Bakken/Three Forks Large Caps Find Promising Prospects

by: Michael Filloon

Those who follow my articles would know I like EOG Resources (NYSE:EOG) as a large cap investment. There are plenty of reasons to be bullish on this company, but most importantly it established positions in the best U.S. unconventional plays early and cheap. EOG has a large number of drilling rigs to work these plays, and it is moving these rigs to liquids acreage from lower margin gas. The last reason to like EOG has to do with working interest. When companies like Chesapeake (NYSE:CHK) are selling non-operated portions of its leaseholds, EOG is maintaining full interest. It is planning to do this while maintaining less than 30% debt to cap ratio.

EOG Resources is the largest oil producer in North Dakota. It has 600000 net acres in the Bakken/Three Forks. Most of these leases were signed from 2004 to 2007. Its 10 rig program will drill 106 gross wells in 2011. EOG's core acreage is in Mountrail County. This is the same county Brigham (BEXP) has had its best results. EOG's most recent core area completions are:

  1. Fertile 19-29H had an IP rate of 1008 Bo/d
  2. Fertile 45-29H had an IP rate of 1223 Bo/d
  3. Liberty LR 21-36H had an IP rate of 1201 Bo/d

In eastern McKenzie County, EOG had a very good Three Forks result. Clarks Creek 3-0805H had an IP rate of 1384 Bo/d. It also has acreage in northwest McKenzie County also known as its state line project. Hardscrabble 13-3526H is in the state line project and had an IP rate 1474 Bo/d.

These Bakken/Three Forks results are quite good, but EOG also has large acreage positions in these U.S. resource plays. It is the biggest oil producer in the Eagle Ford and has 535000 net acres in the oil window. EOG has a total of 610000 net acreas when its wet and dry gas areas are included. It recently increased its Barnett combo core acreage to 195000 net acres. EOG has 131400 net acres in the Wolfcamp. The Leonard/Bone Spring position is now 108000 net acres. Its NIobrara position is 220000 net acres. These are just some of the liquids rich shales that EOG will benefit from for years. EOG is still adding to some of these positions and plans to divest some of its gas assets for this purpose.

In summary, EOG is my favorite large cap oil producer. It has been labeled a gas orientated company, but it is shifting from this to more profitable liquids. Estimates have EOG growings liquids production by 52% this year and 30% in 2012. It is able to do so because of its large number of drilling rigs. These rigs are being shifted to liquids plays and will continue to do so for some time. This is a very well managed company and should be considered as a core investment in any portfolio.

Williams (NYSE:WMB) recently made a large investment in the Bakken/Three Forks. This $925 MM acreage is just north and west of Kodiak's (NYSE:KOG) Koala leasehold. Kodiak had two very good wells in this area, which is also near acreage of these operators:

  • EOG Resources
  • Enerplus (NYSE:ERF)
  • Continental (NYSE:CLR)
  • Burlington Resources (NYSE:COP)
  • Marathon (NYSE:MRO)

It should be also be noted that Enerplus spent $456 million for this acreage. At the end of the second quarter of this year, Williams gave an update on its Bakken/Three Forks acreage. Production had almost doubled from the first quarter at 4000 Boe/d. It has three rigs and plans to add two more before year's end. Williams also inked a deal with Halliburton (NYSE:HAL) on a stimulation agreement. Most importantly, Williams is now the operator of the acreage. Williams estimates each well will produce reserves of 710 MBoe. With NYMEX oil price at $95/barrel, it estimates a net cash margin of $52.55.

Williams is in the process of creating two companies from its existing business structure in 2012. The exploration and production company will be WPX Energy. The Bakken/Three Forks is a very small portion of the overall business, but it would be a significant portion of WPX Energy after the spin off.

Hess Corp. (NYSE:HES) is a very large oil denominated company. It has been in the North Dakota Bakken/Three Forks since 1957. Hess Corp. currently has more than 900000 net acres in North Dakota. It has an 18 rig program this year. Hess Corp. has operations in Tioga, Williston, Keene, Fryburg, and Newburg. It is currently the number one gas producer and number three oil producer in North Dakota with over 40000 Boe/d. It also operates the Tioga gas plant. From 2010 to 2015, Hess Corp. estimates production will have a CAGR of 40%. Although, this is a small portion of the company's overall production, it is still significant as Hess Corp. has one of the best positions in the Bakken/Three Forks.

Marathon (MRO) has 410000 net acres in the Bakken/Three Forks. 30 day IP rates have averaged 325 to 700 Boe/d. Marathon EURs are 350 to 580 MBoe. It estimates 2000 to 2250 gross wells with 420 to 640 acre spacing. This seems conservative considering where most of its acreage is. Marathon's core acreage is in Mountrail and Dunn counties (possible 4 middle Bakken and 4 Three Forks wells). Another area that Marathon has significant exposure is in northwest Williams and southeast Sheridan counties. Well results from its core acreage is:

  • Danks USA 11-3H: IP rate of 1300 Bo/d
  • Pennington USA 14-22H: IP rate of 1400 Bo/d
  • Elk USA 11-17H: IP rate of 1400 Bo/d
  • Guenther 31-29H: IP rate of 1200 Bo/d
  • Darwin 14-35H: IP rate of 1100 Bo/d
  • Hartman 14-32H: IP rate of 1000 Bo/d

The first three wells are in the Fort Berthold Indian reservation, and is in one of the better areas of the Bakken/Three Forks. Its Dunn acreage has also very good. It currently has 6 rigs running with a total of 8 by midyear of 2012. Marathon has two dedicated frac crews. It plans to exit 2011 with production of 20000 net Boe/d. By 2016, Marathon estimates an average production of 33000 net Boe/d. It will spend approximately $700 MM of cap ex per year on the Bakken/Three Forks.

Marathon is being very conservative with estimates in North Dakota. Its acreage at the stateline at Divide County has well spacing of two wells per 1280 acre spacing. With results from other neighboring competitors, I would guess this number could increase to four. It would not be unrealistic to approximate the number of proposed wells could double throughout its acreage. Also, its EURs could significantly improve as Marathon is moving from 20 to 30 stage laterals. This is just a guess as Marathon would know its business better than I, but I believe Marathon is being conservative with its overall estimates.

Marathon has other very good acreage in the United States. It has made some large purchases recently, most notibly its purchase of Hilcorp's Eagle Ford position. It now has 285000 net acres in the Eagle Ford. I wrote a series of articles on this purchase and how it affected Eagle Ford players.

Marathon also has 126000 net acres in the Anadarko Woodford. Most of this is in the oil and condensate windows of the play. I would pay close attention to this as some areas have EURs of up to 1000 MBoe. Marathon is also in the Niobrara. It paid $5000/acre for 177000 net acres. It also has international exposure through several plays. In summary, I like Marathon's U.S. acreage, although they had to spend significant capital. Its recent pullback is a very good buying opportunity.

ConocoPhillips (COP) is working the Bakken/Three Forks as Burlington Resources. It has 460000 net acres here, and another 183000 net acres in the Cedar Creek Anticline. Average daily production is 34 MBoe/d in the Williston Basin. It has increased its total rigs to five this year as it plans to increase production. The majority of its acreage is in McKenzie County and stretches out and into Mountrail, Williams, Dunn, and Billings counties. Conoco also has concentrated acreage in Richland and Stark counties.

When Exxon Mobil (NYSE:XOM) merged with XTO, it inherited 450000 net acres in the Bakken/Three Forks. Much of this acreage is located around the Nesson Anicline, with approximately one-fourth in the Elm Coulee.

Chesapeake (CHK) is another large cap player. Chesapeake states they are a top ten Williston Basin player. When Chesapeake lists its unconventional liquids plays, only 320000 net acres are not accounted for. Also, during the conference call in January of this year, Chesapeake announced it had acreaege at the southern portion of the Williston Basin. During this conference call it stated the position was 100000 net acres. In an update since then,Chesapeake announced it has increased this position to 320000 net acres, which is planned to increase to 400000 net acres. In the southeast portion of GMX Resources' (GMXR) Little Knife of the Greater Lewis & Clark, Chesapeake has three permitted wells.

In summary, all of these companies are ways to play the Bakken/Three Forks. Some plays are more levered than others, but all of these companies have a larger than $10 billion market cap.

Disclosure: I am long BEXP, KOG. This is a list of large cap oil companies with acreage in the Bakken/Three Forks. It is only a list and not a buy recommendation. If you have any questions or concerns feel free to email me at anytimne.