I recently covered some of the smaller players in the Bakken that I have been watching. Although many of these names are not well known, some are my favorites in this space. These names can be very volatile and are not for every investor.
Due to this, I am now going to cover some of the mid-level players in the Bakken/Three Forks area. These names, in my opinion, are the best way to play the space. Not only are they good companies with legitimate assets, they also have some of the best management teams in the business. Most of these names got in early and cheap and could have substantial upside. Lastly, for those placing positions in these names, a pullback in the price of oil could potentially create a large decrease in market cap over a short period of time. Watch these names closely, as a substantial increase in stock price has occurred; whether it is based on oil price or inflationary fears, either could create a sizeable pullback.
Kodiak Oil & Gas (KOG) is a $1B market cap company with sizeable holdings in the Bakken/Three Forks. Kodiak, in my opinion, has an almost cult-like following, and with good reason, as Kodiak has been able to ramp production and, in doing so, has seen its stock price increase from $2.55/share to $7.10/share in the after hours on March 4th.
I wrote about Kodiak on February 11th (see here). The main reason was its exponential production growth. This stock is up 34.5% in three months and 167.4% over the past year. As of February, Kodiak had 69,000 net acres with a possible 320 drilling sites in the Bakken/Three Forks.
Kodiak's position is in prime oil real estate with 34,000 net acres in Dunn County, and 35,000 net acres in McKenzie, Williams, Divide and Sheridan Counties. Kodiak's claim to fame is how quickly it has increased production. In 2008, it produced 300 Boe/d. This year the estimate is 5500-6500 Boe/d. It looks as though it will continue to do this as in 2009 it spent $27 million on cap ex, and it is estimated that it will spend $200 million in cap ex this year.
Virtually all of Kodiak's time and energy is being invested in its Bakken/Three Forks position. Kodiak does have an additional 9,200 net acres in the Greater Green River Basin. In the first quarter of 2008, an agreement was made between Kodiak and Devon Energy Production Company to explore and produce its Vermillion property. The well was abandoned in early 2010.
Northern Oil and Gas (NOG) is a different way to play the Bakken. I covered Northern on January 19th based my evaluation on its benefiting from a Bakken non-operator model (see here). Northern currently controls more than 147,400 net acres in the Bakken/Three Forks play. The non-operator model is what differs Northern from Oasis (OAS) and Brigham (BEXP). Many skilled players, like Brigham, want to be the operator. The reason is because they have a very high skill set in getting oil out of the ground, plus they offer a high level of management. This "if you want it done right, do it yourself" mentality is what makes make great oil companies great, but it also comes at a cost to margins.
But Northern's non-operator model has several advantages:
- Direct drilling costs of well
- Development costs of well
- Operating costs of well
Costs paid by cperator
- Legal & Accounting
- Higher Employment Costs
Choice top operators
- EOG (EOG) - 27% of NOG gross wells
- Continental (CLR) - 15% of NOG gross wells
- Slawson - 15% of NOG gross wells
- Brigham (BEXP) - 8% of NOG gross wells
The main points to consider when investing in Northern are:
- Large Bakken/Three Forks acreage (147,400 net acres)
- 95% oil weighted
- Participation in over 400 Bakken wells
- 100% success rate
- Looking to add acres (purchased 56,800 acres at $1043/acre in 2010)
I remain optimistic on Northern. Not only is it performing well, it is doing it differently from others in the space (with 8 employees). Northern is up 33.8% in the past three months.
Oasis Petroleum Inc. (OAS) is a pure Bakken/Three Forks play (see here). On March 4t, 2010, it filed to become a $350 million IPO. On June of the same year, Oasis completed its IPO. Although this IPO was in 2010, this company had been accumulating Bakken/Three Forks acreage since June 2007, when it acquired 175,000 leasehold acres. It continues to acquire acreage as it did in the fourth quarter of last year. Oasis currently has 303,000 net acres in the Williston Basin. Here is what it paid for these acres:
- June of 2007 - 175,000 acres for $83 million
- May of 2008 - 48,000 acres for $16 million
- June of 2009 - 37,000 acres for $27 million
- September of 2009 - 46,000 acres for $11 million
- November of 2010 - 26,700 acres for $80 million
By examining these purchases, it is possible to determine the difference in cost of acreage in this formation in a matter of approximately three and a half years.
This company is 92% oil weighted and is running a 7 rig program this year. At this rate, the company has over 22 years of inventory. Growth in average daily production has been very good. In the first quarter of 2009, Oasis was producing 1183 Boe/d. By the second quarter of this year that total will increase from a low estimate 9200 Boe/d to a high estimate of 11200 Boe/d total average daily production. Oasis is spending $441 million this year in development capital. This company has $533 million in cash and zero debt, but has $400 million outstanding in 7.5% notes. Oasis is 25% to 40% hedged. Oasis has done a very good job of increasing production and executing company plans. Oasis is up 27.9% in the last three months.
It should be noted that MDU Resources Group (MDU) also operates in the Bakken/Three Forks, but only 35% of its business is focused on exploration and production. It operates in the Bakken as Fidelity Exploration & Production Company. 43% of MDU's business is regulated (utilities and pipelines) and the final 22% is in construction. MDU currently has the most extensive natural gas transportation system in the Bakken play. MDU is also in the pursuit of expansions to this Bakken pipeline. This should be in service sometime in the last quarter of this year.
MDU is also adding 12 miles of high pressure transmission pipeline for processed natural gas in northwestern North Dakota. I do not want to steer anyone in the wrong direction on MDU, as its exploration and production is mainly natural gas, but oil did represent 28% of production last year, which is 5% higher than the previous. Of its 646 Bcfe of proved natural gas and oil reserves at the end of last year, 31% is oil.
In Mountrail County, this company increased production 41% from 2009 to 2010. MDU has 16,000 net acres in Mountrail County, and has 37 operated wells at this location. One additional drilling rig will be added next quarter. MDU plans to drill 13 wells this year, and 12 in 2012 and in 2013. MDU has 50,000 net acres in Stark County. Six wells will be drilled her this year and 12 or more wells next year. MDU holds 65,000 acres in the Niobrara, and plans are to drill two test wells this year and 12 wells annually starting next year.
MDU is also targeting Texas, buying plays with higher liquids content, plus it has approximately 80,000 exploratory acres in the Heath oil shale play. MDU is a very well run company that is also diversified. Although it has a significant Bakken leasehold (66,000 net acres), it is a fairly small portion of this business.
Brigham Exploration (BEXP) may be the best way to play the Bakken. This is due to outstanding drilling results in the Bakken shale (see here). This company currently has 368,400 net acres in the Bakken/Three Forks. It's not just the acres that are important, but what is being done with them. Brigham has consistently outperformed its competitors with respect to IP average. It also has the record Williston Basin Bakken well with respect to 24 hour peak rate (5133 Boepd).
Brigham has led the way in horizontal drilling, as it has used longer laterals, increased stages, and unlocked performance through offset drilling. Recently, Brigham completed a long lateral with 38 stages. It also has four of the top five producing wells in the Williston Basin. As for the numbers, Brigham recently announced an increase in 2010 proved reserves of 141%. Production at the end of 2010 was 11384 Boe/d, which was an increase of 125% from 2009 and a 34% increase sequentially.
Bud Brigham CEO recently announced that Brigham had only drilled 7% of its core de-risked locations. One thing to remember about Brigham is that it is leading the pack with respect to well production; therefore, it seems to be one step ahead with respect to cracking the Bakken code. It seems that it is perfecting these very complex drilling techniques. As long as it continues to perform, it will be included in other projects, drilling wells for competitors such as Northern (NOG). Brigham has grown 32.7% over the past three months, and 111.4% over the past year.
The sleeper of the Bakken group is SM Energy Company (SM). The reason I like this company is because it looks to be in a very good position based on several key locations (see here). SM has 85,000 net prospective acres in the Bakken/Three Forks. It has an additional 120,000 net legacy acres here also. It has two rigs running and will add one more this year.
In 2011, SM will participate in 20 net wells as the operator and an additional two non-operator wells. Since the second quarter of 2009, it has increased oil and gas production from 1317 Boe/d to 3757 Boe/d in the fourth quarter of 2010. Even though this is about the Bakken, SM has a very interesting Eagle Ford position. SM has 250,000 net acres in this play. It is interesting because the majority of this acreage is in the liquefied natural gas and oil windows. SM is ramping up its rigs from two to six and will be focusing on liquids here. In the non-operated Eagle Ford, rigs are being ramped up to nine or ten. 2011 cap ex for SM is $830 million, with 20% of this being spent in the Bakken. I would watch SM closely as it has substantial acreages in two very good areas. If it can sell its Haynesville position, it help increase cash levels so these plays could be developed at an increased pace.
Enerplus Resources Fund (ERF) is an oil and gas exploration and production company that was converted from a trust to dividend paying corporation on January 1st, 2011. Enerplus has 74,500 gross acres (90% working interest) in the Fort Berthold Indian Reservation. Enerplus has further Williston Basin properties in southeastern Saskatchewan, where it has an additional 140,000 net acres. Total net undeveloped acreage is 210,000 in Bakken tight oil areas. Enerplus will be putting $190 million of development capital into these tight oil assets. 11% of daily production comes from these areas.
Enerplus also has an additional 200,000 net acres in the Marcellus shale. Enerplus' Deep Basin is 65,000 net acres in Alberta and British Columbia. Capital investment plans for the next two years will increase oil weight to portfolio. At the end of 2012, Enerplus will be 50% oil. Bakken production will increase to 25% of the total by the end of this year and will increase to 30% of total production by the end of 2012.
In 2011, Enerplus plans for 32 net operated wells in the North Dakota Bakken/Three Forks. Three to four rigs will be working this play. Over the next four years, it plans to increase North Dakota Bakken oil production from 4,000 barrels/day to over 20,000 barrels/day.
As with many of the players in this play, long laterals will be normal operating procedure. Although the cost is significantly greater, longer term fundamentals are much better. 2011 capital spending will have 46% going to the Bakken acreage. One thing to remember is that Enerplus made its Bakken purchase later in the game, and therefore paid $618 million. Also, Enerplus has been trying to get oily, and this takes time. Enerplus continues to produce just enough gas to keep its leaseholds, but this costs money. It will continue to pay a very good dividend yield, so if an investor has time, he/she will get paid to wait for growth.
In summary, these companies all have significant acreage in the Bakken/Three Forks. These companies are growing quickly and, as market caps and valuations run higher, it is a good assumption that some of these names will pull back.
Looking at some of their forward P/E ratios, it would be easy to assume they are still fairly valued. Because of this, I have some valuation and growth estimates from analysts covering these stocks (Yahoo Finance):
Kodiak Oil & Gas (KOG)
- P/E Ratio - 436.25
- Forward P/E Ratio (1yr.) -8.42
- 2011 Earnings Growth Estimate - 1266.7%
- 2012 Earnings Growth Estimate - 102.4%
Northern Oil and Gas (NOG)
- P/E Ratio - 154.2
- Forward P/E Ratio (1yr.) - 18.16
- 2011 Earnings Growth Estimate - 245.2%
- 2012 Earnings Growth Estimate - 68.2%
Oasis Petroleum Inc (OAS)
- P/E Ratio - N/A
- Forward P/E Ratio (1yr.) - 36.01
- 2011 Earnings Growth Estimate - N/A
- 2012 Earnings Growth Estimate - 753.3%
MDU Resources Group (MDU)
- P/E Ratio - 16.97
- Forward P/E Ratio (1yr.) - 14.89
- 2011 Earnings Growth Estimate - 2.3%
- 2012 Earnings Growth Estimate - 9%
Brigham Exploration Co. (BEXP)
- P/E Ratio - 94.28
- Forward P/E Ratio (1yr.) - 18.96
- 2011 Earnings Growth Estimate - 86.7%
- 2012 Earnings Growth Estimate - 68.8%
SM Energy Company (SM)
- P/E Ratio - 24.02
- Forward P/E Ratio (1yr.) - 24.75
- 2011 Earnings Growth Estimate - 27.7%
- 2012 Earnings Growth Estimate - 68.6%
Enerplus Resources Fund (ERF)
- P/E Ratio - 42.81
- Forward P/E Ratio - 35.66
- 2011 Earnings Growth Estimate - 87%
- 2012 Earnings Growth Estimate - 5.8%
Depending on your preference, there is probably a stock with acreage in the Bakken/Three Forks that you find interesting. This overview of stocks discusses companies with a market cap of at least $1B, as it is the second part of a series covering companies in the Bakken play (see part I here). As many of these names have run up quickly over the past three months to a year, there could be a pullback in these names. Be careful if you put your money in now as a quick retracement in oil prices could move many of these names down as quickly as they went up.
Lastly, there are factors other than oil to consider. Currently these names are paying a higher tax rate in North Dakota. There has been talks of reducing this rate, which would increase profits for those covered here. Also, much of the production is either being trucked ou or transferred via the train. Over the upcoming years, pipelines and other infrastructure is being added to move the oil out of the Bakken. This will also decrease expenses, but there probably wont be anything exceptional done until 2013.