Williams.
Kodiak's Wells From Liberty Purchase
|Well||Lateral Ft.||Stages Ft.||Water Bbls.||Proppant Lbs.||IP 30||IP 90||IP 80|
The Liberty wells are slickwater fracs. These have had good success in western Williams, although it raises well costs. This is derived from the large volumes of water used, and why the production numbers have outperformed. The average total oil produced at these four wells for 180 days is 81,720 bbls. Keep in mind, these aren't typical results. These Kodiak wells and also EOG Resources' (EOG) results below are well ahead of the curve.
EOG's Top Wells In West Williams County
|Well||Lateral Ft.||Stages Ft.||Water Bbls.||Proppant Lbs.||30-Day IP Bo/d||90-Day IP Bo/d||180-Day IP Bo/d|
EOG uses a different well design to accomplish results very close to Liberty's. It focuses source rock stimulation closer to the well bore. By doing this, it causes more and wider fractures in the shale. The increased surface area is filled with larger volumes of sand, and this greater surface area produces more resource.
Northern Divide is much like Western Williams with respect to the main interval target. Western Williams is working the middle Bakken while northern Divide targets the upper Three Forks. The reason for this is depth. The middle Bakken is shallower in west Williams and across the Montana border. We see the same in north Divide, although it has even less depth. In North Divide the middle Bakken becomes too shallow and this does not provide the well pressures needed for the economics required. Because of this, the upper Three Forks has became the main interval. So far, north Divide holds up well when compared to west Williams. Below I have provided EUR and well cost estimates.
EUR/Well Cost Estimates
|Operator||Location||EUR MBoe||Well Cost MM|
|AMZG||N. Divide||535 TF||$6.9|
|MHR||N. Divide||350 to 550 TF||$6.0|
|HK||W. Williams (Marmon)||328 MB||$7.8|
|HK||W. Williams (Marmon)||291 TF||$7.8|
|HK||W. Williams (New Home II)||333 MB||$7.8|
|OAS||W. Williams||500 to 600 MB||$7.5|
|KOG/Liberty||NE McKenzie (Ursid)||600 MB||$9.5|
The above table compares north Divide County to other areas outside the Bakken core. MHR has well costs of just $6.0 million a few miles to the east of AMZG's acreage. AMZG's average EUR is much higher than MHR's current model. Moving to the south into west and northwest Williams there are large differences in results. HK's numbers are from older presentations, and I would guess it has increased its EURs in that part of its leasehold. OAS's well cost and EURs fit better in this area. Keep in mind, the middle Bakken is the target in western Williams, and several companies have already begun better completion designs that have significantly improved IP rates. Some wells by EOG Resources and Liberty have modeled to 800 MBoe. Kodiak's data is based on Liberty's results, and I used the low end of projections here.
In summary, AMZG is an interesting investment. It has low well costs when compared to other, better producing areas of the Williston Basin. Although these wells produce less, payback times are still competitive. Its most recent quarter was quite good and adds optimism to the names going forward. Magnum Hunter and SM Energy have been working the area with success, and it would seem AMZG could improve well results and lower costs based on Magnum Hunter's current data. When valuing this acreage, keep in mind the upper Three Forks is the main target, and middle Bakken results have not been as good. This could still be a stacked play, as the second and third benches may be productive as well. Given its result to date, AMZG could be a good investment. There are still questions about management and if American can continue to outperform. As Colgan Field and its surroundings continue to be de-risked, we could see acreage values grow. This area could also respond well to newer completion techniques being tested in other areas of the Bakken. If well spacing tightens, and other intervals are viable, AMZG will see a significant increase in stock price.
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.