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

by: Michael Filloon

<< Return to Part III

GMX Resources (GMXR) recently added 11449 net acres in the Bakken increasing its total to 35524. I have said before that GMXR was late to the Willston Basin. This is true, but I have to commend its aggressiveness. This added acreage increased net operated locations to 172. GMXR's new acreage location and cost are:

  • Billings/Stark-9608 net acres at $2500/acre
  • McKenzie/Billings-1684 net acres at $2211/acre
  • Fee/Leasehold acquisition-157 net acres at $1635/acre
  • Total acquisition of 11449 net acres at $2446/acre

GMXR's operated acreage has 14 submitted permits in McKenzie, Billings and Stark Counties. Another 14 will be submitted in the first quarter of 2012. Its Wock 21-2-1H spud July 7th at an 18500 foot depth. It had a 10700 foot lateral with a projected 41 stage frac planned for September 22nd. GMXR is participating in two non-operated wells with another 6 already permitted. Its non-operated well program has begun with:

  • Slawson Taboo 1-25-36H with 25% working interest
  • Whiting (NYSE:WLL) Marsh 21-16H TFH with 2.08% working interest
  • Continental (NYSE:CLR) Nyla 1-17Hx with 4.1% working interest
  • Burlington (NYSE:COP) Logan 24-8H with 16.46% working interest
  • Burlington COP Rose 28-1H with 8.85% working interest
  • Burlington COP Hillman 31-29H with .52% working interest
  • Burlington COP Jair 31-28H with .39% working interest
  • Burlington COP Wilson 31-6H with 13.7% working interest

Five of these wells do not have a current spud date or proposal as it is still in a planning stage. GMXR's focus area is in the Little Knife of the Greater Lewis & Clark. This has been a very good play with respect to the Bakken/Three Forks.

One point I would like to add is the presence of three permitted wells in the southeast portion of the play by Chesapeake (NYSE:CHK). Chesapeake has been very quiet about its Bakken acreage since announcing a purchase, and seems to be new to the Three Forks. Chesapeake's permits are near a few very good wells:

  • Froehlich 44-9TFH (IP rate of 2090 Boe/d)
  • Kubas 11-13TFH (IP rate of 1953 Boe/d)
  • Hecker 21-18TFH (IP rate of 3612 Boe/d)

The Little Knife had 65 well completions in 2011 with IPs in excess of 1500 Boe/d. The average well IP rate has been 2507 Boe/d. In summary, GMXR has been moving quickly with its Williston Basin and Niobrara acreage to get oil to production. GMXR spent a large dollar amount to get into these plays, and its stock has been punished. Although I am not a big fan of this company, it share price is getting to a level where there may be some value.

Voyager Oil and Gas (VOG) has approximately 30000 net acres in the Williston Basin. It participated in 18 gross wells in 2010 and plans on 70 gross wells this year. It is currently drilling or completing 40 gross wells. Voyager is an oil and gas producer, but uses a non-operated model. This model is shared by Northern Oil and Gas (NYSEMKT:NOG). The largest difference between Voyager and Northern is average well percentage held, and NOG is a Bakken pure play. Of Voyager's 40 gross wells, either drilling or being completed, it has a net interest of 1.8 net wells. Of Voyager's estimated participation in 70 gross wells in 2011, net participation is 6 net wells.

NOG's stock had been trading to the upper right corner until recently as the model had worked through lower costs. Not long ago, Streetsweeper wrote a series of articles that gave reasons to be short. An individual from Bronte Capital also addressed Bakken well depletion. No one knows for certain how long these wells will produce, and it is also possible that these will produce more oil than current EURs suggest. Northern's stock price decreased significantly as its stock already held a very high valuation. A decreasing oil price and worries of a worldwide recession pulled the stock down further. This is important as VOG was pulled down with the price of NOG, although it was not part of Northern's scrutiny. Northern Oil and Gas and Voyager Oil and Gas are somewhat insulated from an escalating price of acreage.

Northern Oil and Gas has 155000 net Bakken/Three Forks acres. Due to its non-operated program, Northern is almost like a Williston Basin producer ETF as they partner with most of the companies active in the play. It has participated in over 600 gross Bakken/Three Forks wells. 166 gross or 17.14 net wells are either drilling, waiting completion, or being completed. Northern holds working interest in 439 gross or 37.69 net producing wells. Northern estimates on average 1280 acre spacing will produce 3 Bakken and 3 Three Forks wells. This would produce 704 net wells in the Williston Basin. Northern accumulated 12700 net acres in the second quarter of this year at an average price of $1995/acre.

Since Northern can purchase smaller land position, it is able to keep land costs down, but these prices are headed upward as other companies like Triangle Petroleum (NYSEMKT:TPLM), continue to add non-operated acres. Northern has $77 million in cash and no debt. It recently increased its estimate to 40 wells spud in 2011. Northern estimates well costs of $6.5 million. Because of its non-operated status, costs per well are lower than an operator's. It plans to spend $20 million per quarter on land acquisitions. Voyager accumulated its Williston Basin acreage for approximately $1500/acre. Recent large acquisitions in the Bakken:

  • Williams (NYSE:WMB) purchased 85800 net acres in October of 2010 for $10780/acre.
  • Enerplus (NYSE:ERF) purchased 46500 net acres in September of 2010 for $9800/acre.
  • Kodiak (NYSE:KOG) purchased 14494 net acres in October of 2010 for $7600/acre.
  • Linn (LINE) purchased 12000 net acres in December of 2010 for $17000/acre.

From a cost standpoint, both Voyager and Northern are good plays. Northern seems to have exceptional value here as its well costs are lower and it has a significant position in the Bakken. Most importantly is Northern Oil and Gas' story and business has not changed. The pullback on both of these companies is over done.

Earthstone Energy (NASDAQ:ESTE) had a very good first quarter. This tiny $22 million company could be headed in the right direction. Earthstone has begun to purchase non-operated acres in Montana and North Dakota. It has three new Banks Field wells in McKenzie County. Two wells were participated with Zenergy and one with Brigham (BEXP). All three wells are on confidential status, but Earthstone has commented that all three seem successful. These wells are:

  • Zenergy's Berquist 33-28H (.18% WI)
  • Zenergy's A. Johnson 12-1H (.08% WI)
  • Brigham's Gunderson 15-22-1H (3.9% WI)

Banks Field wells drilled and awaiting completion are:

  • Brigham's Enderud 9-4 1H (5.5% WI)
  • Brigham's Enderud 9-4 2H (5.5% WI)
  • Brigham's Banks State 16-21 1H (3.4% WI)
  • Zenergy's Wold 34-27H (2% WI)

All four of these wells are expected to be on production by the end of the calendar year. Earthstone has committed to participate in four additional Brigham wells:

  • Broderson 30-31 1H (4.9% WI)
  • Garman 19-18 1H (2.6% WI)
  • Topaz 20-17 #1H (2.9% WI)
  • Samson 29-32 #1H (5.4% WI)

Drilling will be completed this calendar year on all four wells. Earthstone is also participating with Continental in its Indian Hill Field of McKenzie County. The Montpelier 1-14H has an Earthstone 4.4% working interest.

Year over year, Earthstone saw increases in both revenues and net income. 2011 basic net income per share was $.39 versus $.22 for the same quarter of a year earlier. Oil production actually decreased with a substantial jump in gas sales. Much of the increase in income comes from higher realized oil and gas prices. In summary, Earthstone seems to be doing the right things. Its working with very good partners in fields that should have very good results. Although realized prices will be lower this quarter, increased production should help to increase revenue. I think oil production will increase significantly as working interests in McKenzie County are large for a company this size.

Arsenal Energy (OTCQX:AEYIF) is a play on North American oil. Its core areas are:

  • Stanley, North Dakota (3862 net acres)
  • Lindahl, North Dakota (562 net acres)
  • Renie Lake, North Dakota (2524 net acres)
  • Edgerton, Alberta
  • Princess, Alberta

It produces 82% oil with reserves of 89% oil. As of May of 2010, Arsenal's production was 1850 Boe/d. By the end of 2011, production is estimated to be 2500 Boe/d. Arsenal's Stanley acreage is impressive as this area has out produced other areas in the Bakken/Three Forks. It is surrounded by three major oil companies:

  1. Hess (NYSE:HES)
  2. EOG Resources (NYSE:EOG)
  3. Whiting

Breaking down Arsenal's core areas by location:

  • Stanley 13 net locations
  • Lindahl 2 net locations
  • Rennie Lake 8 net locations
  • Southeast Alberta 30 net locations
  • Gas Plays 21 net locations

A recent Stanley well result was quite good and has created some upward movement in Arsenal's stock price. As it continues to work this acreage I believe results will continue to improve. The only problem is limited locations to work. I believe Arsenal is cheap and could see a significant appreciation in the short to intermediate term, but will have to see how fast it can get production going.

Kodiak Oil and Gas (KOG) is not only growing but a value at these levels. In the second quarter of 2011, Kodiak produced 2887 Boe/d. For the full year of 2011, Kodiak estimates it will produce 4500 to 5000 Boe/d. The exit rate for 2011 is estimated above 9000 Boe/d. This estimated improvement comes from a change in rig count. Kodiak is running an operated and non-operated program. The operated program had two rigs in the second quarter which will increase to five at year end. The non-operated program will increase from one rig to two. 26 net wells are budgeted for 2011, plus $10 million for pipeline infrastructure. This will allow for revenue from natural gas sales, plus decrease costs of trucking. Kodiak has been growing in acreage:

  • August of 2010-55400 total net acres
  • December of 2010-72000 total net acres
  • June of 2011-93000 total net acres

Kodiak's highest EURs are in Dunn County. It estimates 700 MBoe to 850 MBoe. There have been two large purchases in this area. Enerplus (ERF) and Williams (WMB) both paid a significant amount to have acreage next to Kodiak.

Kodiak will operate part of its Dunn County acres. The other part of Kodiak's acreage is non-operated with XTO (NYSE:XOM). Kodiak's long lateral wells here in the third and fourth quarters of 2010 were good:

  • MC #13-34-28-1H had a 30-day IP of 1082 Boe/d
  • MC #13-34-28-2H had a 30-day IP of 1259 Boe/d
  • TSB #14-21-33-15H had a 30-day IP of 877 Boe/d
  • TSB #14-21-33-16H3 had a 30-day IP of 603 Boe/d

The 3rd and 4th wells listed did not have very good initial statistics, but were hampered by poor weather. Production was curtailed as oil could not be trucked out. Kodiak has 7 wells awaiting completion in Dunn County. It estimates 4 Bakken and 3 Three Forks wells per 1280 acres.

West of the Nesson EURs are 550 to 700 MBoe. McKenzie County has also had very good production. Wells in the Koala area have had production of:

  • Koala #9-5-6-12H3 had a 30-day IP of 1072 Boe/d
  • Koala #9-5-6-5H had a 30-day IP of 1377 Boe/d
  • Koala #3-2-11-14H had a 24 hour IP of 3412 Boe/d
  • Koala #3-2-11-13H had a 24 hour IP of 3021 Boe/d

The last two Koala wells were just completed and seem to model in the 750 MBoe and 850 MBoe EUR range. Kodiak states its stateline acreage will have EURs of 400 MBoe to 550 MBoe. This is a number to remember with respect to Triangle Petroleum (TPLM) and Samson (NYSEMKT:SSN) as both have projects in the area. Kodiak is one of my favorite stocks. The reason is its ability to grow while selling for 7.5 times next years earnings.

In summary, oil and gas names have pulled back. The Bakken has had head winds starting in the fourth quarter of last year. This was one of the worst winters in recent memory which slowed trucks to a standstill. With no way to transport oil from locations, wells could only produce until the well site was full. Wells were shut in and oil completions ran behind schedule. The excessive snow led to flooding which continued to slow fluid transports and other equipment.

The first quarter was also hit with unrealized hedging losses. In early June flood waters pulled back and operations began catching up. Well shut ins were brought on line, and completions increased. Many of the Bakken players learned a lesson from the difficult winter, and have started moving ahead with pipelines and other infrastructure. Pressure pumping services used to frac wells were having significant difficulty in keeping up with time frames. This should begin to change as zipper fracs are decreasing times. Pad drilling is decreasing the amount of time needed to drill wells. 2011 capital expenditures have increased significantly to start working through inventories. The Bakken players have had a couple of difficult quarters, but it seems these companies could be turning the corner.

Disclosure: I am long NOG, KOG, TPLM calls.This is the fourth part of a group of articles on small Bakken oil producers. It is only a list and not a buy recommendation. Study companies before making an investment as large losses can happen, especially with companies linked to the price of commodities.