8 Extra Large Caps Focusing on Bakken Oil Plays

 |  Includes: BTE, CLR, DNR, EOG, HES, NFX, QEP, WLL
by: Michael Filloon

When I take a look at oil and gas exploration and production companies, I follow a set of rules. The first is valuation. This is easy enough as the analysts do all the work. The second is growth. Also easy enough, as analysts will do this work for you also. The third rule is don't second guess the analysts. I remind myself of all the times I thought I was more intelligent then the people who do this for a living. It's a good way to lose money.

Once these rules are set there is very little to do- unless the price of oil goes up. Wars, hoarding, and inflation cause prices to go up. We all knew this would happen. It wasn't that long ago that we were scared to death of deflation, and becoming Japan. This is why I placed my money in oil back in 2009. Now we just have to figure out how long it will last.

Since natural gas prices aren't much fun and oil seems destined to stay above $90/barrel, I am guessing that oil companies are not a bad way to play this. So to stay oily, an investor needs to find companies with significant oil assets in the ground. What better place to do this but the Bakken, with oil content in the 90% range and companies producing IP rates out of this world.

So now we are following the three basic rules. We have found our sector, and have a favorite with respect to location (Bakken). I recently identified companies in the Bakken with market caps under $1 billion, and companies above $1 billion. Smaller companies are more difficult to evaluate due to having a smaller number of analysts to give proper numbers. As these companies get bigger, it is much easier to value the company. This new list of Bakken players are those bigger then $6 billion in market cap. If an investor does not have the experience or is just starting out, these companies will decline less if oil retraces.

Baytex Energy Corporation (NYSE:BTE) recently converted to a corporation from a trust, due to tax changes in Canada.

Baytex currently has approximately 124000 net acres in the Bakken/Three Forks. Current estimates of Baytex has potential development of this project being 150-300 net wells depending on spacing. Baytex also has 105 sections of land with 100% working interest in Seal, located in northwest Alberta. It also has 495000 net acres in the Lloydminster area. This area is Baytex's majority heavy oil producer. It also has approximately 60000 net acres in the Viking Sand in southwest Saskatchewan. The Cardium play in central Alberta has Baytex net acres of 10000. Baytex has a low cost, long term oil inventory. Although they are heavily oil weighted, the projects are diversified. It has a projected organic projected growth rate of 8%. Projected production mix for 2015 is 92% oil. It should be noted that Baytex has not begun producing much by the way of its Bakken position. Of the overall production of the company, only 3% is coming from the United States, while heavy oil is 67%. Baytex seems to have decent growth prospects all the while sporting a decent dividend. Long term investors with growth and income needs might want to look here.

Enerplus Corporation (NYSE:ERF) is another example of this. Baytex and Enerplus are dividend paying machines, and should be able to continue this for the foreseeable future.

QEP Resources Inc. (NYSE:QEP)
began trading in June of 2010 after being spun off by Questar (NYSE:STR). QEP has 89000 net acres in the Bakken. Two rigs are operating there. Five percent of capital in 2010 went to the Bakken, and that percentage is estimated to increase to 12% of total capital in 2011. QEP estimates it has 492 gross remaining locations. Average working interest in the Bakken is 74%. QEP has other significant assets such as 49000 net acres in the Haynesville shale. It has 1300 remaining locations at Pinedale. It has 27000 net acres in the Granite Wash/Atoka. QEP has 66000 net acres in the Woodford "Cana" shale. Another location, and one I believe will be a very good location, is the liquids rich area in the Rockies, consisting of 156000 net acres. This includes Powder River, the D-J Basin, and E. Green River. The biggest reason to get excited about QEP is it's getting oily. This company has leading positions in natural gas production areas that are low cost. This, along with extensive hedging has helped them through a time of very low natural gas pricing.

QEP estimates it will have organic production and reserve growth potential of 12% to 15% a year. The company has concentrated positions in some of the best resource plays in the United States. Its midstream business adds value downstream of wellhead. Lastly, QEP has done a very good job of controlling costs and working within cash flow.

Denbury Resources Inc. (NYSE:DNR) uses CO2-enhanced oil recovery to pull oil out of depleted wells. Basically what this means is the company uses carbon dioxide to push part of the remaining oil in depleted reservoirs. Recently this company stated in its most recent quarterly earnings report that 93% of its revenue was from oil. That, plus the "Green Factor" this company has gives it a little extra PR.

Denbury has 275000 net acres in the Bakken. It has five rigs running in the area. Production in 2010 ended over 5000 BOE/d. This holding has the potential of 350MMBOE. Denbury's Bakken wells are estimated to produce 525000BOE/well. Costs are estimated at $7.5 million/well. I would watch this number, since it seems everyone is deciding longer laterals with increased stages are more profitable in the long run.

With $80 per barrel of oil, these wells will produce a margin of $46.40 per barrel. Estimated internal rate of return is 34%. Of Denbury's $1.2 billion 2011 capital budget, $300 million is going to the Bakken. 2011 estimates for Bakken production will increase from the average of 4480 Boe/d to 8700 Boe/d. IP rates of wells drilled in 2010 have varied, but the last four drilled had over 20 stages and IP rates between 1087 Boe/d and 2006 Boe/d.

Denbury's EOR (enhanced oil recovery) areas are the company's focus. Over the last 11 years, EOR production has a compound annual growth rate of 33%. Denbury states it can continue this EOR growth profile over the next 10 years with a CAGR [compound annual growth rate] of 13%-15%. Denbury's EOR properties in the Rockies and Gulf coast have an estimated 10 billion barrels of recoverable oil. The one thing I am not that excited about is the extensive hedging Denbury has. Some 85% is hedged the first half of this year and 80% the second half. All said, Denbury is one of my favorite companies in this group. This company has acquired vast amounts of CO2 over the years, and its use in recovery cannot be overstated. It is set for remarkable growth for a company its size.

Newfield Exploration Company (NYSE:NFX) is a company that I covered recently. My take on this company was its conservative management, with a very good portfolio of areas to drill. Newfield has 174000 net acres in the Bakken. Two recent 9000 foot laterals produced over 3300 BOEPD in this area. Newfield also has 172000 net acres in the Woodford shale. Recently Newfield found oil in this play that was thought to be predominantly dry gas. Newfield also has a large acreage in the Eagle Ford. This company plans to drill 30-35 wells in this play. Newfield has 183000 net acres in the Uinta Basin. It currently has 1500 producing wells, with a five rig program for 2011. The company has 280000 net acres in the southern Alberta Basin with substantial upside. Newfield has an oil property in Malaysia, which has 4 planned developmental wells. It also has 100% of cap ex being spent on liquids in 2011.

Whiting Petroleum (NYSE:WLL) is currently the number two oil producer in the state of North Dakota. I covered this stock a while back as I was impressed by its Bakken position. Whiting has a considerable acreage position in the Bakken. It has 829015 gross acres and 521525 net acres in this play. Whiting states this cost $243 per acre. This acreage breaks down as follows:

  • Lewis and Clark-360516 gross and 234938 net acres

  • Sanish/Parshall-182315 gross and 84700 net acres

  • Starbuck-110326 gross and 88534 net acres

  • Big Island-97968 gross and 72671 net acres

  • Hidden Bench-53123 gross and 28433 net acres

  • Cassandra-24767 gross and 12249 net acres

Of the $1.35 billion in cap ex for 2011, Whiting will use $707 million on the Bakken. Whiting estimates it will drill 100 net Bakken wells in 2011. Total planned net wells for 2011 is 157. Since January of 2009, Whiting's six month cumulative production has been the best in the Bakken and only EOG (NYSE:EOG) has drilled more wells. Whiting also has 73115 net acres in the Redtail Niobrara Prospect. The Big Tex Prospect has 71736 net acres. Flat Rock Field has 11454 net acres. Postle Field in Oklahoma accounts for 24225 net acres. There are 58000 net acres in North Ward Estes Field in Texas. The Texas and Oklahoma fields are EOR projects.

Over the next few years, the Bakken position will begin to overshadow the EOR projects due to capital being placed for growth. In summary, Whiting has several good locations in its portfolio. By far the most amazing is its Bakken area. Proven reserves from 2003 have increased 325%, and production is up 300% over the same time frame. Average daily production has improved 61% since 2007. When looking at Whiting's company and inventory it is easy to get bullish, as it is one of the premier players in the Bakken.

Continental Resources (NYSE:CLR) is another big player that is levered to the Bakken. If you are the type of investor that is looking for a bigger, well-run company that will be able to produce growth over the next couple of years, this company may be for you. Currently, 56% of Continental's proved reserves are coming from the Bakken. It has the largest leasehold in the Bakken play. My belief in Continental having Bakken upside is covered here.

Continental currently has 865000 net acres in the Bakken. This is significant when comparing to Continental's 1.47 million net undeveloped acres. Continental currently has 22 rigs running in the Bakken. $955 million of cap ex for 2011 is going to the Bakken. Of this, $845 million goes directly to drilling, and is estimated will create 132 net wells. In 1995, the USGS estimated that 151 million barrels of recoverable reserves were located in the Bakken. Recently this number was increased by Continental with an estimate of 20 billion barrels of reserves.

Although this company's emphasis is on the Bakken, it has other properties as well. Continental is the #3 producer in the Rockies. It has 310 million barrels of oil equivalent proved reserves as of the end of 2010, and 67% is oil. The company saw 44775 boepd average production in the third quarter of 2010, and 75% of this was oil. Continental is planning to drill 200 net wells and is targeting 30% production growth. Continental's CAGR from 2005 to 2009 was 17.3%. It has an estimated 30% growth guidance for 2011. It is hard not to like this company. As with Whiting, it is a larger company with a very large exposure to the Bakken. The Bakken seems to be leading Continental to very high growth rates in to the distant future.

EOG Resources (EOG)
is in the process of a major change from gas to liquids. An article was written highlighting this here. EOG is a top player in the Bakken. The company was the largest oil producer in the state of North Dakota. EOG had gross production of 49.4MBoed at year end of 2010. Its 600000 acres is in prime location, and EOG got in early. This year, it has a 10 rig development program. This is due to its technical leadership in horizontal completions. EOG is reporting Bakken light and Three Forks wells are 97% liquids. EOG also has acreages in other top horizontal oil plays, which it has stated will drive growth through 2013.

EOG is also the largest producer in the Eagle Ford, with over 500000 oily acres. EOG is the largest producer in the Barnett Combo, with 175000 net acres. The company has 120000 net acres in Wolfcamp and the Leonard Shale. EOG is the largest oil producer in the Niobrara, with over 300000 net acres. EOG also has some vertical wells, and sizeable positions in some of the most cost effective fields in the United States, but oil from the Bakken and Eagle Ford will drive earnings for this company going forward. It has a very large cap ex for 2011 at $6.4 to $6.6 billion. Some 80% is focused on liquids. EOG looks well positioned here, as it was the first mover in many of the premier horizontal oil plays in the country. This created a portfolio of projects that were inexpensive, creating much better margins.

Hess Corporation (NYSE:HES) is another very large company with sizeable interests in the Bakken. Hess currently has more than 500000 net acres in this area. Hess' acquisition of American Oil and Gas (AEZ) added over 85000 acres. In the third quarter, 2010 net production was 16 MBoed. The company estimates production will increase to 80 MBoed in 2015. This would create a CAGR of 35% from 2010 to 2015. Other locations include Valhall field in the Norwegian North Sea. Other properties are in Malaysia and Thailand. There are several other international plays that Hess is working on, placing them as an interest in international and sea oil. Hess also has retail gas locations, and a refining business. Hess estimates it will be able to grow reserves over 3% per year over the long term. Hess produces more liquids than gas. As of September of 2010 Hess was producing 305 Mboe/d of liquids and 112 Mboe/d of gas. Hess is a very large company and one that may not see as much of a positive effect on earnings through its Bakken holdings, but still this company has a sizeable position, and got in early.

  1. Baytex Energy Corp. (BTE)
  • PE Ratio-42.35

  • Forward PE Ratio-26.42

  • 2011 Earnings Growth Estimate-N/A

  • 2012 Earnings Growth Estimate-5.4%

  • 3 Month Return-25%

  • 1 Year Return-72.2%

  1. QEP Resources Inc. (QEP)
  • PE Ratio-20.65

  • Forward PE Ratio-19.42

  • 2011 Earnings Growth Estimate-17.1%

  • 2012 Earnings Growth Estimate-36.1%

  • 3 Month Return-(-.1%)

  • 1 Year Return-N/A

  1. Denbury Resources Inc. (DNR)
  • PE Ratio-33.08

  • Forward PE Ratio-20.53

  • 2011 Earnings Growth Estimate-62.9%

  • 2012 Earnings Growth Estimate-14.9%

  • 3 Month Return-21.8%

  • 1 Year Return-57.4%

  1. Newfield Exploration Co. (NFX)
  • PE Ratio-18.42

  • Forward PE Ratio-12.55

  • 2011 Earnings Growth Estimate-2.9%

  • 2012 Earnings Growth Estimate-23.7%

  • 3 Month Return-.7%

  • 1 Year Return-36.3%

  1. Whiting Petroleum Corp. (WLL)
  • PE Ratio-26.55

  • Forward PE Ratio-13.94

  • 2011 Earnings Growth Estimate-46.1%

  • 2012 Earnings Growth Estimate-22.5%

  • 3 Month Return-17.6%

  • 1 Year Return-75.8%

  1. Continental Resources Inc. (CLR)
  • PE Ratio-68.28

  • Forward PE Ratio-23.47

  • 2011 Earnings Growth Estimate-36.4%

  • 2012 Earnings Growth Estimate-22%

  • 3 Month Return-15.5%

  • 1 Year Return-66.9%

  1. EOG Resources Inc. (EOG)
  • PE Ratio-172.35

  • Forward PE Ratio-18.95

  • 2011 Earnings Growth Estimate-276.1%

  • 2012 Earnings Growth Estimate-65.6%

  • 3 Month Return-17.1%

  • 1 Year Return-11.5%

  1. Hess Corporation (HES)
  • PE Ratio-13.04

  • Forward PE Ratio-11.28

  • 2011 Earnings Growth Estimate-24.9%

  • 2012 Earnings Growth Estimate-16.3%

  • 3 Month Return-11.8%

  • 1 Year Return-16.3%

Many of the names here are good buys in light of the price of oil. As long as the price stays high, these names will also. If you have seen a rapid move in share you own, sell some. No one ever lost money taking profits.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CLR, WLL, DNR over the next 72 hours.

Additional disclosure: Yahoo finance was used for 2010 and 2011 growth estimates, along with PE and forward PE ratios. Seeking Alpha provided 3 month and 1 Year Return. The stocks mentioned can go up or down in price in a rapid fashion depending on market dynamics. I urge everyone to study before buying, and making an educated purchase based on company fundamentals. This write-up is not a buy recommendation but a starting point in finding a proper investment in Bakken related stocks.