Bakken Update: This Bakken Focused Microcap Had A Blow Out Q3

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 |  About: American Eagle Energy, Inc. (AMZG), Includes: ATHL, CLR, EOG, EOX, FANG, HES, KOG, MHRCQ, SM, SYRG, TPLM
by: Michael Filloon

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 (NYSEMKT: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.

Operator Well

24-Hour IP Boe/d

30-Day IP Boe/d
(NYSE:HES) Wahlstrom 18-1H 913 486
Liberty Nygaard 150-101-28-33-1H 950 774
Liberty Fritz 150-101-32-29-1H 1092 655
(NYSEMKT:TPLM) Larson 149-100-9-4-1H 2265 824
Crystal 14X-34 1265 418
Zavanna Larsen 32-29 1H 1381 678
Slawson Catapult 1-30H 342 418
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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
Pirate 1-2-11H 1801 1025
Arsenal Federal 1-17-20H 1638 768
Caper 1-15-22H 2063 994
Mongoose 1-8-5H 1523 892
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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 (NYSEMKT:SYRG), Athlon (NYSE:ATHL) and Diamondback (NASDAQ:FANG).

American Eagle (NYSEMKT: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
Roberta 1-3 TF1 408 9615
Lester 16-33 TF1 226 5580
Albert 16-33S TF1 357 9928
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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.

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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.

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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 (NYSE: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
M. Johnson 518
Baja 446
Border Farms 2H 587
Burton Olson 802
Burton Olson 1XP 661
Marilyn Nelson 765
Thornte 3H 867
Bailard Karen 1H 558
Bailard William 1H 658
Almos Farms 2H 525
Border Farms 5H 383
Montclair 2H 333
J Olson 2DM 644
J Olson 2XM 608
Baja 2H 496
Baja 3H 620
Baja 1H 567
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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
21768 26/64 10048 11 30942 860086 385 163 214
22516 10104 20 52160 1479420 551 458 292
20549 20/64 10119 20 49018 1952980 399 329 222
24176 36/64 10035 26 48184 2005620 534 402
24211 40/64 10110 26 47211 2021731 223 203
24212 20/64 10157 26 46411 1943500 413 310
24715 22/64 10064 26 47277 2456960 312
20545 10143 446 401 288
22717 9865 20 49572 1978341 317 283 179
24471 20/64 9917 26 46398 2460464 506
24448 10083 26 44490 2274100 471 432
24449 10153 26 46404 2003940 334 296
23348 28/64 10101 20 49000 1994861 363 322
22793 26/64 10112 26 46855 1967257 360 308 194
Avg. 10072 23 46456 1953789 401 326 232
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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 (NYSE: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
24590 12/64 5457 31 46228 2080160 274 246
24591 9258 43 42153 1267660 207 242
23465 40/64 10260 30 40421 2402980 473 358
23466 40/64 5865 31 37903 1550660 151 131
24969 30/64 5909 35 47809 2706240 62 71
24636 16/64 6969 31 44640 2060683 153 111
24635 16/64 10406 30 49885 2390899 199 188
23816 14/64 5671 31 40089 1958202 201 201
22474 16/64 5941 31 45015 2089742 353 269 205
22699 16/64 5893 31 45015 2043720 209 179
23808 25/64 9825 30 55124 2422520 422 339
22960 10237 30 51237 2429819 453 335 225
22961 36/64 5945 30 44920 1959800 336 293 202
23504 40/64 10716 30 63986 2527840 317 377
24179 15/64 10318 30 50929 2418613 357 241
24069 10/64 10598 30 52366 2395090 332 271
25276 12/64 10926 30 51258 2323490 258
23827 25/64 6332 31 27673 1931840 330 278
23828 25/64 9449 30 57812 2309770 359 307
Avg. 8209 31 47077 2172091 287 247 211
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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
21641 9250 30 59740 2598954 671 473 392
23054 9638 30 60082 2227201 565 403 323
21639 9565 30 57710 2565343 499 270 254
21027 9272 30 51674 3283208 413 292 238
21778 9665 30 51886 3024843 334 230 198
22329 9550 30 57589 2601909 549 392 342
21966 9533 30 58638 2848750 265 255 218
21971 9791 30 57991 2581450 543 365 261
Avg. 9533 30 56914 2716457 480 335 278
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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 (NYSE: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
22067 10486 35 256297 4129812 645 493 426
22495 9986 35 243250 4095724 860 613 499
22068 9359 35 250327 4108310 431 419 366
21481 9102 35 241234 4059653 866 656 526
Avg. 9733 35 247777 4098375 701 545 454
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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' (NYSE: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
19927 9656 48 112514 9905670 712 562
20766 8882 37 103333 9668031 689 598 440
23421 9735 49 109753 9669220 884 555
20219 5071 21 55617 4862530 283 246
Avg. 8336 39 95304 8526363 642 490 440
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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
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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.

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.