Bakken Update's 2014 Bakken Stock Picks: The Bakken Operators

 |  Includes: CLR, EOG, EOX, HES, HK, KOG, OAS, TPLM, WLL
by: Michael Filloon

In Part 1, I covered Bakken differentials and how it could be a good year for refiners using it as a feedstock. We recently saw Bakken/WTI differentials widen from $4/bbl to $11/bbl. Most are reporting estimates of $11 to $13/bbl in 2014. These differentials will cut into operator profits, but pad development will aid in lowering costs. Fewer rigs are needed as operators are drilling and completing wells in a shorter period of time. Operators are also testing new completion designs that significantly outperform results from just a year ago. Differentials may not be too detrimental as I don't see it widening much in 2014.

Bakken producers should have another good year, but focus on good investments. A consistent operator is the most important. One bad well result can cause a considerable pull back. Operators that consistently beat production guidance do so on a great well design. The problem with determining whether well results are good is time. Not only does one have to find and go through all of the operators' well results, but also those around that specific well.

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Obviously, wells in Divide County will not produce like those in Mountrail. Sweet spots like Parshall and Twin Valley fields will out produce most if not all. These better areas have more appealing IRRs, so the oil price needed is much lower than average areas. The above map identifies middle Bakken thickness, and also shows where the best areas are. The darkest area runs along the Nesson Anticline and is considered to be very good areas. This is also affected by downspacing. We are finding North Dakota is producing a much larger number of location per square mile.

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Downspacing is probably the most important reason to be bullish the Bakken. There are currently three identified economic intervals throughout the core area of the Bakken. There are up to five targets, but the third and fourth benches of the Three Forks are still being delineated. Three Forks' thickness is also important. Below I have provided a Three Forks thickness map.

When we take the middle Bakken isopach and compare to the Three Forks group, we find both are good in roughly the same area. What is more important is the area the Three Forks covers. When shale thickness is considered we find why the Three Forks has upside. The orange colored area is 250+ feet, but is to the south and west of the thickest middle Bakken interval. This is not as important as the green areas are still 200 feet thick, while the light orange is between 225 and 250 feet. This provides ample opportunities for tight well spacing. Density pilots are being done throughout the play. Some are being watched closely while others aren't. The map below provides this information.

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Continental (NYSE:CLR) is doing the most to delineate the play, throughout its intervals. The Wahpeton pad is a focal point, and I believe could drive acreage values in northwest McKenzie County. This provides 660 foot spacing between interval locations. It provides the same spacing from each interval.

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Continental has stated its Wahpeton pad is progressing as planned, but a more bullish indicator is three additional tests planned near the Nesson Anticline. This includes Lawrence, Mack, and Hartman. These pads will test 8 wells per interval from the middle Bakken to the third bench of the Three Forks. The first results from the Hawkinson pad tested 1320 foot spacing and had excellent (my opinion) results. This was a 14 well pad, but 3 wells were already existing, the other 11 were completed after. Over the first 24 hours, these wells combined to produce 14850 Boe. I would expect future wells will produce better as Continental gets more comfortable with pads this size.

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Whiting (NYSE:WLL) is also downspacing in the Bakken, and is having good success. The picture above only begins to show the speed at which Whiting is tightening locations. The map below show where each of the above prospects are. The map below also provides the location of Whiting's recent acreage acquisition. This is important as the area may have significant upside with respect to well spacing.

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This is important to acreage valuation. Other operators drilling nearby will benefit from the results in North Dakota and Montana. The Missouri Breaks prospect includes these areas. Whiting now estimates it can have four additional middle Bakken infills. Including the upper Three Forks it will support 11 wells per section. Hidden Bench Prospect is to the east of Missouri Breaks. Its newest acquisition connects these prospects. The geology improves here, and Whiting is downspacing more aggressively. The middle Bakken may provide 8 locations and the first bench of the Three Forks 7. The Sanish Field is seeing the testing of 7 middle Bakken locations and 3 in the first bench (upper) of the Three Forks as a comparison.

Oasis (NYSE:OAS) has currently de-risked its acreage to 4 middle Bakken and 4 first bench locations per mile. It believes this spacing can be tighter, resulting in 6 wells in each of the 4 intervals. It doesn't include the fourth bench as this isn't uniform, and will probably be a focus around the Nesson Anticline. It is not surprising that North Dakota and Montana can see mega-pad type development. It is a surprise how quickly this has occurred.

Well design will continue to increase IP rates and EURs. 2013 was a big year, as operators experimented with differing designs as well costs headed lower. Well costs continue lower, even as operators use longer lateral, shorter stages, and more water and proppant.

Decreasing Bakken Well Costs

Operator 2012 2013 2014 est.
Continental 9.2 8 7.5
Hess (NYSE:HES) 13.4 7.8
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The above table covers the well costs for two of the largest operators in the Bakken. This is the trend for all of the Bakken names. Smaller operators are experiencing the same thing, although its costs are generally higher.

Well design will be a popular topic in 2014. Some operators have decided to stick with what has worked, while others are testing out new and different completion methods. Slickwater fracs have been used more in west McKenzie and Williams counties. I covered this frequently last year, and it has shown promise. Slickwater fracs have always provided good results, but well costs pushed operators to other completion styles. Early in development, there were water shortages throughout North Dakota. Back then, there weren't enough industrial water permits in play to sell to the oil companies, which increased water costs significantly. Since then, a large number of agricultural water permits have been converted to industrial. This has made water much more affordable, and easily obtained near the well site.

Emerald (NYSEMKT:EOX) is a new Bakken operator that has employed the use of slickwater fracs with very good results. Its first three completions used an average of 4 million pounds of proppant and 240000 bbls of water. Kodiak (NYSE:KOG) recently purchased Liberty Resources. It has also used slickwater fracs exclusively in its western Williams and McKenzie leasehold. Below is a list of those wells and its design.

Well Lateral Stages Water Proppant
21198 10429 35 262306 3838339
21197 9144 35 255051 3806161
20748 9240 32 192580 2948196
22067 10486 35 256297 4129852
22068 9359 35 250327 4103810
21481 9102 35 241234 4059653
21578 9881 35 224632 3774597
22495 9986 35 243250 4095724
21141 9777 35 248977 4070072
22522 9886 35 248103 4101909
21680 9427 35 252788 3906420
22401 9675 35 247741 4122587
23132 9816 35 240291 4111530
23398 9961 35 245481 4074751
23201 9337 35 245595 4156300
23423 9475 35 245826 4035679
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Kodiak was willing to pay a premium of Liberty's wells and acreage, as the results warranted the cost. The results below, show how important slickwater fracs have been in the western Bakken.

Well Date 30-Day IP 90-Day IP
21198 4/12 1032 754
21197 4/12 821 628
20748 5/12 511 412
22067 6/12 645 493
22068 6/12 431 419
21481 7/12 866 656
21578 7/12 317 285
22495 8/12 860 613
21141 8/12 827 565
22522 8/12 718 631
21680 9/12 656 543
22401 9/12 699 486
23132 9/12 851 611
23398 10/12 772 496
23201 11/12 638 520
23423 12/12 1190 854
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It is very important to understand how western Williams and McKenzie counties have evolved in 2013. On August 1st of 2012, Halcon (NYSE:HK) purchased GeoResources. This acquisition included operated western Williams County acreage. Development had already begun, but results were unimpressive. The middle Bakken is shallow here, which provides lower well costs. IP rates were very low as well pressures increase at greater depths. It was initially thought these well weren't economic. In reality, they model differently with a much lower rate of depletion. Halcon has improved this design, which has helped increase recoveries.

Oasis has an impressive Bakken leasehold. It has acreage both east and west of Nesson. It has been very active in western Williams. Oasis has been responsible for a good amount of development in western Williams.

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The picture above highlights the large acreage purchase by Oasis last year. Its acreage purchase east of Nesson fit well with its current leasehold, but isn't as important as west Williston. Increased activity in this area points to Painted Woods, Indian Hills and Foreman Butte being a stacked play with further possible downspacing. Part of this acreage is prospective to the lower Bakken Silt. This plus additional thickness in the middle Bakken and upper Three Forks. Whiting believes much of this area will support 15 wells in just the top two intervals. The lower Bakken silt (as seen in the Williston Basin Primary and Prospective Drilling Plan By Area Image above) is its own interval, but operators are fracking into it as opposed to drilling the silt directly. During the second half 2013, Oasis used a standard well design.

Well Lateral Ft. Stages Ft. Water Bbls. Proppant Lbs.

IP30 Bo/d

IP90 Bo/d

IP180 Bo/d
21721 10153 36 80570 4090462 633 424 347
21314 9947 36 74197 4003952 489 388 324
23988 9604 36 59483 3239158 379 255 242
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Stages are a little tighter on average, as the average well design uses 300-foot stages. 70000 to 80000 bbls. of water are generally used on long laterals. Oasis' use of 4 million pounds of proppant also falls within operator averages. The well design is important as it shows the importance of proper amounts of water and proppant. Both well 21721 and 21314 have 180-day IP rates significantly better than well 23988. All three wells are in the same field, and relatively close to one another. The geology is comparable. Well 21721 produced 62460 bbls of oil. Well 23988 produced significantly less at 43560 bbls. Using $90/bbl. as the realized oil price, the first well will produce $1.7 million in revenues over the first 6 months. Oasis does use a fairly large choke, which allows the resource to flow with less resistance. Due to this, depletion rates will be higher when compared to other operators.

Triangle Petroleum (NYSEMKT:TPLM) has come a long way from a non-operated producer. It is now an operator, and has its own midstream and completions business. This has provided better control of its locations, and more importantly better margins. The table below provides some of Triangle's locations, well design and results.

Well Field Stages Water Proppant

IP 30

IP 90 IP 180
23775 Ragged Butte 31 71974 3561229 515 407 328
23777 Ragged Butte 31 74275 3826324 497 421 328
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 416 317 259
24027 Antelope Creek 31 77002 3253844 376 319 247
24664 Antelope Creek 31 73028 3892538 534 382
24665 Antelope Creek 31 76908 3942852 476 339
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
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Triangle has used a standard well design. It does use varying amounts of ceramic proppant and averages 3.5 to 4.0 million pounds per long lateral. Triangle's were the best results in the area until we started to see slickwater fracs. Triangle has and continues to do an excellent job of stimulating the source rock. I am unsure how it accomplishes this, but would guess it has to do with the number of perforation clusters per stage. Triangle has continued to decrease stage length well below the 300-foot average. It continues to produce excellent data.

In 2013, we started to see an evolution in completion design. In the past, we had tried to stimulate source rock fractures long and deep into the formation. This initial perception was correct, as completion designs improved and produced large voids that spread out like tree branches. There were initial worries that these induced fracs would commingle causing the wells to stop producing. This hasn't been a problem, but the issue at hand was increasing total surface area exposed to the well bore. Using more hydraulic horsepower to create even longer fractures was self defeating. The longer the fracs, the more difficult it is to get the proppant to its furthest point. Many times these long fracs didn't produce consistently throughout. EOG Resources (NYSE:EOG) initially developed what I believe will be the U.S. completion standard. It changed focus to fractures closer to the well bore. This was important, as it was able to create more total surface contact with the well. More surface area equals more recovered resource, and this is a game changer.

The table below provides the well design of EOG wells in Parshall Field. The production rates are impressive, but more important is the depletion rate. By focusing closer to the well bore and using more proppant, well results improve dramatically.

Parshall Field

Well Choke Lateral Stages H20 Proppant IP 90 IP 180 IP 270
21378 24/64 6475 32 79855 6867099 793 784 673
22780 32/64 8916 38 99316 9438324 786 770 678
21239 30/64 7873 42 106887 9023010 1101 1082 1072
22091 32/64 10277 50 112114 10369690 747 694 622
22704 44/64 10662 53 153900 10927550 761 633
22703 44/64 6810 34 93360 6972110 748 616
20633 48/64 9672 49 142457 10690860 1054 932
22921 48/64 9101 49 139370 10530567 1408 1186
21406 48/64 10296 53 170645 13623942 1168
24281 28/64 9901 49 136936 10178260 1383 1298
23763 40/64 12464 62 168459 12431941 1387
23764 40/64 11121 55 143806 10880259 1542
22689 48/64 10999 54 155204 11173990 1047
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Whiting was the first to duplicate or replicate EOG completions in the Bakken. Its older completions utilized sliding sleeves with free fluid between packers. Sliding sleeves are limited to one frac port per stage. This basically means there is only one opening over that space to creates fractures in the source rock. The new design uses a cemented liner. Whiting is able to use three perforation clusters per stage, which effectively triples its ability to frac the interval. Improvement in 90-day cumulative production have ranged from 55% to 97%.

There are several ways to play the Bakken in 2014. Looking at the operators, some caution should be exercised as differentials could widen. There are other factors I emphasize as important, when shopping these names. When picking Bakken operators, values will be levered to downspacing. It is not necessarily the operators with the best acreage, but the acreage with the most upside. Operators in central to northeast McKenzie County could see as many locations as the best parts of the play. Keep in mind, EURs will not be as good on a per well basis. I would stick with names levered to these areas. This includes Oasis, Whiting, Triangle, and Emerald. Whiting has further upside as it is using an optimal well design and one that still can improve. Emerald's slickwater fracs have also outperformed and seem well suited to this specific area. Triangle and Oasis have further upside as its integrated model provides cost containment.

Disclosure: I am long TPLM. 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. 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 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