I recently covered, in a four-part series, small and micro caps in the Bakken. (See Part 1, Part 2, Part 3, and Part 4.) I believe Williston Basin operators are cheap on valuation, based on a large drop in share price after U.S. GDP revisions. Since this call, recent gains across the board have backed this assertion. Companies like Triangle Petroleum (NYSEMKT:TPLM) and Kodiak Oil and Gas (NYSE:KOG) are up significantly over the past week, and look to keep some momentum going forward. More importantly for the price of oil was Goldman's rumored purchase of 3 million barrels of February 2012 WTI oil at a strike price of $88. This not only is bullish on the price of oil, but the world's economic environment. Oil, along with other commodities, should continue to have price support, based on an inflationary environment.
In my opinion, Brigham (BEXP) is the best play on the Williston Basin Bakken. There are competitors that could grow more over the next few years, but Brigham seems to be the better placed, with respect to acreage. Brigham has 375,800 net acres in the Montana/North Dakota Bakken. Of this, 35,200 net acres are in Ross. This area has outperformed Brigham's acreage, and might be the best acreage in the Williston Basin.
The best way to understand Brigham is in its numbers. Brigham estimates its cost per well is $8.9 million. An estimated ultimate recovery (EUR) of 600 MBoe will produce a NPV of $8.7 million using August 4th NYMEX strip pricing. Expectations are an undiscounted payback period of 1.9 years. Expectations for a total number of wells using today's estimates place the number at 2205. Brigham plans to increase its rig number from 10 to 12. With 12 rigs in the first quarter of 2012, it will have a gross annual run rate of 132.
Brigham's acreage breaks down into three areas: Ross, Rough Rider, and Montana
Looking at these areas, they can be broken down into possible EURs. Ross wells are by far the best with an average Initial Production (IP) rate of 3328 Boe/d using 21 long lateral high frac stage wells. Variance in 24 hour IP rates can create problems in modeling possible EURs. Because of this I will list 30-day IP rates of Brigham wells in Ross, listing earliest to most recent:
- Strobeck 27-34#1H: (Three Forks) 18 stage produced 989 Boe/d
- Anderson 28-33#1H: 24 stage produced 1346 Boe/d
- Liffrig 29-20#1H: 29 stage produced 1082 Boe/d
- Jerome Anderson 15-10#1H: 30 stage produced 1146 Boe/d
- Sorenson 29-32#1H: 27 stage produced 1909 Boe/d
- Jack Cvancara 19-18#1H: 36 stage produced 1800 Boe/d
- Ross-Alger 6-7#1H: 32 stage produced 1465 Boe/d
- Wright 4-33#1H: 38 stage produced 1322 Boe/d
- Domaskin 30-31#1H: 38 stage produced 1882 Boe/d
- Clifford Bakke 26-35#1H: 38 stage produced 2328 Boe/d
- Roger Sorenson 8-5#1H: 38 stage produced 1120 Boe/d
- Arvid Anderson 14-11#1H: 38 stage produced 1330 Boe/d
- Hospital 31-36#1H: 33 stage produced 785 Boe/d
- Brown 30-19#1H: 37 stage produced 1324 Boe/d
- Afseth 34-3#1H: 38 stage produced 618 Boe/d
- Cvancara 20-17#1H: 36 stage produced 1577 Boe/d
- Sorenson 29-32#2H: 38 stage produced 1850 Boe/d
- Esther Hynek 10-11#1H: 31 stage produced 828 Boe/d
- Vachal 3-34#1H: 38 stage produced 1304 Boe/d
Wells with a 30 day IP of 1200 Boe/d could produce EURs of 800 MBoe. The Clifford Bakke 26-35#1H well production is almost twice that. Brigham's average 30 day IP rate for North Dakota Bakken and Three Forks wells is 1062 Boe/d. Its Montana acreage has shown promise of late. Its Johnson 30-19#1H produced an IP rate of 2962 Boe/d, with a 30 day average of 803. It is quite early in Brigham's Montana development, so more wells will have to be drilled to know its true value. Brigham has another three Bakken wells around the state line that had IP rates 2000+ Boe/d.
Brigham states its average EURs are 600 MBoe. I believe this estimate is low. EUR differences of just 100 MBoe result in:
- Net PV10% increases from $8.7 MM to $11.7 MM
- ROR increases from 51% to 77%
- Undiscounted payout decreases from 1.9 years to 1.5 years
- Life of the well increases from 31.8 years to 33.5 years
Brigham's largest land position is in the Rough Rider. Depending on location, the Rough Rider can have average to good production. To the northwest of this play, results have not been exceptional. Continental's (NYSE:CLR) Obert 1-13H had an IP rate of 896 Boe/d. Looking at the western aspect of Brigham's acreage in the Rough Rider, its State 36-2#2H is a Three Forks well and had a 30 day IP 874 Boe/d. In the south west Kodiak (KOG) has been active in de-risking. Its Koala (Three Forks) 9-5-6-12H3 had a 30 day IP rate of 1072. If Kodiak's next couple of wells in the Rough Rider have 30 day IP rates north of 1200 Boe/d, we could see this legitimizing this part of the play. In doing so, all players in the area will benefit. Brigham already has several very good wells with respect to the Bakken pay zone.
Looking at the first quarter of this year, there has been a general slowing of well completions in the Williston Basin. The total number of wells drilled using Brigham and its peers is as follows:
- 1st Quarter of 2010-98 total wells
- 2nd Quarter of 2010-164 total wells
- 3rd Quarter of 2010-190 total wells
- 4th Quarter of 2010-93 total wells
- 1st Quarter of 2011-22 total wells
These statistics are telling of the weather conditions in the Williston Basin. Only Whiting (NYSE:WLL) drilled more wells (5) in the first quarter of this year than Brigham did, while EOG Resources (NYSE:EOG) was the only company to drill as many (3).
Over the last few quarters, all of the Bakken oil producers have commented on rising costs. In my opinion, Brigham has done a much better job of managing this. Costs associated with completions have grown the most, but Brigham has been able to cut other costs to help manage this. Density drilling decreases costs while increasing production. Rough Rider wells have shown promise, and Brigham plans a four well density pattern this quarter. In the fourth quarter, it will try a 5.5 well density pattern. It should be noted that both Continental and Kodiak have planned four well density patterns. The key points to Brigham's Brad Olson wells are:
- Downtime removed
- The 2nd Brad Olson well flowed double the oil as the 1st before being placed on a pump
- The 3rd well flowed 1.3 times the oil of the first before being placed on a pump
Pad drilling is also beneficial, as it:
- Minimized environmental footprint
- Reduces costs
- Decreases time for completions
- Allows for the use of centralized tank batteries
Brigham states it should have continued recovery factors going forward in the Rough Rider. The potential for increased density drilling could provide for lower costs/higher production. Brigham also is planning additional methods in Ross. It has stated options for refracs and secondary recovery methods are possible. Most importantly is Brigham's list of possible other targets for drilling in Ross:
- Red River
- Mission Canyon
This is the first I have heard about other possible targets, from Brigham, other than the Bakken and Three Forks. Brigham states they have had four Red River discoveries in four attempts to date. All of this coupled with a possible 5.5 well spacing in Ross could increase recoveries significantly. If there are increased payzones in Ross and this can also be done in the Rough Rider, we could see a very large increase in the value of North Dakota/Montana acreage.
Continuous acreage blocks will provide further operational efficiencies:
- Multi-well pad development
- Stacked locations allow for zipper fracs
- Efficient infrastructure such as pipelines
- Will provide for 10% to 20%/well in cost savings
I would like to point out that Brigham is not the only company using these technologies, but they are already realizing savings. Zipper fracs allow for simultaneous fraccing and plug & perf operations. One well can be fracced while wireline is performed on another. Here is Brigham's zipper frac estimates:
- Single well frac is approximately 9 days/well
- A two well zipper frac has an average of 5.3 days/wells(75% improvement)
- A three well zipper frac has an average of 3.9 days/well(130% improvement)
Brigham has 430 miles of oil, produced water, fresh water and gas gathering lines. This will reduce costs significantly, but most importantly will allow for better efficiencies during winter weather. In summary, Brigham is an easy investment to like. It is reducing costs while increasing production and looks to be able to continue doing so for some time. In my opinion, Brigham is the best way to play the Bakken.
Enerplus (NYSE:ERF) is a $5.27 billion oil production company with interests in Canada and the United States. Operational areas in the U.S. include North Dakota, Montana, Pennsylvania, and West Virginia. Enerplus' production breaks down into five categories:
- Tight and shallow Canadian gas-39%
- Bakken/tight oil-20%
- Crude oil waterfloods-18%
- Other oil and gas-18%
2011 capital spending is 62% liquids. By area this capital will be spent on:
- Crude oil waterfloods-18%
- Tight and shallow gas-13%
I like the direction Enerplus is going as 67% of cap ex is being spent on two premier U.S. plays. It has 74,000 net acres in Fort Berthold and 110,000 net acres in the Marcellus. It estimates production growth from Fort Berthold will increase by 20,000 Boe/d in four years. This would be an increase of 300%. The Bakken acreage will be self funding in one to two years. Net operating income will reach $500 million in four years. F&D costs are estimated between $10 to $19/barrel of oil equivalent. Enerplus has a large concentrated acreage in the Bakken/Three Forks. Four rigs are running and $230 million will be spent here in 2011. 22 wells are planned this year. Enerplus expects to double production by 2011 exit. 90% of its Bakken acreage is operated. Enerplus has completed five long lateral wells with an average 30 day IP rate of 1,230 bbls/d. This would provide EURs of over 800 MBoe. This type of estimate will provide a payout period of less than one year. Enerplus is also planning to drill from wells pads to decrease costs and footprint.
In summary, Enerplus is a very good way to play the Bakken/Marcellus. It provides very good income with its 7.6% dividend. If Enerplus can continue to produce 30 day IP rates above 1,200 Boe/d it will have very good prospects.
Denbury (NYSE:DNR) is known for enhanced oil recovery. A recent acquisition provided acreage in the Bakken where it will be attempting primary recovery. Denbury believes over the next ten years it can maintain a 13% to 15% CAGR in EOR. From 1999 to 2010, Denbury achieved a CAGR of 33%. Denbury estimates its Bakken acreage will have EUR of 525 MBoe. Denbury estimates it will cost $7.5 million per well. At $80 NYMEX, it will have estimated gross margins of $46.40/barrel. Denbury has 266000 net acres in the Bakken. Its proved reserves are 73.6 MMBoe. In the second quarter of this year, Denbury had production of 7,626 Boe/d. It plans to exit this year with 8400 Boe/d.
Of its $1.35 billion capital program for 2011, it will spend $400 million on the Bakken. Denbury hedges 80% of its production. For the second half of this year, it has support at $70/barrel and ceilings of $100/barrel. The Bakken is a significant part of Denbury's oil production, but not the majority. Of its 65600 Boe/d production in 2011, only 8400 Boe/d will come from the Bakken. Of the 20 wells drilled in 2011, wells in the its Cherry play have done the best. The best performing well had a 30 day IP of 886 Boe/d. Many of these wells have been done with fewer stages than comparable wells worked by competitors. I would like to see Denbury's IP rates increase with some word of how it will contain costs in the short term.
In summary, all three of these mid caps are active in the Williston Basin Bakken/Three Forks. As I stated earlier, Brigham is the purest play of the group and might be the best investment in the entire play. For those looking for income, Enerplus and its 8% dividend would fit nicely into a portfolio. Those with good long-term growth, with a "green" way to play oil may be interested in Denbury. Either way all three are good investments.
Disclosure: I am long KOG, TPLM, BEXP.
Additional disclosure: This is a list of mid cap oil producers in the North Dakota/Montana Bakken. This is just a list, and not a buy recommendation. If you have any questions or concerns, feel free to email me.