Brigham: Mark to Market Hedging Losses Create Buying Opportunity

Includes: BAS, NOG, STO
by: Michael Filloon

May 4th was a tough day for the oil trade. The past few days have been controlled by the shorts. It is a perfect time to put your cash to work. One of the names I covered yesterday was Basic Energy Services (NYSE:BAS). Its stock was down 10% the day prior, due to Chesapeake's (NYSE:CHK) comments on pressure pumping. It was also up from a great quarter. For the first quarter Basic beat earnings by 566.7%.

I am bullish the oil service sector because of companies like Brigham Exploration (BEXP). Oil companies are drilling wells at an exponential rate. Oil service will increase utilization for years. Like Basic, Brigham was punished. Going through the first quarter results, I found it looked good. Brigham's daily production volumes were up 109% (11314 Boep/d) when compared to the first quarter of 2010. This was down 1% when compared to the fourth quarter of 2010. Crude oil production volumes were up 159% (9211 Bop/d) from the first quarter of 2010, and 1% from the fourth quarter of 2010. Crude oil represented 81% of production, compared to 80% quarter over quarter and 66% year over year.

In March of 2011, Brigham's Williston Basin volumes reached 10000 Boep/d for the first time in history. Revenues from the sale of crude oil and natural gas, including hedge settlements, was up 158%($76 million) compared to the first quarter of 2010. The average revenue estimate for the quarter was $76.49 million. Of the $76 million, revenues from higher crude oil sales volumes were $37.3 million and increased crude oil prices were $9.4 million. The average realized price of crude was $82.76 per barrel. This included a $1.27 loss from a cash settlement of derivatives.

2011 production costs were up $.95 per barrel of oil equivalent compared to the first quarter of 2010. Taxes increased per barrel of oil equivalent by $2.37. Many don't know that North Dakota's tax structure increases the price of oil. North Dakota taxes are capped at 11.5%. Brigham was able to decrease the $2.37 charge by $1.48 because of decreased expensed workovers.

General and administrative expenses decreased $3.07 per barrel of oil equivalent. This decreased due to higher oil volumes. Increased G&A expenses were due to increased wages of employees. Depletion expense was $18.61 per barrel of oil equivalent versus $19.07 per barrel of oil equivalent the first quarter of 2010. Total depletion cost increased because Brigham has increased oil production. It does not mean the wells are depleting at a faster rate. Brigham did have a deferred income tax expense of $200000 realized this quarter.

Reported net income seemed terrible this quarter at $1.6 million or 1 cent per diluted share. The first quarter of 2010 reported net income of $11.3 million or 11 cents per diluted share. On paper, Brigham missed earnings by 24 cents, but the company had $33.8 million or 29 cents per diluted share in mark to market hedging losses. in the first quarter of 2010, Brigham had hedging gains of $8.3 million or 8 cents per diluted share.

Brigham expects the second quarter of 2011 volumes would be between 12000 and 14000 Boep/d. Its estimated oil volumes will be 82% of total production. This is a one percent increase over the first quarter. Here is a summary of Brigham's first quarter of 2011 as compared to the first quarter of 2011:

  1. Average Daily Production Volumes Up (Boe/d) 109%
  2. Average Daily Crude Oil Production Volumes Up (Bop/d) 159%
  3. Average Daily Production Volumes In Williston Basin Up (Boep/d) 190%
  4. Revenues From Crude Oil and Natural Gas Up 158% ($76 Million)
  5. Average Realized Price For Crude Oil Up $10.37/Barrel
  6. Production Costs (Includes O&M Expense) Up $.95/Boe
  7. 11.5% North Dakota Production Tax Rate $2.37/Boe
  8. General and Administrated Expenses down $3.07/Boe
  9. Depletion Expense Decreased by $.46/Boe
  10. Net Interest Expense Up $.5 Million
  11. Deferred Income Tax Of $.2 Million
  12. Net Income Excluding Mark to Market Hedging Losses were $33.8 Million Or $.29/Diluted Share

Without unrealized hedging losses, Brigham would have missed revenue by approximately a half million dollars. It would have beat on earnings by 4 cents.

More importantly, the Bakken had a harsh winter. Wells were shut down due to lack of oil transportation. Taxes are up in North Dakota. Oil service costs are up. Backlog increases fraccing time, and the winter made it worse. The last problem has to do with depletion expense. There are rumors that Northern Oil and Gas (NYSEMKT:NOG) has not claimed the proper amount of depletion on its wells. This has created some doubt in Bakken names. Depletion cannot be determined in total dollars. Northern's total was approximately four times a year earlier. Brigham's was double that of a year earlier. Northern added 5.85 net wells in the fourth quarter of 2010 and its depletion will be figured on the new wells, plus any others producing in previous months. Most importantly, several Bakken oil companies are oversold, making a very good entry point.

Disclosure: I am long BAS, BEXP, NOG.

Additional disclosure: This article is not a buy recommendation for any of the stocks listed. All three are high growth stocks that have been sold off over the past few weeks. I recommend doing research on any company before buying a stock.