Market Pullback Creates Value In Small Bakken Oil Companies, Part II

by: Michael Filloon

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In the first part of this four part series, I covered four Bakken oil companies that have value following the market sell off. The timing could not have been better as Triangle Petroleum (NYSEMKT:TPLM) was rated a buy and given a $10 price target by Canaccord. I believe Canaccord is right about its price target. I covered Triangle's non-operated acres in the first article, but where Triangle has value is in its operated Montana leasehold.

Triangle has a market cap of $202.69 million. Of this market cap, $110 million is cash with zero debt. This leaves $92.69 million for its 72050 net Williston Basin acres. This provides a value per acre of $1286, without assigning any value to its 413000 net acres in Nova Scotia. I believe Triangle's holdings in the Williston Basin are worth $3000/acre. Using this valuation, Triangle would have a market cap of approximately $326 million. In short, Triangle's price per share would be north of $7.50.

Triangle's Station Prospect in Roosevelt County, Montana, could be a very good play. The reason is well results from companies just south of Triangle's acreage:

  • Brigham's (BEXP) Swindle 16-9 had an IP rate of 1065 Boepd
  • Brigham's Rogney 17-8 had an IP rate of 909 Boepd
  • Brigham's Gobbs 17-8 had an IP rate of 1818 Boepd
  • Brigham's Charley 10-15 had an IP rate of 1069 Boepd
  • Zenergy's Beulah Irene 19-18H had an IP rate of 1206 Beopd
  • Continental's (NYSE:CLR) Obert 1-13H had an IP rate of 896 Boepd (Three Forks)
  • Zenergy's Amazing Grace 11-2H had an IP rate of 1168 Boepd

These are very good results and it is possible that Triangle could see 2 Bakken and 2 Three Forks wells/pad. A third Bakken well is also possible which would provide five wells per 1280 spacing. I would guess the middle Bakken wells will have EURs of 500 MBoe with the Three Forks producing 350 MBoe. Triangle has serious upside from here, but remember this is a speculative unhedged play.

Abraxas (NASDAQ:AXAS) has done a very good job of purchasing acreages in some of the best plays in the United States. Its current properties are:

  • Williston Basin (20835 Net Acres)
  • Niobrara (17800 Net Acres)
  • Eagle Ford (12073 Gross Acres)
  • Alberta Basin (10000 Net Acres)
  • Pekisko Fairway (9120 Net Acres)
  • Texas Oil Plays (8700 Net Acres)

Abraxas estimates it will drill 35 net wells in 2011. Of the $60 million Abraxas plans to spend in cap ex, $25.5 million will be spent in the Williston Basin. Its Williston Basin acres are located in:

  • Harding/Rough Rider 7010 net acres
  • North Fork/Nesson 3540 net acres
  • Carter 3200 net acres
  • Sheridan 2340 net acres
  • Nesson 2270 net acres
  • Elkhorn Ranch/Lewis & Clark 2035 net acres
  • Elm Coulee 440 net acres.

In the North Fork/Nesson, Abraxas had a very good operated well. The Raven 26-35 1H had an IP rate of 1705 Boe/d. Abraxas has 60% working interest. Its first operated middle Bakken well is the Stenehjem 27-34 1H. Its IP rate of 600 Boe/d was averaged over 44 days. These well results are quite good, which bodes well for the company. Abraxas has the potential for 130 net locations in the Williston Basin. Its North Fork/Nesson acres have very good potential. Abraxas plans 4 Bakken and 4 Three Forks per 1280 acre unit. The North Fork/Nesson will produce 18.2 net locations from its current 3540 net acres.

Abraxas' well dynamics are interesting. Drilling and completion/well is estimated to be $9 million. This decreases to $7.5 million if pad drilling is used. Abraxas' bottom line numbers could continue to improve with new technologies. EURs (Estimated Ultimate Recovery) are 500 MBoe. Of this number, 390000 barrels will be oil and 45 MBbl will be natural gas liquids.

Abraxas is working with good operating partners in the North Dakota and Montana Williston Basin:

  • Continental: Abraxas has 4% working interest in 5 total wells with 4 on production.
  • Denbury (NYSE:DNR): Abraxas has 2% to 6% working interest in 2 wells with 1 on production and the other on flow back.
  • Brigham: Abraxas has 1% to 7% working interest in 3 wells with 1 on production and two completing.
  • Whiting (NYSE:WLL): Abraxas has 13% working interest in 1 well on production.
  • XTO Energy (NYSE:XOM): Abraxas has 1% working interest in 1 well currently drilling lateral.
  • TAQA: Abraxas has 36% working interest in 1 well waiting on completion.
  • Petro-Hunt: Abraxas has less than 1% working interest in 1 well drilling vertical.

Abraxas is mainly working as a non-operator for cash flow in the Bakken to fund its operated program. It has purchased a drilling rig and plans to spud its first well this fall. Abraxas has value. It currently sells for 7.56 times forward earnings. When coupled with growth, this company is very cheap.

Credo Petroleum (NYSEARCA:CRED) is a play on five resource areas:

  1. Central Kansas Uplift (150000 gross acres)
  2. NW Oklahoma (75000 gross acres)
  3. Southern Oklahoma (10000 gross acres)
  4. Williston Basin (7000 gross or 6000 net acres)
  5. Texas Panhandle (3000 gross acres)

Credo has shifted focus to oil and increased production significantly. Its Williston Basin acreage is on the Ft. Berthold Reservation. Although this is a small position of just 6000 net acres, it is just west and south of Parshall Field. Parshall Field has had excellent results and could prove very lucrative for Credo. Credo has decided not to operate these wells, but has been a non-operator in a total of 7 wells this year and expects another nine to be completed before the end of 2011. It working interest has been between 1% to 3%. Credo states it has an average 140 Boepd share to date of initial production. Its Enerplus Ethan Hall reported an IP rate of 3732 Boepd. The majority of wells to be completed this year will have working interests of 12% to 20%. It has managed to change its business from gas to liquids which has provided much needed revenue. I like Credo as an investment, but think Triangle and Abraxas are better investments.

US Energy Corp. (NASDAQ:USEG) is a play on the Williston Basin, but it also has other interests. Its businesses are:

  • Oil and gas production
  • Molybdenum
  • Geothermal
  • Uranium
  • Real Estate

These different businesses are intriguing, but are also very different. Because of this US Energy would be better served to divest and become a pure oil and gas production company. US Energy has been adding to its oil and gas businesses since 2007. Here are its interests:

  • In 2007, US Energy entered into an agreement with Petroquest. This agreement runs to September of 2011, in which it can acquire up to 20% three different Gulf Coast areas.
  • In April of 2008, it entered into an agreement with Yuma Exploration and Production. It is estimated that US Energy's interest may increase 50000 net acres in the Gulf Coast.
  • In April of 2009, it entered into an agreement with Houston Energy with interests in South Louisianna and the Permian.
  • In August of 2009, USEG entered into an agreement with Brigham. This agreement was for 5500 net acres in the Williston Basin. This has been a very good non-operated agreement for USEG.
  • In November of 2010, US Energy entered into an agreement with Cirque Resources. It received 40% working interest in 6200 net acres on the San Joaquin Basin.
  • In December of 2010, it entered into an agreement with Zavanna for 6200 net mineral acres in the Williston Basin.

I have not been completely sold on US Energy. The reason for this is not its inability to earn, but its business lacks direction. Due to the very good run in oil and the lucrative non-operator contracts still available in the Williston Basin, USEG may be better served if it were to concentrate on that portion of its business.

American Standard Energy Corp. (ASEN.OB) as of the end of last year had interests in three very good plays:

  1. Williston Basin (30800 net acres)
  2. Permian (6500 net acres)
  3. Eagle Ford (1200 net acres)

Second quarter of 2011 revenues showed sequential growth of 33.2% over the first quarter of 2012. Revenues year over year increased 106.5% when compared to the second quarter of 2010. Its 20.1 net wells in the Permian produced 558 Boepd. Its .81 net wells in the Bakken produced 125 Boepd. It participated in .2 net wells in the Eagle Ford.

American Standard is very interesting as it has 100% working interest in the Permian, and has acquired significant Williston Basin Bakken net acres in a very short time. There is just one analyst covering this stock. This analyst estimates American Standard will make a penny per share this year. In 2012 American Standard is estimated to earn 32 cents per share, or a 3100% increase. The current stock price translates to a forward PE of 16.41. If American Standard can maintain even a fraction of the growth it is expecting in 2011 and 2012, it will be a very good investment. Careful with this stock as it is speculative and I am unsure of the exact location of its acres.

I think there is value in oil and gas names going forward. The stocks listed have seen large decreases in market cap over a very short period of time. Starting positions in high growth companies could prove lucrative, as they have priced in the worst case scenario.

Disclosure: I am long TPLM, BEXP.

Additional disclosure: This is the second part of a four part series on small oil companies in the Williston Basin. It is just a list and not a buy recommendation.

Continue to Part III >>