Primary Petroleum's New JV Is Good for All Alberta Basin Bakken Players: Part I

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On the 27th of July, Primary Petroleum (PETEF.PK) entered into a non-binding LOI [letter of intent] with a major United States partner. This should have created a pop in Primary's shares, but it seems this was priced in as its stock was sitting at 60 cents/share just a week prior.

On the 24th of July, I wrote Looking for the Next Samson? Speculative Stocks Sitting on Large Resources. In this article I highlighted several small oil and gas stocks that could have significant upside, including Primary Petroleum. This news specifically effects companies in the Alberta Basin Bakken. This is not to be confused with the well-known Williston Basin Bakken. There are specific differences in these resource areas. The most important is land value, as Newfield purchased 156000 acres for $12 million or $85/acre in December of 2009. By September of 2010, acre valuations were as high as $1800/acre with an average of $820. The Williston Basin Bakken has a much higher price per acre as seen in the Williams (NYSE:WMB) purchase of 85800 acres for $925 million in cash.

If we analyze the Williston Basin Bakken and the Alberta Basin Bakken, there are similarities and differences. Similarities are:

  1. Rocks and rock layering

  2. Hydrocarbon saturated in large continuous reservoir

  3. Low water saturation

  4. Requires horizontal drilling and fraccing

Alberta Basin Differences are:

  1. Multi-zone oil formations (Nisku, Sunburst, Madison)

  2. Oil rigs available

  3. Encountered at shallower depths

  4. Much lower development costs

There are several players in the Alberta Basin Bakken. Rosetta (NASDAQ:ROSE) has 300000 net acres in Montana. Rosetta has drilled 11 delineation wells and plans for three horizontal wells in 2011. Rosetta has stated these delineation wells have provided understanding of the area, while the three horizontal wells will be drilled to test the play. It has 1500 potential locations in the southern Alberta Basin. One thing I would add, is the southern Alberta Basin Bakken is still speculative, and there is a chance it will not be profitable. The fact they are drilling the three horizontal wells reinforces a good chance of profitability.

Another big player in this area is Newfield (NYSE:NFX). It is not as levered to the Alberta Basin Bakken as Rosetta is. Some 58% of Newfield's 2010 year end reserves were located in the Woodford Shale and Monument Butte. It also has acreage in the Eagle Ford, Granite Wash, and internationally. Only 3% of its 2010 reserves were located in the Alberta Basin Bakken and Williston Basin Bakken combined. It has 280000 net acres in the Alberta Basin Bakken. Newfield believes it has up to possibly four different resource locations/well. The southern Alberta Basin has had six recent industry wells drilled. Newfield has seven new wells drilled or permitted here. I like Newfield, but would not purchase this stock on its Bakken resource as it is a very small portion of its reserves.

Quicksilver (NYSE:KWK) has 175000 net acres in the southern Alberta Basin. It is currently watching industry players in the area, as 13 recent wells have been drilled adjacent to its leasehold. Quicksilver states the Bakken formation was found at approximately 4000 feet. This depth should provide for reasonable drilling costs. Decreased costs allow for a much lower estimated ultimate recovery. Multiple resource zones could also provide upside. Quicksilver's current southern Alberta Basin Bakken acreage could create significant upside. As competitors begin to de-risk acreage, we will have a better idea of what its acreage will produce.

For those following FX Energy (NASDAQ:FXEN), you know this company has a very large acreage in Poland. These acres are sitting on a very large natural gas resource, and prices are much higher in Europe. FX Energy also has 10418 net acres in the south Alberta Basin. Prices per acre should continue to head higher, as much of this south Alberta Basin Bakken has been purchased. FX Energy states it has found the Bakken at a depth of 2900 acres, which is 1100 feet less in depth as Quicksilver is reporting. It is also participating in a JV with American Eagle Energy Inc. in approximately 75000 gross acres. FX Energy is currently testing other resource locations such as Lodgepole and Three Forks. I really like FX Energy as an investment. Its play in Poland could be amazing, with a speculative oil play in the south Alberta Basin. FX Energy seems a bit expensive when using next years earnings, but it is difficult to gauge its growth because of the raw size of its Polish leasehold. If its acres are as good as expected, FX Energy will blow past earnings estimates. Be careful, as this company is priced for perfection.

If you are looking for a good risk-to-reward ratio, Primary Petroleum is one to consider. It has 290000 net acres in the south Alberta Basin. For 2011, Primary plans to continue acquisition of leases in the south Alberta Basin and the Williston Basin. It will spend between $4.5 and $5 million on 3D seismic this year. Primary plans to drill six vertical and one horizontal wells to identify multi-zone targets. There is a total of six possible targets. The first well will spud in the third quarter of this year.

It's easy to forget about Stone Energy's (NYSE:SGY) Alberta Basin Bakken position with its Marcellus and Gulf of Mexico production. It currently has 35000 net acres in the Alberta with Newfield as the operator. Stone should continue to increase production as Newfield drills the play. Although it is not a large portion of Stone's inventory, it is a good buy with respect to oil and gas names.

Arkanova Energy Corp. (OTCPK:AKVA) is a very small company with 9900 acres in the Alberta Bakken Basin. It is located in Glacier and Pondera counties of Montana. This company is speculative with little by the way of information. It currently has 30 producing wells, including those in Arkansas and Colorado. Its Two Medicine Cut Bank Sand Unit had second quarter production of 7344 bbls. which is 56% higher than the second quarter of 2010. Arkanova is currently working with Schlumberger on well completion. I do not recommend buying this company as information on this company is spotty at best.

American Eagle Energy (NYSEMKT:AMZG) has 75000 acres with 33%-50% working interest in the Alberta Bakken Basin. This play encompasses Glacier and Toole Counties in Montana. Based on two horizontal wells per section, 234 wells are expected. American Eagle could significantly benefit from Primary's JV. If acreage values increase, it will exponentially increase its stock price.

The southern Alberta Basin has what could be tremendous upside. Due to the depth of resource, wells could be drilled and completed at a low price compared to the Williston Basin. Rig styles to drill these wells are currently available and cost significantly less. Average price per acre since April of 2010, is $820. Acres have sold for as high at $1800/acre. 60 wells are currently being tested, completed and/or drilled.

In summary, the Bakken formation in the Alberta Basin and Williston Basin are two completely different plays. The Williston Basin Bakken has higher EURs, but wells are much more costly. The Alberta has lower costs, but has more locations to drill due to multiple resource locations. It is hard to say whether the Alberta Bakken will ever have a price/acre of the Williston Basin. One thing is certain, if results continue to show promise, all the companies on this list will benefit.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This is a list of companies operating in the southern Alberta Basin. It is just a list and not a buy recommendation. Be careful in investing, and please study any company before purchasing any stock. Also make sure of the value of resource as the Bakken can hold a much different amount of resource from area to area. Source: American Eagle Energy (AMZG) Source: Arkanova (OTCPK:AKVA) Source: Stone Energy (SGY) Source: FX Energy (FXEN) Source: Quicksilver Resources (KWK) Source: Newfield (NFX) Source: Rosetta (ROSE) Source: Primary Petroleum (PETEF.PK).The author owns no shares nor has any relationship with Primary Petroleum.