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Michael Filloon, Split Rock (379 clicks)
Oil & gas, small-cap, research analyst, growth at reasonable price
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The market pullback of 1000 points on the Dow Jones is over. This pullback has created value in very good companies. I have received a large number of emails as to what companies I own. Because of this, I have decided to put my money where my mouth is and show where I am currently invested.

My largest holding is Brigham (BEXP). I began purchasing it on May 4th of this year. For those who read my articles, you already know why I like Brigham. Analysts estimate Brigham will grow on average 40.8% per year for the next five years. Much of this growth is figured in this year at 138.3% with additional growth of 65.7% next year. Its earnings estimates are derived from 22 analysts covering the stock. Although much has been said about mark to market hedging losses, Brigham has been exceeding earnings guidance for at least four quarters.

  • June of 2010-Beat by 44.4%
  • September of 2010-Beat by 50%
  • December of 2010-Beat by 33.3%
  • March of 2011-Beat by 16%

Brigham beat its first quarter numbers at a difficult time. One of the worst North Dakota winters in recent memory bogged down many of the Bakken producers. Brigham was also able to cut costs to cover increasing employee wages and to pay well service costs. Brigham currently has a possible 2221 locations in the Williston Basin. It estimates $10.9 million PV-10/well (at 5/31/11 NYMEX pricing). This basically means that at 600,000 barrels of oil equivalent per well, Brigham expects to net $10.9 million. Brigham also has the top four wells with respect to initial production (IP rate) and has seven of the top ten. For a more specific outlook on Brigham, check out this article by Zman.

My second largest position is in Western Refining (WNR). I began purchasing this stock on 5-17-11. Western has performed well, and I believe will continue through the second half of the year. The reason stems from my belief that the price of Brent crude will continue to trade at a disconnect to WTI pricing. WTI is West Texas Intermediate, and is a light sweet crude. It is the standard for light sweet crude pricing in the United States. Brent crude is the standard for the North Sea, and more importantly OPEC. Refineries in the mid-continent have seen an influx of oil from areas like the Bakken, Niobrara, Permian, Eagle Ford shales along with pipelined Canadian crude. At the same time, OPEC (and the North Sea) is having difficulties in maintaining Brent production. Much of the large resource areas have been drilled, leaving more difficult and less prolific wells to maintain production.

The majority of a refiner's costs are the purchase of crude. The WTI price is selling at a discount to Brent, so refiners are able to buy less expensive feedstock. Brent pricing more closely follows what refined products sell for. Brent pricing will remain high because of Iran and the other OPEC nations supporting higher oil prices. In summary, refiners in the middle portion of the country will be able to buy feedstock (oil) for less, as inventories will remain high in Cushing. Refiners will be able to sell its refined products for more, based on North Sea Brent production decreasing and OPEC nations taking a hard line on oil pricing. Western's El Paso refinery derives 100% of its crude requirements from the Permian Basin. Year to date, Western's refineries are ranked fourth and fifth with respect to operating margins when compared to other independent locations. My only worry with respect to Western is it has missed earnings three out of the last four quarters. Analysts covering this name estimate 50% growth per year for the next five. In my estimate, the economy will continue to improve over the next two years, which will increase demand for gasoline and diesel fuel. Western trades at a little over 7 times forward earnings. Look for Western to outperform other independent refiners, although I am bullish the sector. For more on how the WTI/Brent disconnect will affect independent refiners go here.

Basic Energy Services (BAS) is my third largest holding. The reason I invested in Basic, was its pressure pumping services. On May 4th, I highlited Basic as one of the four oil service companies I favored. Basic recently added 32000 hydraulic horsepower, to bring its total to 142000. Not only did it add HHP, Basic also has been increasing prices. From 2009 to the first quarter of 2011, it increased revenues per truck from $64,000 to $88,000. Pressure pumping is used to frac a well. Many of the bigger oil production companies have signed contracts for at least one dedicated frac crew. Without a frac crew, wells can sit for months to be completed. Hydraulic horsepower is expensive, so it is difficult for companies to add pump trucks in the short term. Basic is currently selling for 16 times forward earnings. It has beat earnings three out of the last four quarters. Most importantly, Basic beat first quarter earnings by 566.7%. Twelve analysts estimate Basic will grow 233.3% this year and ten estimate growth of 31.6% next year. Basic has an interesting story that revolves around fracing. It is a business that is growing quickly and should for many of the oil service names.

Kodiak (KOG) is another pure Bakken play. Smaller than Brigham, its growth prospects could be larger, but it also has more downside. I think Kodiak could be a takeover target, but this is not why I own it. Fifteen analysts covering have Kodiak growing 933.3% this year, and eighteen analysts estimate next year's growth to be 158.1%. It sells for just 8 times forward earnings. Things have not been perfect for Kodiak as they have missed earnings four straight quarters. For a company this size it has very good acres. It has 34,000 net acres East of Nesson, that Kodiak estimates with have an estimated ultimate recovery (EUR) of 700 to 850 Mboe. It has 21,000 net acres in the Koala and Smokey project areas with an expected EUR of 550 to 700 Mboe. Its final 16,000 net acres, including those in the Elm Coulee has an expected EUR of 400 to 550 Mboe. Kodiak does a very good job of explaining its well economics. Using an EUR of 750 the NPV-10 would be:

  • $8.8 million at $75/barrel of oil
  • $11.6 million at $85/barrel of oil
  • $14.4 million at $95/barrel of oil

For every $10 increase in the price of oil, Kodiak will make an additional $2.8 million over the life of the well. This is significant,, as it has the possibility of 320 locations. This number could increase significantly depending on how many wells per 1,280 acre spacing is possible. One thing I would like to note, is Kodiak has not been as shareholder-friendly as Brigham. This is the main reason I do not have a larger investment here. In summary, Kodiak could be a good investment if an investor is OK with some risk. For those not interested in risk, take a look at larger companies like EOG Resources (EOG) or Whiting (WLL). Both have substantial acreage in the Bakken and other plays in the United States.

RPC (RES) is another oil service company I believe could do very well over the next five months. The beauty of owning oil service, is the investor does not have to worry about the price of oil heading lower or mark to market hedging losses. RPC garners 48% of its business from pressure pumping. This has been significant for business, as they have beat earnings estimates for four straight quarters. Eleven analysts estimate RPC will grow 103% this year, and 13.8% next. Analysts estimate it will grow 18.2% per year for the next five years. It trades at eleven times next years earnings. I generally stay fairly close to analyst estimates, but believe pricing power will continue for pressure pumping. Companies like Brigham have announced plans to increase drilling cap ex for the purpose of drilling more locations in a shorter period of time. Long term contracts are being signed to provide a dedicated frac crew, and this trend should continue. I expect RPC will continue to benefit from this dynamic.

Samson Oil and Gas (SSN) has had a great run this year. I took profits back in March, but still hold a position. Samson has several things going for it in the second half of 2011. Samson has stated it will be releasing it results in the Niobrara in mid-July. I am guessing Chesapeake may announce its results around the same time. Samson has the right to first refusal on the acreage sold to Chesapeake. Samson has decided to participate in several wells to date. Which is interesting as Samson sells a large portion of its acreage to Chesapeake and then uses this money to buy back into the same area. It also announced a purchase of up to 90,000 net acres in the Montana Bakken. Samson has not announced what its price per acre will be, but hopefully it will be announced with the results from the Niobrara. In summary, not much has changed for Samson. The prospects are still good, but it will take some time. For more information on Samson, please read this article.

Triangle Petroleum (TPLM) has purchased 72,000 net acres in the Bakken/Three Forks. 21,000 of its acres are non-operated and in McKenzie County. Triangle plans to add acreage to approximately 100,000 total net acres. Triangle is interesting based on growth. It trades at 17 times forward earnings. Eight analysts cover this stock and estimate growth of 102.3% this year and 3,800% next year. It has 413,000 net acres in Maritimes Basin of Nova Scotia, which is mainly natural gas. Triangle could have significant growth over the next couple of years, based on its Bakken holdings.

Credo Petroleum (CRED) is another spec play I own. Over the past few years Credo has changed the focus of its business from natural gas to oil. Its has acreage in:

  • Central Kansas Uplift-150000 Gross Acres
  • NW Oklahoma-75000 Gross Acres
  • Southern Oklahoma-10000 Gross Acres
  • ND Bakken-7000 Gross Acres
  • Texas Panhandle-3000 Gross Acres

Its Bakken acreage is in a very good location. The Fort Berthold Indian Reservation is near some of the best wells to date in the play. It currently has 50 drillable spacing units. Locations will grow as Credo estimates more than one well will be drilled on each spacing unit. Its Kansas acreage provides low cost, repeatable projects with a very good return at today's oil prices. In 2010, Credo managed to create 59% of its revenue from oil. Credo's plan creates revenue from its Kansas holdings, to finance horizontal wells in other areas. Credo is not for the faint of heart with a market cap below $100 million, but there could be opportunity here. If Credo is able to create enough revenue to purchase acres in other plays, or if natural gas prices recover this stock's market cap could increase significantly.

My last holding is Clayton Williams (CWEI). After a large market cap increase earlier this year, Clayton has pulled back. It sells for just under 7 times forward earnings. Analyst estimates have Clayton earning $4.71/share this year and $9.42 next year. This stock has pulled back on the expectation it may have to raise capital to pay for its aggressive cap ex program. Clayton also missed first quarter earnings by 140.6%. Clayton is a play on the Permian, where they have 198,000 net acres. This is the majority of its production. The question mark is Clayton's Giddings holding of 254,000 net acres. Much of this play is on the Austin Chalk, but has other possible resource locations including the Eagle Ford. Another positive is its purchase of 14 drilling rigs from Desta Drilling. They should be able to push the development of acreage as all 14 are capable of horizontal drilling.

I am looking to add a second refiner to my portfolio. This will either be HollyFrontier Corp. (HFC) or CVR Energy (CVI). Both have refineries well positioned for mid-continent shale and Canadian oil. HollyFrontier is a bigger and better run company, but CVR Energy is located for the best price on feedstock.

Over the past week, oil and gas has made a significant come back. The release of 60 million barrels from strategic oil reserves around the world reminded us of the diminished spare capacity. Iran and other OPEC nations are supporting the higher price of oil. All are good reasons for US oil companies to speed drilling and get more oil on line. This is why I favor these companies through the end of 2011.

Disclosure: I am long BEXP, WNR, BAS, KOG, RES, SSN, TPLM, CRED, CWEI.

Additional disclosure: This is a list of stocks I am currently invested in. It is just a list and not a buy recommendation. Any stock can lose a large portion of market cap in a very short period of time, especially those linked to the price of commodities. This is also true of the names listed here. I sell and purchase stock frequently, and because of this my holdings can change will little or no notice. Please study any stock before purchasing including the prospects of the sector in question. Source: Brigham (BEXP)Source: Western Refining (WNR)Source: Basic (BAS)Source: Kodiak (KOG)Source: RPC (RES)Source: Sampson (SSN)Source: Triangle Petroleum (TPLM)Source: Credo Petroleum (CRED)Source: Clayton (CWEI)Please feel free to email me with any questions or concerns.

Source: Bakken, Oil Service and Refining Plays for the Second Half of 2011