Identifying Small Oil Companies With Eagle Ford and Bakken Exposure

 |  Includes: AXAS, CHK, GEOI, MHRCQ, MRO, SM, SSN
by: Michael Filloon

There has been plenty of speculation as to which U.S. shale play is most lucrative. The two mentioned most are the Eagle Ford and Bakken. It is difficult to judge, because specific acres within these shales are better than others. There are "hot spots" in every shale in the United States. In the Williston Basin, Brigham's (BEXP) Ross acreage just broke a new 24 hour IP rate record. In the Niobrara, Chesapeake (NYSE:CHK) paid top dollar in the DJ Basin to Samson (NYSEMKT:SSN), plus a royalty. For a detailed valuation of Samson and its acreages please go here. This was nothing, as Marathon (NYSE:MRO) was happy to pay $5000/acre not long after Chesapeake paid $3150. For more information on this location please read Samson Oil: Competitors Paying Top Dollar for Presence in the D-J Basin.

Marathon did the same paying approximately $25000/acre, or $3.5 billion for the Eagle Ford. Marathon also has 375000 net acres in the Bakken with ongoing additional acreage purchases. Marathon paid significantly less for its acreage in the Bakken than the Eagle Ford. Because of this, investors unfamiliar with these acreages believe the Eagle Ford has more upside than the Bakken. In cases such as these it is better to look for the hot spots within each play, to use as a guide to expectations for EURs and IP rates with respect to overall value.

There are several large companies that have exposure to both the Eagle Ford and the Bakken. It is much more difficult to find smaller companies that are levered specifically to these plays. The bigger names will de-risk neighboring acreage and also add value to your investment. These are four oil and gas producers in the Eagle Ford and Bakken/Three Forks. Before investing, find out who the neighboring companies are, and check the IP rate. This will take some of the guess work out of buying a stock.

Abraxas Petroleum (NASDAQ:AXAS) is currently trading at $3.92/share, down from its 52 week high of $6.16. It has a market cap of $359.59 million. On February 11th of this year, Abraxas was initiated at Robert W. Baird as an outperform. The same day, Stifel Nicolaus initiated at a buy. On May 16th of this year, CK Cooper upgraded it from hold to buy. Abraxas has a small market cap, but has 50000 net acres in unconventional plays. Its 2011 expanded budget of $60 million is 100% liquids weighted. It has 26.6 MMBoe of proved reserves, and 49% is proved developed. Abraxas operates 81% of its acreage and 42% of this reserve is oil and NGLs. Its proved reserves are diversified with:

  • 41% Onshore Gulf Coast
  • 32% Rocky Mountains
  • 21% Permian Basin
  • 5% Mid-Continent
  • 1% Canadian

Abraxas has holdings in these United States oil and gas plays:

  • Bakken/Three Forks-20835 net acres
  • Niobrara-17800 net acres
  • Alberta Bakken-10000 net acres
  • Eagle Ford-9586 gross acres (50% JV Interest)
  • Pekisko Fairway-9120 net acres
  • Texas Oil Plays-8700 net acres (Includes Wolfberry)

Abraxas states it will be able to drill between 4 and 8 laterals per 1280 acres in the Bakken / Three Forks. Drilling and completion costs will average $8.5 milliion and an EUR of 500 Mboe. Its Eagle Ford acreage has an average drilling and completion cost at $8.5 million and a EUR of 1100 Mboe.

In summary, its Rocky Mountain (Bakken / Three Forks, Niobrara, and Alberta Bakken) acreage totals 81190 net acres and is 86% liquids. It has 38951 net acres in the Permian and is 31% liquids. Abraxas has 7776 net acres in the Texas Gulf Coast (Eagle Ford) and it is 17% liquids. Just to be clear, its Eagle Ford acreage is in the gas / condensate and oil windows). I think Abraxas is a good buy at this time, as this pullback seems overdone. For a more on this company please read Abraxas Petroleum Built Around Solid Assets.

Magnum Hunter Resources (MHR) is currently trading at $6.64, a discount from its 52 week high of $8.66. I covered Magnum on January 23rd, as its recent deals provided upside. Another article, Magnum Hunter: Built for Speed addresses its current valuation and provides reasons to be bullish this name. Magnum has assets in some of the best plays in the United States. Since the 2nd quarter of 2009 it increased production over 2000%. Magnum has 25074 net acres in the Eagle Ford. This is located in the oil window, and has an EUR per well of 200000 to 500000 BO. Magnum estimates a well cost of $6.5 to $8.8 million. It also has locations in the Appalachian Basin. Of its 97020 net acres, 58820 are in the Marcellus.

Magnum has 15000 gross acres in the Williston Basin and has 43% interest. It has 2.5 MMboe of total proved reserves. There will be new wells in the Bakken / Three Forks and Sanish when litigation with working interest partner is settled. Magnum believes there are also good prospects for secondary recovery at these locations. Its acquisition of NuLoch Resources added 69900 net acres in the Williston Basin, with 31200 in North Dakota. 50680 net acres were added in Alberta also. Magnum estimates it will spend $80.3 MM in 2011 on its North Dakota and Saskatchewan acreages. Its acquisition of NGAS provided 300000 net acres in the Appalachian Basin.

The completion of both acquisitions will create:

  • Production Over 6000 Boe/d
  • 60% of Production is Liquids
  • Total Proved Reserves of approximately 29.4 million Boe
  • 25074 Net Acres in the Eagle Ford
  • 397020 Net Acres in Appalachia (58820 are in the Marcellus)
  • 76350 Net Acres in the Williston Basin
  • Other Net Acres Total 51423

Magnum has 88% of its natural gas production hedged for 2011, and only 19% of its oil hedged. In summary, Magnum is well positioned. The company is working three shale plays with very good IRRs. This, coupled with a large inventory of locations, bodes well for Magnum. Estimated growth for this year is 350%, and 280% in 2012.

GeoResources (NASDAQ:GEOI) is a company I have liked for sometime. It currently trades at $22.96, well below its 52 week high of $32.94. It has a forward PE of 10.34. GeoResources has a market cap of $584.54 million. On February 17th Robert W. Baird initiated GeoResources at Outperform. On June 3rd Global Hunter Services was upgraded at Accumulate. This was interesting, as Global Hunter downgraded the company on April 5th of this year. It has 68000 total net acres. GeoResources produced 5090 Boe/d last year, providing significant cash flow. It has proved resources of 24 MMBoe, with 60% oil. GeoResources has 45000 net acres in the Bakken and will add a third rig at the end of this year. It has another 23000 net acres in the Eagle Ford. A third rig will be added here also at year end. GeoResources leasehold is in the oil / gas condensate window.

GeoResources has leaseholds in other areas as well:

  • Austin Chalk-29000 Net Acres
  • St. Martinville Field-2585 Net Acres Leased, 534 Net Acres Owned
  • Quarantine Bay Field-14000 gross acres

GeoResources recently increased its 2011 cap ex to $114 million, from the original $88 million. Its estimated 2012 cap ex is $173 million. Estimated growth is 24.1% this year and 54.2% next. These estimates seem low, especially after the increase in capital expenditures for this year. The current stock price is a value.

SM Energy (NYSE:SM) currently sells for 69.67 per share, down from a 52 week high of $78.55. It has a PE of 86.23 and a forward PE of 20.92. SM is the largest company on the list at a $4.43 million market cap. It has been busy working its Eagle Ford acreage. This led to record first quarter of 2011 production. SM's operated Eagle Ford position is 165000 net acres. It is largely 100% working interest and has 3 rigs running. SM plans to up its rig count to 6 by the end of 2011. Average well costs are $6.5 to $7 million.

SM has another 85000 net acres in the Eagle Ford via a partnership with Anadarko (NYSE:APC). There are 10 rigs here. The company has 204000 net acres in the Bakken / Three Forks. There are 2 rigs at this leasehold, and that will increase to 3 total rigs by year end. Of the $870 million to be spent on 2011 drilling projects, 57% will be on the Eagle Ford. 20% will go to the Bakken / Three Forks development. I really like SM Energy. Last Wednesday, it announced the sale of its Constitution Field and will receive $44 million for assets that have been for sale since the 3rd quarter of 2010. SM also plans to divest some of its Eagle Ford assets. It has also increased its credit facility and offered 3.5% notes due in 2027. In summary, SM is obtaining funds to push forward in its drilling program. It will be interesting how large the sale in the Eagle Ford is, and to whom it was sold. Earnings growth estimates for 2011 are 50.4% and 61.7% in 2012. This is a less risky play, but should be able to deliver a good return on investment.

All four of these companies are a good way to play the Eagle Ford and Bakken / Three Forks. I decided to stick to smaller companies as these two shales would be more levered than a company the size of EOG Resources (NYSE:EOG). There has been a lot said about the Eagle Ford after Marathon's most recent purchase. Although late to the party, these are very interesting purchases by Marathon. To pay this type of premium, the company is either purchasing much better resource sites, or believes oil prices will increase significantly in the short term. Of the names on this list, I like Magnum's growth prospects, GeoResources' value, Abraxas' diversification and SM's continued push to maintain investor value. This is a good entry point for these names.

Disclosure: I am long SSN.