Bakken Update: Small Caps, Part I

by: Michael Filloon

The recent purchase of Brigham (BEXP) by Statoil (NYSE:STO) has provided a significant move upward in stocks working the Bakken. Most of this excitement has been focused on Kodiak Oil and Gas (NYSE:KOG), and with good reason, as Kodiak recently announced good well results in Dunn County. Its Koala well results in McKenzie County were also better than expected. Shortly after, it spent a significant sum on acreage north of Koala, in Williams County. For those interested or invested in Kodiak, the reason to own this name is based on middle Bakken and Three Forks pay zones, as both are de-risked, in my opinion. Kodiak is a very good investment, but it has been volatile, so keep this in mind.

Oasis (NYSE:OAS) is another Bakken play that deserves some attention. It has 303,000 net acres in the Williston Basin. Oasis is a better value than Kodiak, but it recent performance has not been as good. It has been improving and is currently starting a well service company. It will be interesting to see how much this will cut company costs. Statoil's purchase of Brigham does not only effect Kodiak and Oasis, but smaller players in the Bakken as well. Here is an update of the Bakken and the players working it.

Eternal Energy Corp. (OTC:EERG) has acreage in the North Dakota and Canadian Williston Basin. It is currently merging with American Eagle Energy (NYSEMKT:AMZG). This merger will create a $37 million company. These companies have been focused on Divide County, North Dakota. Non-operated well interests in the Spyglass Project are operated by these oil producers:

  1. North Plains Energy
  2. Continental Resources (NYSE:CLR)
  3. Samson Resources
  4. SM Energy (NYSE:SM)
  5. Murex Petroleum
  6. Crescent Point (CTCTF.PK)

Working interest varies for .03% to 6.24% in the 18 wells operated by the above-mentioned companies. Eternal/American is participating in three additional non-operated wells that are scheduled to be drilled by year's end. Working interests in these three wells range from 1.5% to 16%. The two companies estimate a 2011 exit rate of 240 Bo/d from non-operated Spyglass wells. It currently controls 14,700 acres in Spyglass.

Divide County is an area that Continental has been working to de-risk. Although not mentioned as much as Mountrail and McKenzie counties, it is a legitimate play for both the middle Bakken and upper Three Forks. Eco-Pad development in Divide by Continental provided an average IP rate of 940 Boe/d for the four wells completed at Glasoe/Raymo.

These are not amazing results, but still good. These two companies have pulled back significantly over the past few months, and might be a decent spot for a small investment. Also, keep an eye on American Eagle's 75,000 acres in the Alberta Bakken. Newfield's (NYSE:NFX) recent results of its acreage bodes well for American, plus its results in this area with its partner FX Energy (NASDAQ:FXEN) have been good. Primary Petroleum's (PETEF.PK) recent deal with an industry partner is also bullish.

Earthstone Energy Inc. had very good results last quarter. These numbers were a big surprise, but may be the start of something big for this Bakken non-operator. The reason I say this has to do with a change with in its business. Earthstone has historically purchased poor producing wells for the purpose of refurbishment to increase production. Now Earthstone has placed emphasis of investment as a non-operator. It is not only investing in more wells, but purchasing larger working interests per well. It has a working interest of 3.9% in Gunderson 15-22 1H. This well had an IP rate of 2746 Bo/d. In the first 64 days it produced 55484 barrels of oil. Earthstone's Enderud 9-4 2H is still under confidential status and it owns a 5.1% working interest.

Both wells belong to Brigham, which has been the preferred partner of Earthstone of late. Earthstone's wells in Banks Field are Banks State 16-21 1H (Brigham) and Wold 15-33H (SM Energy). The Banks State well is still in confidential status. Earthstone has a 3.4% working interest in this well. The Wold well is also confidential. It has a working interest of 2.3%.

In summary, I would watch these non-operated Bakken names. As daily production increases, it will produce cash flow to begin operated programs. The recent pullback and credit crisis in Europe has helped to beat up more speculative investments. These microcaps are a risky way to play the Bakken/Three Forks. High levels of risk generally provide a much higher reward. I like the prospects of American Eagle and Eternal's prospects, based on its Divide County and Alberta Bakken prospects. Earthstone is also interesting pending its most recent non-operated Bakken wells.

Disclosure: I am long BEXP, KOG.

Disclaimer: This is a list of Bakken micro caps. It is just a list, and not a buy recommendation.

Continue to Part II >>