The Bakken Update: Small Caps, Part VI

Nov. 1.11 | About: Samson Oil (SSN)

Click here for part V

Continuing this series on small caps in the Bakken, a company I find very interesting is Samson (NYSEMKT:SSN). This company has had a very good year, as it was one of the biggest oil stories in the United States. In January of this year, I recommended buying this stock. This turned out to be a good call as the stock saw large appreciation in a short period of time. No one would have guessed that Chesapeake (NYSE:CHK) would pay as much as it did for this acreage ($3150/acre), but very few realized the value of D-J Basin acreage. Marathon (NYSE:MRO) helped to confirm the value of these acres, with its purchase ($5000/acre) of Marubeini's acreage.

Samson holds 16391 acres in the D-J Basin. I have received some emails with concerns about Samson and how prolific Goshen County is because IP rates have lagged its North Stockyard wells. This is a completely different resource area than the Bakken, and will produce differently. Well costs are a third of the Bakken, helping to offset IP rate deficiencies. Over the past few months several players have completed D-J Basin wells. We are still in the early phase of this play, so expectations are initial production rates will improve. Here are the companies with the number of completed wells and average IP rates:

  • Chesapeake: 2 wells/967 Boe/d
  • Noble (NYSE:NBL): 12 wells/595 Boe/d
  • EOG Resources (NYSE:EOG): 8 wells/800 Boe/d
  • Rex Energy (NASDAQ:REXX): 3 wells/340 Boe/d
  • Slawson: 2 wells/650 Boe/d
  • SM Energy (NYSE:SM): 1 well/1075 Boe/d
  • PetroQuest: 1 well/831 Boe/d
  • Carrizo (NASDAQ:CRZO): 1 well/690 Boe/d
  • PDC Energy (PETD): 1 well/625 Boe/d

Of the 31 wells there was an average IP rate of 678 Boe/d. This is not bad, especially since many of these operators have only drilled the first well. As these companies get more comfortable, IP rates should continue to increase. Three companies have EUR estimates for this area:

  1. Rex Energy: 200,000 to 350,000 bbls
  2. Samson: 413,000 bbls
  3. Chesapeake: 1,250,000 bbls

Rex Energy may be the closest to with respect to its estimates, but we won't know for sure until these companies begin to get a feel for this play. The most active players are:

  • Noble has five rigs running
  • Slawson has a 22 well program for 2011
  • PDC Energy has a 14 well program for 2011

These wells seem to be profitable, even at IP rates between 700 and 900 Boe/d. PDC Energy states well costs are $3.5 million/well, and Slawson is paying $3.2 million. Samson is currently testing three pay zones, two vertical and one horizontal. Samson retained a 3.8% royalty from the leases Chesapeake acquired. Samson also has the right to first refusal on Chesapeake's wells. So in effect, Samson will use the money Chesapeake paid to buy into wells it knows through its 3-D seismic.

There is no doubt that Samson's deal with Chesapeake was a good one, but one variable difficult to value is its Montana Bakken acres. There are several reasons it is difficult to value, but the most important is Samson's decision to not release the cost of these acres. Samson bought here late, so it could be this company does not want to release this info as it may have paid a premium.

Samson has had decent well results. Its North Stockyard Project has five results with these IP rates:

  1. 1100 Bo/d
  2. 1300 Bo/d
  3. 900 Bo/d
  4. 2780 Bo/d
  5. 2936 Bo/d

These results are good for 640 acre spacing. Samson's results improved after it signed an agreement with Haliburton (NYSE:HAL). This agreement spans all of Samson's acreage. It improves the chance of good results from Roosevelt County. There has been significant interest in this area. Neighboring competitors are:

  1. Continental (NYSE:CLR)-South
  2. EOG Resources (EOG)-Southwest
  3. Brigham (BEXP)-East
  4. Whiting (NYSE:WLL)-Northwest

Fort Peck was one of the few remaining areas with a large condensed acreage in Roosevelt County. It seems Samson was looking for a sizable position in the Bakken, but one that was reasonable in price. Its reasoning is simple as Samson needed a large acreage position, but needed to maintain liquidity for its operated program and JV with Chesapeake in the D-J Basin. The most important variable of this purchase is what Samson paid per acre.

Since this was the last large continuous acreage in this area not already leased, one would wonder why another company had not acquired it. Also, Fort Peck has a one time back in for a third or approximately 6667 net acres. At this time, Samson can acquire another 20000 net acres of leases from Fort Peck. There are several companies that share the assertion this area has significant resource from the middle Bakken pay zone. Brigham has three well results in the general vicinity:

  1. Rogney 17-81H: IP rate of 909 Boe/d
  2. Swindle 16-91H: IP rate of 1065 Boe/d
  3. Gobbs 17-81 H: IP rate of 1818 Boe/d

These are all middle Bakken wells, but there are wells currently testing the upper Three Forks:

  1. French 21-30H (Whiting)
  2. Herness 15-22H (Continental)

In summary, I do like an investment in Samson, but there are some big questions as to whether it has made the right decisions. This company became a big name in the oil business with its large find in the Niobrara. Samson got top dollar (or at least close to it) for a large portion of this acreage. I think Samson's management felt it needed a big purchase in a well known play. Given Samson's non-disclosure of a per acre price, I would guess it paid a much larger price than other purchases in the area. There is a possibility the price is based on performance, but that is a guess and probably not the case.

Samson has not said much about this since June, but when the first and second tranche are completed it has an additional 50,000 acres it can purchase with Fort Peck in a third tranche. If all three are completed, Samson will have approximately 60000 net acres in the Montana Bakken. Also watch for results on the Three Forks, it will help to better define the value of this area of the play.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This is the sixth article in a series updating small cap oil producers in the Bakken. It is not a buy recommendation.