Bakken Update: Small Caps, Part II

by: Michael Filloon

<< Return to Part I

In the first part of this series, two micro caps were addressed. American Eagle (NYSEMKT:AMZG) and Eternal Energy's (OTC:EERG) upcoming merger could reap long term rewards through its Alberta and Williston Basin Bakken acreage. Earthstone's very good results last quarter could be indicative of the current quarter's results.

Mountainview Energy (OTCPK:MNVWF) has 85,000 net acres in the Bakken/Three Forks of the Williston Basin and Alberta Bakken. Its 11,000 net acres in the Williston Basin seem to be the focal point of its business. Mountainview plans to spend $22 million on one vertical and four horizontal wells in 2011. Its Williston Basin acreage is in several counties:

  • Divide, North Dakota
  • Williams, North Dakota
  • Sheridan County, Montana

Oil producers with well results near to Montainview's Montana Stateline project are:

  • Brigham (BEXP)
  • Kodiak (NYSE:KOG)
  • Northern (NYSEMKT:NOG)
  • EOG Resources (NYSE:EOG)
  • GeoResources (NASDAQ:GEOI)

The best well of these operators was Brigham's Gobbs 17-8 #1H, which had an IP rate of 1818 Boe/d. Other operators have had IP rates from 200 to 1000 Bo/d. Newfield's (NYSE:NFX) two Christensen wells in northwestern Williams County produced IP rates of 217 and 562 Bo/d. The most recent well produced over 21 thousand barrels of oil in the first 67 days of production. This area of the Bakken/Three Forks have had little by the way of development. Continental (NYSE:CLR) has de-risked a good portion of eastern Divide County towards the edge of the Bakken overpressured zone.

Mountainview is also a play on the Alberta Bakken. $2.3 million will be spent this year on this acreage. It has 60000 net acres to the south of Rosetta (NASDAQ:ROSE) and Newfield's acreage. This acreage has potential from multiple pay zones, which increases the possibility of it being commercial.

The most important reason to be bullish Mountainview is its working interest with G3 Operating. This is a subsidiary of GeoResources. Olsen 1-21-16H is its current well, in which it has a 12.5% working interest. The agreement Mountainview made with GeoResources in late July provided a platform for Bakken/Three Forks growth.

US Energy Corp. (NASDAQ:USEG) is another microcap in the Williston Basin. US Energy is difficult to value because it has several different businesses:

  • Oil E&P
  • Molybdenum
  • Real Estate
  • Geothermal
  • Uranium (sold in 2007)

This would work if the businesses had synergies, but in all honesty, they are very different.. This company may benefit from breaking up this business and focusing on exploration and production. US Energy is making some changes, with the biggest change in oil and gas exploration and production. As US Energy divests itself from companies outside its oil business, it uses that capital to buy working interests in wells it believes will have very good production.

US Energy has seen a significant drop in stock price over the past few months. This drop began with the dissolution of a partnership with respect to its molybdenum assets. The stock continued to fall as negativity hit the oil sector. US Energy's oil business is focused on four locations:

  • Bakken/Three Forks
  • Eagle Ford
  • California
  • Gulf Coast

US Energy currently has working interests in Brigham wells in the Bakken/Three Forks. It has 19,200 gross acres or 5,500 net acres which could produce up to 120 gross locations. US Energy also has an agreement with Zavanna for 35,840 gross or 6,500 net acres in the Williston Basin. It estimates 248 gross drilling locations with Zavanna. Because it is a non-operator, it has been hovering below the radar. Take a look at its well results with Brigham listed with working interest and IP rate:

  • Brad Olsen 9-16 #1H: 60.94% and 2112 Boe/d
  • Brad Olsen 9-16 #2H: 31.5% and 2717 Boe/d
  • Brad Olsen 9-16 #3H: 31.5% and 2375 Boe/d
  • BCD Farms 16-21 #1H: 46.97% and 1776 Boe/d
  • Lee 16-21 #1H: 57.89% and 1544 Boe/d
  • Strand 16-9 #1H: 40.37% and 2264 Boe/d
  • Williston 25-36 #1H: 61.46% and 3394 Boe/d
  • State 36-1 #1H: 29.58% and 3807 Boe/d
  • State 36-1 #2H: 17.97% and 2356 Boe/d
  • Kalil 25-36 #1H: 37.5% and 1586 Boe/d
  • Papineau Trust 17-20 #1H: 42.98% and 3042 Boe/d
  • Jack Erickson 6-31 #1H: 21.02% and 2652 Boe/d
  • Sedlacek Trust 33-4 #1H: 48.03% and 2695 Boe/d
  • Sukut 28-33 #1H: 41.76% and 19.59 Boe/d
  • Lloyd 34-3 #1H: 29.07% and 4030 Boe/d
  • Kalil Farms 14-23 #1H: 40.93% and 1603 Boe/d
  • MacMaster 11-2 #1H: 42.4% and 1129 Boe/d
  • Hovde 33-4 #1H: 24.91% and 2349 Boe/d

Of these 18 wells, working interest averaged 39.27% and this equates to 31.18% revenue interest. With Statoil (NYSE:STO) purchasing Brigham, this can only improve US Energy's current situation. This is a guess, but it seems likely Statoil will develop this Brigham acreage much faster than Brigham could do on its own. If Statoil is aggressive and puts significant capital into this play, it could prove to be lucrative.

Zavanna has one well producing. The Amy Michelle 16-21 1H is currently producing with 15 Boe/d net going to US Energy in the month of July. It has seven other wells in different stages of the drilling and completion process. US Energy should start seeing meaningful production soon.

US Energy also has 13,285 gross or 4,135 net acres in the Eagle Ford. It owns 30% working interest in Crimson's (NASDAQ:CXPO) Dimmit and Zavala county acres. It could have acreage in some of the best areas of the Eagle Ford, as the condensate generally outperforms the oil window in this play. Some areas have EURs of 1,000 MBoe. There are 70 gross and 21.3 net possible drilling locations. Other players around Crimson's acreage are:

  • Chesapeake (NYSE:CHK)
  • Anadarko (NYSE:APC)
  • Newfield (NFX)
  • Petrohawk (NYSE:BHP)
  • Goodrich (GDP)

Crimson reported some water problems with its first well, but this was rectified with a plug and since the well has produced with no other problems. US Energy is encouraged by the oil flow from just half the lateral. I am optimistic US Energy has made a good investment in this area.

US Energy also has 7,127 gross or 2,448 net acres in the San Joaquin Basin with Cirque resources. This area has been a very good long term oil producer in California, and it has a well permitted and expected to spud before year end. US Energy has several prospects onshore of the Gulf Coast. Its JV with Yuma E&P (private) had a disappointment in Weyerhauser 19-1, but believes this well can be used for saltwater disposal. A second well Weyerhauser 57 #3 offset to the producing well Weyerhauser 57 #2 which is currently producing 145 Boe/d. US Energy has an option for 88,000 acres here. Other partners in the onshore gulf coast are:

  • Houston Energy (private), 1,900 gross acres
  • Southern Resources (private), 1,280 gross acres
  • PetroQuest (NYSE:PQ), 2,000 gross acres

US Energy has good prospects. It has chosen good operators in good locations. I would like to see it divest its businesses, like it did with its uranium business. US Energy is planning to divest its real estate (apartment complex). It could garner a significant amount of liquidity by selling its geothermal and molybdenum assets. Four analysts estimate US Energy will grow 220% next year, but be careful as the high estimate is earnings of 39 cents per share versus the low estimate of a 3 cent loss. These estimates show a high risk/reward situation over the next year.

In summary, both Mountainview and US Energy could be home run type plays. Neither has exhibited the ability to operate its acreage, but they both seem to have an eye for commercial acreage in the Williston Basin and elsewhere. Be careful here as these stocks could see significant declines if the market pulls back. I like both, but do not own either of these stocks because of the uncertainty in world markets. I would suggest watching these names to see if there is a good time to get in.

Disclosure: I am long BEXP, KOG.

Additional disclosure: This is the Part II of a list of Bakken microcaps. It is not a buy recommendation.