Brigham: Outstanding Drilling Results in the Bakken Shale

 |  Includes: CLR, COP, KOG, NOG, OAS, STO, WLL, XOM
by: Michael Filloon

New technology with respect to land drilling for oil and natural gas has made a huge impact on several states in the USA. The Bakken shale may be a site with vast potential. Current technology does not gauge with certainty how much oil is in this shale, but USGS estimated 4.3 million barrels of oil and 1.8 trillion cubic feet of natural gas. These numbers don’t include the Tyler Formation which sets above the Bakken and could have as much as 50% the resources of the highly touted Bakken. Like most shale, horizontal drilling is a must in this region. Brigham Exploration (BEXP) got started in the Bakken in 2005 with an initial purchase of a 46,000 net-acre leasehold in North Dakota. At this time, BEXP also had positions in the Gulf Coast, West Texas, and the Anadarko Basin. Since then, they have increased their exposure to the Bakken, purchasing a total of 368,400 acres.

BEXP has some impressive numbers going into 2011. Approximately 200000 acres have been largely de-risked. In the Bakken/Three Forks area they have 45 long lateral high frac stage wells at average peak rate of 2810 Boe/d. In the counties of Richland, Mountrail, Williams and McKenzie there are 571 net development locations in core acreage with opportunity to grow to 933.

Based on NYMEX pricing as of October of last year, BEXP will make approximately $9.5 million per well. By May of this year they will increase their rig count from 7 to 8 (approximate 80 gross well annual run rate). Currently, BEXP estimates they will increase drilling to approximately 260 net wells over 13 years. In the short term, oil volumes increased 155% last year, and should have little trouble funding their projects. They have $540 million of liquidity, $315 million in cash and short term investments.

The most interesting development with respect to the Bakken, has been the increase in barrels of oil equivalent per day being pulled from the ground. Using a basket of approximately 16 oil drillers operating there has been a marked increase. BEXP has drilled 36 wells over the past 6 quarters. Their competitors have drilled 612 over the same period. In the third quarter of 2009 BEXP was averaging 1991 Boepd with respect to the wells drilled that quarter, while their peers were averaging 776. In the 4th quarter of 2010 BEXP averaged 3591 Boepd. There peers averaged 2094. BEXP's peak outperformance is remarkable, but more important is the increase in peak performance for the entire group.

BEXP has only touched the surface with respect to possible locations for new wells. Of the 205600 acres that have been de-risked only 19 locations were booked as of the end of 2009. This location has a potential for 519 more locations. Future projects could add another 1029 wells.

BEXP estimates that the Williston Basin could potentially have a total 1619 wells. Although this is just an estimate including areas that have not been de-risked, BEXP could see each of these locations net $9.5 million (for more information on how this number is reached go here.) BEXP estimates they have an inventory of 14-19 years to drill all locations.

Margins are another good reason that BEXP looks good going forward. When comparing the Bakken/Three Forks to Barnett, Haynesville, Fayetteville, and the Marcellus shale, there is a much different dynamic because the Bakken/Three Forks are providing up to 96% oil the margins are much better. As of 12/10, oil was trading at $92 which provided a 6 to 1 conversion when comparing oil to natural gas. The Bakken/Three Forks margins are $76 as compared to $19 of other natural gas orientated shale plays. This difference in margins should persist for some time as the over abundance of natural gas is drilled from other formations.

Oil volumes are currently increasing at a 27% clip from the first quarter of 2010 to the last quarter. Much of this increase seems to based on demands as the price of oil continues to move upward. OPEC recently stated they would not increase production, as they believed $100 barrel of oil was a "fair" price. Recently there has been a slight move downward in price, but the chart is still intact for a continuance of price moving upward in the short/long term.

All that said, BEXP's future looks bright. Although some may think the stock is a little pricey in this range, prospects for growth long term still make it a good long term investment. Although BEXP is increasing their acreage in the area, much of the prime locations have been purchased. This has increased the value of these properties which also increases BEXP's value. It has been rumored that conglomerates such as COP and XOM are looking around to purchase some of the smaller companies before lease values increase. Drillers that already have a large foot print in the area are also looking, such as CLR, EOG, and WLL. Companies like BEXP, with substantial Bakken/Three Forks leaseholds such as OAS, NOG and KOG may be possible takeover candidates.

Disclosure: I am long BEXP, NOG.