Bakken/Three Forks Mid Caps Find Promising Prospects, Part III

 |  Includes: BTE, CLR, LINEQ, NFX, OAS, SM, STO, WLL
by: Michael Filloon

<< Click to view Part II

In the third of a three part series I will complete an overview of mid cap oil producers in the Bakken / Three Forks. In the first two parts I started each article with a companies I believed to be better placed going forward than its competition. Brigham (BEXP) in part one is a pure play with very good acreage, management and technology. Much of the same could be said for Whiting (NYSE:WLL) who has a majority position in the Sanish Field, and has a much larger acreage position than that of Brigham. Whiting is not a pure play but is the number two oil producer in North Dakota, the number three producer in Oklahoma, and the seventeenth producer in Texas at the end of 2010.

The third company I will highlight is Continental (NYSE:CLR). It is the number one oil producer in the Williston Basin. Although this article is focused on the Bakken / Three Forks, Continental does have some good acreage outside of the Williston Basin. It has acreage in the Anadarko and Arkoma Woodford. I would encourage looking into the Anadarko, as its liquids acreage is quite good. The second quarter of 2011 Continental's production was:

  1. North Dakota Bakken 40.2%
  2. Red River 26.5%
  3. Montana Bakken 10.2%
  4. Other 9.6%
  5. Anadarko Woodford 7.5%
  6. Arkoma Woodford 6%

Of Continental's mid-2011 421 MMBoe proved reserves, 49% is located in North Dakota and 9% is located in Montana. Continental has 901370 net acres as of June of this year. Continental's second quarter Bakken production was 27177 Boe/d. It has 23 operated rigs running. It has EURs (estimated ultimate recovery) of 603000 Boe/Bakken well. This is an upward revision from 518000 Boe/Bakken well earlier in the year. Continental estimates its ECO-Pad has the possibility of drilling four middle Bakken and four Three Forks wells, but a total of eight wells per 1280 acre spacing. In my earlier article, Brigham is planning a 5.5 density pattern as opposed to the current 4 of Continental's and Whiting. Continental is currently test drilling the second Three Forks bench. If this is successful, there is a very good possibility of further tests of the third and fourth benches. Recent ECO-Pad work has proved productive. Continental has five completed ECO-Pad projects in which four wells have been completed on a pad. The average result / four wells are:

  1. Glasoe / Raymo IP rate (Initial Production Rate) of 940 Boe/d
  2. Kennedy / Miles IP rate of 1377 Boe/d
  3. Arthur / Hegler (#1) IP rate of 1088 Boe/d
  4. Bridger / Bonneville (restricted rate) IP rate of 745 Boe/d
  5. Carson Peak / Morris IP rate of 1948 Boe/d

The Glasoe / Raymo results were from southeast Divide County while the others were from McKenzie and Dunn Counties, and this is the reason for the lower production. Continental has also had some good and consistent numbers in Richland County, Montana. IP rates from this area are:

  1. Rognas 2-22H had an IP rate of 1013 Boe/d
  2. Tolksdorf 1-1H had an IP rate of 642 Boe/d
  3. Big Sky 3-35H had an IP rate of 1163 Boe/d
  4. Clayton 3-20H had an IP rate of 1118 Boe/d
  5. Amestoy 1-6H had an IP rate of 836 Boe/d
  6. Earl 2-25H had an IP rate of 1024 Boe/d
  7. David 2-20H had an IP rate of 831 Boe/d

Continental is a very good company. It believes the Bakken has 20 billion barrels of oil and 4 billion barrels of natural gas. If correct, this would more than double the United States' current reserves. When Continental wrote its paper on the subject, it was estimating wells with EURs of 500 MBoe. Since then it has increased this well estimate to 608 MBoe.

Baytex (NYSE:BTE) is a very good company. It has a dividend of 5.1%. This name rarely comes up in Bakken discussions, and should be a consideration for investors. Baytex was converted back to a corporation at the end of 2010. Its business is split into three parts:

  1. Canadian Heavy Oil
  2. Canadian Light Oil and Gas
  3. United States Bakken

Its production mix is:

  1. 70% Heavy Oil
  2. 16% Gas
  3. 14% Light Oil

Baytex has a CAGR of 8% with respect to production growth since 2006. From 2010 to 2011 production growth was 13%. Oil production growth has been faster at a CAGR of 11% since 2006. Baytex had an oil production growth of 20% from 2010 to 2011. Baytex has some very good prospects with respect to its heavy oil projects. It also has 132000 net acres in the Bakken / Three Forks. 95% of these acres are in North Dakota and the other 5% are in Canada. 55% of these acres are operated. Baytex wells here average a 30 day IP of 420 Boe/d. Its EURs are 420 MBoe/well, and well costs are estimated $5.7 million. It has the possibility of 100 to 300 net locations in the Bakken / Three Forks. This is based on either one or three wells per 1280 acres. This estimate seems quite low as four well pad drilling has already occurred in Divide County. If a three well average is obtained, 253.8 million barrels of oil. It plans to drill 22 horizontal wells here in 2011. Baytex doesn't have the best acreage in the Bakken nor will it have the largest production, but it is a company with a very large resource base that should provide resource for a very long time. It is a very good investment, especially at this level.

Newfield (NYSE:NFX) has a $1.9 billion 2011 cap ex. 100% of this cap ex will be spent on liquids plays. This is divided into five areas:

  • 34% Rockies
  • 33% Mid-Continent
  • 16% International
  • 15% Onshore Gulf Coast
  • 2% Gulf of Mexico

2011 production is divided:

  • 40% Mid-Continent
  • 22% Rockies
  • 15% Onshore Gulf Coast
  • 12% International
  • 11% Gulf of Mexico

Newfield expects it will increase its domestic oil production by 50% in 2011. Newfield has a CAGR of 19% in liquids production. It has a very good list of projects:

  • Uinta Basin (250000 net acres)
  • Granite Wash (44000 net acres)
  • Woodford (172000 net acres)
  • Eagle Ford (300000 net acres)
  • Southern Alberta Basin (280000 net acres)
  • Williston Basin (174000 net acres)

Newfield has a 5 rig program in the Bakken / Three Forks. Over 40 wells are planned here this year. IP rates of the last three wells averaged 3700 Boe/d. Results like this place Newfield in the upper echelon of Williston Basin players. It has five areas of interest in the Bakken / Three Forks.

  1. Big Valley
  2. Catwalk
  3. Westberg
  4. Aquarium/Watford
  5. Lost Bear

A recent Westberg well produced an IP rate of 4468 Boe/d. Two recent wells in the Aquarium / Watford had IP rates of 3417 and 3311 Boe/d. These results are very good and depending on the 30 day IP could produce EURs of 800 MBoe. Newfield is still assessing its Big Valley acreage in southwest Divide and northwest Williams Counties.
In summary, Newfield is a very good company in productive plays. It is also well hedged this year (80% oil and 70% natural gas). Newfield is increasing liquids production and is focusing capital to continue to do so.

Linn Energy (LINE) has a very good dividend at 7.4%. It has interests in five areas:

  1. Mid-Continent- 62% of reserves
  2. Permian Basin-19% of reserves
  3. Michigan- 9% of reserves
  4. California- 7% of reserves
  5. Williston Basin- 3% of reserves

Linn Energy is the largest oil exploration and production MLP/LLC. Since 2006, it has had a CAGR of 115% in production growth. Annualized distributions have had a CAGR of 73% over the same time frame.

Linn Energy's acreage in the Williston Basin is non-operated. It has the potential of 800 future drilling opportunities with an estimated working interest of 10%. Linn Energy is working with some of the best operators in the Bakken / Three Forks:

  1. Whiting
  2. Newfield
  3. Oasis (NYSE:OAS)
  4. Brigham
  5. SM Energy (NYSE:SM)
  6. Continental

The majority of Linn Energy's Williston Basin acreage is in Mountrail County. This is where some of the best wells have been drilled in the Bakken / Three Forks. At the end of June of this year, its Williston Basin acreage was producing 2300 Boe/d. It has 17000 net acres in the play. Reserve life is estimated at 17 years.

The Bakken is a very small portion of Linn Energy's portfolio. Its acreage in the Granite Wash and Permian Basin are both very good plays. Linn Energy's size is a plus as it has the capability of making further purchases of companies with assets that will fit its current business. I like Linn Energy at these levels. It has a very good and stable dividend with bullish prospects for growth.

In summary, these are all good ways to play the Bakken / Three Forks. These companies not only have good acreage here, but also in other very good unconventional United States areas. As far as mid caps are concerned, I feel Brigham is the best way to play the Williston Basin, followed by Whiting. That said, there are still other very good companies in the region as those listed here.

Disclosure: I am long BEXP.

Additional disclosure: This is the third part of a three part series on Bakken / Three Forks Mid Caps. It is not a buy recommendation. An investor should thoroughly study any investment before purchasing stock. If there are any questions or concerns feel free to email me.