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Its hard to believe that oil was trading for $115/barrel on May 2nd. Oil traded for $82.70/barrel at Friday's close. This pullback has created huge moves to the downside in small cap oil companies. This may be a buying opportunity. Be careful as some of these names have more downside. As the first part of a series on small oil companies operating in the Williston Basin's Middle Bakken and Three Forks, I will try to value these companies through acreage size, location and growth.

Triangle Petroleum (NYSEMKT:TPLM) currently trades for $4.36/share. Its market cap has decreased by over 50% from its 52 week high of $9.73. Outside of the Williston Basin, Triangle has 413,000 net acres in the Maritimes Basin of Nova Scotia. These acres are predominantly gas. It has 72,050 net acreas in the Williston Basin. Triangle's acres are 44% operated. Of its 30,000 core acres, 22,000 are in Dunn, Divide, McKenzie, and Williams counties. This is very important, as Triangle states these counties will provide an IRR of 50% at current strip prices (August 15th). Non-operated acres will provide cash flow to fund its operated program. 75% of Triangle's leases do not expire until after 2014. 42,050 net acres are in Roosevelt County in Montana and are operated by Triangle. Its first operated rig will arrive in September of this year. Triangle plans to drill 12 net operated wells by the end of 2012. It will use pad drilling and expects to get up to 4 Middle Bakken and 4 Three Forks wells/pad. Up to 3 total operated rigs are expected by the end of 2012. Triangle has $110 million in cash and zero debt. Initially, Triangle will work predominantly as a non-operator. It currently has 6 producing non-operated wells:

  1. Federal 4-11H (26.25% Working Interest)-Kodiak (NYSE:KOG) is the operator
  2. Grizzly 1-27H R (26.25% WI)-Kodiak is the operator
  3. Grizzly 13-6H (26.25% WI)-Kodiak is the operator
  4. Roedeske Federal 12x-21 (15% WI)-XTO (NYSE:XOM) is the operator
  5. Bonanza 1-21-16-H (12.47% WI)-Slawson is the operator
  6. Kostelank 28-1H (7.5% WI)-Hess/Tracker (NYSE:HES) is the operator

Triangle currently is participating as a non-operator in 30 wells that are at least permitted. Working interest for these non-producing wells ranges from 33.44% to 2.31%. Partners include:

  • Kodiak 4 wells (33.44%-3.13% Working Interest)
  • Oasis (NYSE:OAS) 1 well (31.41% WI)
  • Newfield (NYSE:NFX) 5 wells (23.44%-2.31% WI)
  • Slawson 5 wells (18.95%-16.41% WI)
  • Zenergy 2 wells (16.25%-5.86% WI)
  • Brigham (BEXP) 1 well (15.12% WI)
  • Hess 2 wells (10.74%-3.98% WI)
  • Zavanna 1 well (7.5% WI)
  • URSA Resources Group 1 well (6.65%WI)
  • Petro-Hunt 1 well (5.21% WI)
  • EOG Resources (NYSE:EOG) 1 well (4.83% WI)
  • Continental Resources (NYSE:CLR) 2 wells (4.53%-4.09% WI)
  • XTO Energy 2 wells (3.65% WI)
  • Anschutz Exploration 1 well (2.83% WI)
  • SM Energy (NYSE:SM) 1 well (2.81% WI)
  • Whiting (NYSE:WLL) 1 well (2.69% WI)

Triangle plans to ultimately increase its operated production to 70%. Its operated acreage is a question mark and will drive growth for Triangle. Triangle believes it has five pay zones in its Station Prospect acreage. Keep in mind, it is not known which of these zones are lucrative enough for production.

In summary, Triangle could have significant upside. It has very good acres in its non-operated locations, and is working with proven Bakken producers. Triangle got in early with its Station Prospect purchase. Triangle is currently not hedged. This was a very good situation with oil at $115/barrel, but with oil prices decreasing close attention to this valuation is important. Its well count will grow exponentially over the next couple of years. At the end of the first quarter of this year, Triangle had approximately one net well in production. By the first quarter of 2013, this number will increase to approximately 24 net wells.

Resolute (NYSE:REN) has acreage in five United State's resource plays:

  1. Aneth Field of the Paradox Basin (43,000 net acres)
  2. Big Horn Basin (70,000 net acres)
  3. Hilight Field (45,000 net acres)
  4. Permian Basin (7900 net acres)
  5. Williston Basin Bakken (34,000 net acres)

Although Resolute has been a play on its CO2 flood of Aneth Field, it is increasing its Bakken program. It has acreage blocks in three North Dakota areas:

  1. New Home has 23,528 net acres (NW Williams County)
  2. Paris has 8425 net acres (SW McKenzie County)
  3. Shep has 1423 net acres (West McKenzie County)

Seven wells have been drilled:

  • Four wells producing
  • One well cleaning up
  • Two wells awaiting frac

Of Resolute's $120 million 2011 capital budget, $42 million will be spent on the Bakken. Resolute drilled three second quarter Bakken wells. It also achieved its first meaningful production in the Williston Basin. Resolute produced 18 Mboe in the second quarter and 6 Mboe in the first quarter. Over the first six months of 2011, it has produced a total of 24 Mboe. Resolute's New Home project is a JV with GeoResources (NASDAQ:GEOI). This program has two rigs dedicated. Seven gross wells are estimated to be drilled over the remainder of 2011. Resolute's working interest averages approximately 29%. In Paris, its Watson 14-32H is producing without a pump at 40 barrels/day. A second well, Forest 14-2H is scheduled for completion in August. Resolute is not a bad play. Aneth Field should continue to generate cash flow, helping to fund Williston Basin and Permian development.

Magnum Hunter Resources (NYSE:MHR) had a 52 week high of $8.66/share. It currently sells for $4.04. It has a forward PE of 13.81. Analyst estimates have Magnum growing 1450% next year. It has operations in three very good plays:

  1. Williston Basin 80623 net acres
  2. Appalachian Basin 369238 net acres (58048 net acres in Marcellus)
  3. Eagle Ford 24872 net acres

Magnum Hunter's acreage in the Marcellus and Eagle Ford is impressive. It is not just a play on the Bakken/Three Forks. Of the 80,623 net acres in the Williston Basin, not all are in the United States. This is important as well results differ in Canada as IP rates and EURs diminish. Its acreage breaks down into four areas:

  1. Canada 38,700 net acres with 72% avg. working interest
  2. Divide County 24,500 net acres with 10% avg. WI
  3. W. Burke County 11,700 net acres with 30% avg. WI
  4. E. Burke, Renville, Bottineau Counties 6450 net acres with 50% avg. WI

Magnum has a possible 486 net locations in the Williston Basin. It has unrisked net resource potential of 114 MMBoe.

Magnum announced on August 19th, that its acquisition of Eagle Operating Inc. did not close. Magnum would have purchased Eagle for a total of $57 million. Two pending lawsuits that would have been resolved will continue.

Magnum's Williston Basin properties have 450 Boe/d of production shut in due to poor weather. It also has 3.4 net wells awaiting completion. 27.5% of 2011 cap ex will be spent to drill 9.4 wells. Magnum reports it is seeing better well results due to better frac stimulation techniques. In March, it drilled its best well with a peak rate of 1236 Boe/d. Its average IP rates are 482 Boe/d in North Dakota, and 333 boe/d in Saskatchewan. Magnum Hunter met second quarter estimates.

In summary, Magnum has some very good assets. It is a name to be careful of, as it has aggressively acquired companies. Its balance sheet is not nearly as good as Triangle'.

Renegade Petroleum (OTC:RPTTF) has 95,221 net undeveloped acres. 95% of its current production is light oil. Renegade's acreage is divided into 6 areas:

  1. SE Saskatchewan and North Dakota Mississippian 47,553 net acres
  2. North Dakota Bakken 23,284 net acres
  3. Viking Dodsland 12,608 net acres
  4. Stoughton/Huntoon Bakken 5884 net acres
  5. Spearfish Waskada 3168 net acres
  6. Other 2724 net acres

Renegade has 125 possible net drilling locations. Most of these locations are in the Viking Dodsland. Renegade has drilled one horizontal well on its North Dakota Bakken acreage.

Renegade's second quarter earnings were significantly better when compared to the second quarter of 2011. Oil and natural gas sales increased by 138%. It lost one cent/share compared to a seven cent/share loss in the second quarter of 2010. Crude oil average daily production increased 76%. Natural gas average daily production increased 177% and natural gas liquids increased by 650%. The average realized price for liquids increased 33%.

Renegade is an interesting company. The majority of its production is coming from Viking Dodsland which offsets much lower production (30 day IP of 50-60 Bbls/day) with significantly lower well costs ($900,000 to $1,200,000). Its SE Saskatchewan well economics are like Viking's. 30 day IP rates are 50 Bbls/day. Well costs are an estimated $1,100,000. Only 2% of Renegade's cap ex will be spent on North Dakota this year. I would guess wells will be more productive in the North Dakota Bakken, but it is difficult to know without Renegade well results.

This is the first part of a four part series on small oil companies with acreage in the North Dakota/Montana Williston Basin. I believe the market has already priced this sector for a recession, and because of this, oil names are a value. Some of these companies are more than 50% off from March highs. If the U.S. economy posts 1% growth for the third and fourth quarters, it would not be a surprise if oil not only stayed above $80, but went as high as $90/barrel. Brent will continue to have pricing strength as it could take 12 to 24 months to have meaningful Lybian production. It is difficult to get into a market that continues to sell off, but it is also the perfect time to start positions in quality small cap names.

Disclosure: I am long TPLM, KOG, BEXP.

Additional disclosure: This is the first part of a series on small cap Williston Basin Bakken names. It is only a list and not a buy recommendation. Of the names listed I own TPLM calls, KOG, and BEXP. Other names I like listed in the article are SM, EOG, and WLL.

Continue to Part II >>

Source: Market Pullback Creates Value In Small Bakken Oil Companies, Part I