Investing in the Bakken (Part III): Companies With a Market Cap of $1B to $6B

Includes: ERF, KOG, MDU, NOG, OAS, SM, STO
by: Michael Filloon

This article is a follow up to Investing in the Bakken: 7 Companies With a Market Cap Above $1 Billion. A difficult winter has left many of these names with disappointing numbers. Carry out capacity has been a problem as snow decreased the number of trucks to haul oil from the wells. Wells can store a significant amount of oil on site. When capacity is reached, the oil production is shut down until carry out returns. Bakken operators are reporting decreased production.

Enerplus Corporation (NYSE:ERF) acquired 74500 acres at a cost of $618 million. Enerplus estimates its Fort Berthold production of 4000 bbls/d. Estimates increase production to 20000 bbls/d in the next four years. Enerplus will drill 32 net operated wells this year. 75% will be long horizontals in the Bakken / Three Forks. Enerplus will have three to four rigs running. It has the rigs and fracking services to stay on schedule. Enerplus will have midstream service agreements in place by mid-2011. This will capture gas from its current projects. 300 MBOE/D of take away pipeline capacity will be added to address current shortfall. Enerplus states it is working on contracting more capacity to handle its production increases. Internal Fort Berthold reserve estimate is 18 million BOE. Its internal contingent resource estimate is 50 million BOE. The North Dakota Bakken is 90% operated with 90% working interest. There is also upside in the Three/Forks. 2011 Fort Berthold cap ex is $230 million.

Enerplus groups its United States Bakken with its Canadian Bakken holdings. Combined Bakken holdings are 214500 acres. The Bakken will account for 25% of volumes this year, and increase to 30% in 2012. 2011 cap ex is $650 million. $300 million will be spent on its Bakken holdings (United States and Canadian acres), and 48 wells will be drilled. At the end of 2010, production from the Bakken was 13000 BOE/D. Enerplus estimates 18000 to 21000 BOE/D will be produced at the end of 2011. The Bakken will receive 46% of 2011 capital spending and produce 36% of net operating income. The 140000 acres in the Saskatchewan Bakken cost $176 million.

In summary, Enerplus has two Bakken locations. One is a very good play in Fort Berthold, North Dakota. The second is significantly inferior, but was acquired at a significant discount. Watch production in Saskatchewan and Fort Berthold. The difference in IP rates and EURs will be interesting.

Brigham Exploration (BEXP) has completed 56 long laterals in the Bakken/Three Forks. These high frac stage wells had an average peak rate of 2884 BOED. Brigham has 205300 largely de-risked net core acres. 724 net development locations in core acres. Brigham wells-- with an EUR of 600 MBOED-- are estimated a NPV of $12 million. This would produce an IRR of 93%. Brigham is accelerating its drilling program from 7 to 12 rigs as of September of 2012. Starting in May of this year, Brigham will add an eighth rig. Every four months after, Brigham will add an additional well until 12 are reached. This will create an estimated 132 gross well annual run rate. Brigham estimates this will produce an incremental increase per year of 29 wells. This acceleration will produce an 81% increase in oil volumes in 2011. More importantly, this will de-risk the majority of Brigham's core acreage.

Because Brigham bought some of the best Bakken acres early, its cost is low. Brigham's drilling and leasehold, acquisition finding and development costs are $9.23 per BOE. In 2011, Brigham has 141% reserve growth. Brigham has stated that it wants to increase acres in the Bakken/Three Forks. Since 2009, it has made two acquisitions of 84000 and 64000 acres. This company has also outperformed in IP rates. At the end of 2010, Brigham's proved reserves were 83% derived from the Bakken. 78% of proved reserves are oil. Just a few years ago, Brigham was 80% gas. In total, Brigham has 365000 net Bakken acres.

Brigham's Ross area is outperforming. Fifteen middle Bakken long laterals have an average IP rate of 3567 BOEPD. The Ross area in the Three Forks has two long laterals with an average IP rate of 2249 BOEPD. Brigham's Rough Rider project has 39 long lateral high frac stage wells with an average IP rate of 2654 BOEPD. Brigham continues to outperform in drilling results. The company has mentioned it could increase the number of wells per spacing unit. Currently Brigham is drilling four Bakken and four Three Forks. If increased to five Bakken and five Three Forks wells, the total number of wells would increase from 218 to 280 total wells. If increased to six and six, the number of wells would increase from the current 218 to 336. This well increase may include the Rough Rider area.

Brigham announced in February that it would be using the Smart Pad technology. This technology allows multiple wells to be drilled from one location, significantly decreasing rig mobilization times. In summary, Brigham is one of the best plays in the Bakken. It continues to perform well, and is rapidly increasing its oil revenues. It may have the best acres in the Bakken. By drilling multiple wells from one location, drilling costs can decrease from 10% to 20%. It also decreases the environmental footprint.

Brigham also ordered two PACE "B" Series Walking Rigs from Nabors (NYSE:NBR). Mobile rigs and Smart Pads both decrease mobilization times in drilling. These efficiencies will lower costs and increase margins. On April 13th of this year, Brigham announced the results of its Sorenson 29-32 #2H Bakken well produced 5330 BOE during its 24 hour peak flow back period. It also announced a Montana Bakken record of 2962 BOE in 24 hour peak flow back. Brigham continues to set the pace. Brigham was downgraded by Stifel Nicolaus on 4-26-11, but it seems the reasoning has more to do with oil price per barrel than Brigham's valuation. For a more in-depth article please read Brigham: Outstanding Drilling Results in the Bakken Shale.

Kodiak Oil and Gas (NYSE:KOG) has a lease position in the Bakken of 112000 gross or 70000 net acres. Kodiak has approximately 320 net Bakken / Three Forks locations. It has 34000 net acres East of the Nesson Anticline (Dunn County), and 36000 net acres west (McKenzie, Williams, Divide and Sheridan Counties). Kodiak's proved reserves are 11.5 MMBOE and 87% is oil. In 2009, proved reserves were 4.458 MMBOE, an increase of 158%. This year's cap ex is $20 million up from $75 million in 2010.

Near Kodiak's Dunn County, North Dakota leasehold there have been two recent acquisitions. Williams (NYSE:WMB) made a $925 million purchase. Enerplus paid $456 million for its acres in Dunn County. Dunn County has good IP rates and EURs are between 750-850 MBOE. Kodiak's TSB #14 -21-33-15H produced a 24 hour IP of 2050 BOED. A second well, TSB #14-21-33-16H3 had a 24 hour IP rate 1042 BOED with only 6 of 22 stages completed. 100% of Kodiak's drilling cap ex will be spent on long laterals. In 2010, long laterals have produced IP rates in the 1900 BOED to 2000 BOED. It also uses the Smart Pad technology to decrease costs.

Kodiak currently has 4 wells on a drilling pad waiting on completion in Dunn County. Kodiak has stated it is having very good luck west of Nesson and in the Elm Coulee trend. More news on this will continue throughout 2011. Kodiak has two operated rigs running. It will add a third in the second quarter and another in the fourth quarter. A non-operated rig with 40% to 50% working interest is active. A second non-operated rig will begin drilling in the second half of 2011. Kodiak has six operated wells and two non-operated wells waiting on completion. 10.9 net wells drilled in 2010, with 23.4 net wells to be drilled this year.

Kodiak states that it is decreasing costs through better techniques, which offsets higher service fees. Increasing EURs through longer laterals will increase revenue. Majority of Kodiak's wells will be connected via pipeline in 2011. This increases revenues from natural gas and NGLs. It also decreases trucking costs. Earlier this month, Kodiak's shares popped. Its Koala project released a middle Bakken IP rate of 3024 BOED, and Three Forks IP rate of 2327 BOED. I believe Kodiak is just beginning to realize the Bakken's true potential. For an in-depth article please read Kodiak Oil and Gas: Exponential Production Growth.

MDU Resources Group Inc. (NYSE:MDU) produces oil and natural gas as Fidelity Exploration and Production. Fidelity produces 35% of MDU's earnings. Fidelity has 646 BCFE of proved natural gas and oil reserves, with 69% of it natural gas. In 2010, Fidelity increased oil production by 5% year over year to 28% total. The Bakken is its largest oil property. Its acreage is located in Mountrail County, North Dakota. Bakken production increased by 41% in 2010.

Fidelity produced 2.4 million net barrels of oil equivalent in the last three years. It owns 16000 net acres in Mountrail County. Last year 8 Mountrail wells were drilled to a total of 37 operated wells. Fidelity produces 3700 BOED in Mountrail. Future drilling locations include 20 in the middle Bakken and over 30 in the Three Forks. A drilling cap ex of $52 million will be used to drill 13 operated wells. Fidelity plans to participate in non-operated wells this year. In the second quarter of this year, Fidelity will add a second drilling rig. It plans to drill 12 wells in 2012 and 2013. Fidelity estimates an EUR of 250-400 MBO per well.

An additional 50000 net exploration acres are held in Stark County. This is a play on the Three Forks. Fidelity's first well (Kostelecky 31-6H) was promising with an average IP rate of 1343 BOE. It carries an operating interest of 94.5%. It is drilling two additional wells. A $37 million 2011 cap ex program will be used to drill six operated wells. Fidelity plans to participate in non-operated wells in Stark County. In 2012, it estimates 12 wells will be drilled and completed. 75 potential operated locations on 640 acre spacing are planned in Stark county. An EUR of 250-500 MBOE per well is expected. On April 21st of 2011, MDU announced a five year $2.1 billion investment to develop and produce oil and natural gas properties. This will be spent on other areas as well as the Bakken. MDU also announced lower production due to bad Bakken weather.

Oasis Petroleum (NYSE:OAS) is 92% oil weighted. It has 303000 net Bakken / Three Forks acres. Oasis has 1170 gross potential Bakken locations. It has 1288 gross potential Three Forks locations. With a seven rig program, it is a 22 year inventory. Oasis' $441 million drilling program is part of a $490 million budget. Total proved reserves are 39.7 MMBOE, and 43% are developed. Oasis bought its first 175000 net core West Williston acres for $83 million.
In the first quarter of 2011, Oasis brought 5.5 net wells into production. 15 net wells are awaiting completion. 4.3 net wells are drilling. 7 operated rigs will run this year. 6 rigs in West Williston and one in East Nesson. 46.8 net operated drilling locations will be worked this year. $402 million will be spent on operated wells with $39 on non-operated. Average daily production has increased significantly:

  • First Quarter of 2009 was 1183 BOED
  • First Quarter of 2010 was 3295 BOED
  • First Quarter of 2011 is estimated at 8000 to 9200 BOED
  • Second Quarter of 2011 is estimated at 9800 to 11200 BOED

As with Brigham and Kodiak, Oasis is using new techniques to decrease costs and increase EUR. Oasis states an increase in frac stages by 30% will increase EURs by 20% to 30%. The company is progressing with pad drilling and rig mobilization. On March 8th of 2011, Oasis reported quarter and year ending in December 31st of 2010. It grew average daily production 144% over the fourth quarter of 2009. Oasis grew estimated proved reserves from 13.3 million BOE to 39.8 million BOE. In summary, Oasis has promise. Its large West Williston acreage should provide cash flow for years.

SM Energy (NYSE:SM) is a well diversified company with a large position in the Bakken. SM seems to be focusing on the Eagle Ford this year, but its Bakken acreage is a significant holding. Its Bakken / Three Forks 2010 proved reserves was 232 BCFE. Total fourth quarter of 2010 production was 69 MMCFE. SM has pushed west in the Bakken, with good results. Its Three Forks holdings in Divide have continued to succeed. The ramp up drilling programs are going as scheduled. It will spend $830 million in 2011 drilling cap ex. 90% of drilling cap ex will be spent on liquids. The Bakken / Three Forks is 20% of the $830 million. SM's Bakken acreage increased from 81000 net acres to 84000 net acres. SM holds an additional 120000 net legacy acres in the Basin. Two rigs are currently running with an additional rig added later this year. A plan of 20 net operated wells will be drilled in Raven and Divide projects this year.

Northern Oil and Gas (NYSEMKT:NOG) has recently experienced downward pressure on its share price. The stock had quite a run since July 6th of 2010, when Northern's shares were trading for $12.31, and by March 4th of 2011 it was $32.69. In February, Northern was added to the S&P MidCap 400. Northern has 151300 net acres in the Bakken / Three Forks. It has participated in over 475 gross Bakken / Three Forks wells.

Northern has a 100% success rate, and is increasing production. The last quarter of 2010, it averaged 3700 BOED. It exited 2010 at 5200 BOED. Northern estimates 2011 production to average between 6500 BOED and 7100 BOED. 25 net wells in 2010 and approximately 40 net wells will spud this year. Northern has a total Williston Basin drilling exposure of 708 net wells. It is continuing to add Bakken acres. In 2011, Northern acquired 11100 net acres at an average price of $1540 per acre. It has $125 million in cash with no debt. Northern's number of wells will increase as more rigs are brought to the Bakken. This will de-risk its acreage.

Companies like Brigham and Oasis are rapidly increasing their drilling programs. As this increases it gives more opportunity for Northern to increase cash flow. From August 9, 2010 to March 28, 2011, Northern has seen wells being drilled, completed or waiting on completion increase by almost double. It is currently participating in 141 gross wells drilling or completing in North Dakota. Northern's production increased 36% sequentially in the fourth quarter of last year. Production is 95% oil weighted. Average estimated well cost is $6.3 million. Northern has a $252 million drilling capital plan. As a non-operator, it has lower costs. Northern chooses operators with good reputations. The top 5 operating partners as a percentage of gross wells are:

  1. EOG Resources (NYSE:EOG) 27%
  2. Slawson 15%
  3. Continental (NYSE:CLR) 15%
  4. Brigham (BEXP) 8%
  5. Marathon (NYSE:MRO) 6%

Northern has traded down a considerable amount in the short term. Rumors of increased well depletion and accounting issues were started by individuals short Northern Oil and Gas. This is a buying opportunity.

All of these companies are well run and look to have success in increasing cash flow. Oil may trade down in the short term, but in the long term it seems oil will continue climbing higher. Look for these companies to increase overall locations. The use of Smart Pads decreases costs and time to mobilize rigs. New mobile drilling units are being purchased to decrease time and cost. Longer laterals are being drilled to increase IP and EURs. This will continue to offset higher service charges. Most importantly, oil is selling for $112/barrel. Even if oil retraces to $100, cash flow will continue higher.

Disclosure: I am long BEXP, NOG.

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