Why Did Brigham Sell? Newfield's Q3 Earnings Might Provide Some Answers

| About: Statoil ASA (STO)

Brigham (BEXP) cited a couple of reasons for its abrupt sale to Statoil (NYSE:STO). The main reason given by Bud Brigham was its acreage would be better developed by a large company with a bigger balance sheet. Mr. Brigham hinted that the size of its acreage (375000 net acres) would require considerable cash to implement a proper and aggressive development plan. Brigham has made significant advances over the past few years. It wasn't long ago, that all wells were done with short laterals (one section or 640 acres) and very few stages. It has developed changes that have increased IP rates from around 200 Boe/d in 2006, with some IP rates over 5000 Boe/d at present. Mr. Brigham also has seen what is coming down the road, and he seems to believe it can be done with a large amount of cash upfront and without worrying about diluting shareholders. Here are some of the changes Brigham has made as a company:

  1. Long Laterals: drilled on two sections (1280 acres) or 10600 feet
  2. Increased Stages: Enderud 9-4 #2H recently completed with 42 stages. This is an increase from 20 stages in its first middle Bakken well, Olson 10-15 #1H
  3. Pad Drilling: Allows for multiple wells to be drilled from a single location. This reduces the overall footprint, but most importantly reduces drilling times as the rig does not need to be transported from one location to another.
  4. Zipper Fracs: Microseismic fracture mapping has enabled multiple wells to be fracced at the same time or alternating.
  5. Pipelines: decrease trucking costs
  6. Density Drilling Program: This decreased downtime and increased flow from wells before having to be put on a pump.

Brigham claims its outperformance with respect to IP rates is generated by four factors:

  1. Geosteering
  2. Swell Packers
  3. Perf & Plug
  4. Ceramic Proppant

All of these are important as these variables have not only increased production but reduced costs. This has been important as well service costs have increased significantly. When compared with other plays in the United States, the Williston Basin is at the top of the range. The Bakken/Three Forks wells are some of the most time consuming and costly wells in this country. These wells are viable because of the large amount of resources to be collected from each pay zone. There are several other plays that pay back considerably quicker than the Bakken, but when calculated over the life of the well, total revenue is also to the top end of the range. Brigham has done well over the past few quarters when compared with its competitors in the Bakken. Brigham beat earnings estimates for four straight quarters:

  1. September 2010:+50%
  2. December 2010:+33.3%
  3. March 2011:+16%
  4. June 2011:+6.5%

As costs have gone up in the Williston Basin, Brigham has seen greater difficulty in beating the Street's earnings estimates. Analysts were making it tougher on Brigham quarter over quarter to beat estimates also, so stating this is the only cause would be incorrect. Oasis (NYSE:OAS) has seen a slight improvement in the past four quarter period:

  1. September 2010:-125%
  2. December 2010:-84,6%
  3. March 2011:0%
  4. June 2011:0%

Much of the losses by Oasis came during a time of poor weather, but they have also noted a problem with increasing costs. Oasis has started to finance its own oil services unit. This should help with a significant amount of costs and decrease downtime. Kodiak (NYSE:KOG) recently beat earnings estimates for the first time in recent memory. Its performance versus Street estimates is:

  1. September 2010:-50%
  2. December 2010:-100%
  3. March 2011:-50%
  4. June 2011:+33.3%

These results from Bakken pure players show better results from Kodiak and Oasis. While Brigham is showing earnings estimates a little more difficult to beat. This may have nothing to do with costs, as analysts will set the bar higher each quarter. Although Kodiak and Oasis do not seem to be feeling the pinch of rising oil service costs, several articles have stated that Newfield was feeling the pinch of increased oil service costs, and this was the reason for its reducing of its total number of rigs and delaying the completion of 13 wells in the Bakken. Most likely, Oasis and Kodiak began having operational difficulties with heavy snow and very cold temperatures this past winter. Weather continued to be a problem as this large amount of snow turned into overland flooding after the melt.

Newfield's (NYSE:NFX) results for the third quarter took me off guard, as it was in my opinion, one of the best recent performers in the Williston Basin with respect to initial production. Looking at Newfield's well results, it would be an understatement saying these results were good. Its one Westberg well, Wisness Federal, had an IP rate of 5198 Boe/d, and more importantly it was completed with a short lateral of 5320 feet. Four long laterals were completed to the southwest of Westberg at Watford. This area had IP rates ranging from 3200 to 4000 Boe/d. Newfield stated its five wells cost on average $11 million to drill and complete. Considering one was a short lateral, the four long laterals could have been significantly more.

This is one of the most expensive groups of wells I have been aware of in the Bakken, so either it is a sign of things to come, or Newfield had significant difficulty in getting these wells on line. I think it is a combination of both, and these results have pushed Newfield to ramp up its Uinta Basin acreage where IRR% are very good, and at a much lower investment. I would guess that we won't see companies like Whiting (NYSE:WLL) and EOG Resources (NYSE:EOG) with well costs anywhere near $11 million/well. If I were to be apprehensive about Newfield's Bakken results, it would not be on the cost per well as much as how much difficulty it has had getting wells on line, which created a large miss in production. This company's earnings release statements lead me to believe Newfield thinks this will be an ongoin problem, but if it is smart it will take the rest of 2011 to work on well infrastructure to get pipelines on line. Trucking fluids in and out of wells in the Bakken, was very difficult for most of the winter.

In summary, costs are probably rising in the Williston Basin, but I find it hard to believe that they have risen enough to increase well costs in a standard Bakken well to $11 million. There is no doubt that oil service companies have done well in North America in the third quarter. Haliburton's (NYSE:HAL) numbers back this ascertion, but it would be my guess that there were some operational problems with those wells. Keep a close eye on the Bakken names. As more companies report, it should help to clear up this situation.

Disclosure: I am long BEXP, KOG.

Disclaimer: This is a list of companies possibly effected by Brigham's sale to Statoil. This is only a list and is not a buy recommendation.