Bakken Update: Small Caps, Part VIII

by: Michael Filloon

<< Return to Part VII

Triangle Petroleum (NYSEMKT:TPLM) may be one of the best values in the Bakken. There is plenty of risk with this name, but the reward could be quite large. This was one of my top picks for 2011, and it will be for 2012 also. Triangle has been aggressive in accumulating Bakken acres. It has been quite good at picking its non-operated acres, as its McKenzie County acreage has had impressive completions.

On February 2, I wrote "Triangle Petroleum: Speculating In The Bakken." At the time, it had 15,000 net non-operated acres. This acreage was located in Williams and McKenzie counties. Triangle had originally estimated it would increase to 30,000 net non-operated acres by the end of 2011. It has done an even better job in acquiring acreage than previously expected. Triangle now has a total of 74,000 net acres in the Bakken/Three Forks. 43,000 net acres are mostly contiguous in Montana's Roosevelt and Sheridan counties. Triangle refers to this operated portion of the play a Station Prospect. It also has 31,000 net non-operated acres. It has a one rig operated program that will participate in 8 net wells by the end of 2012. Its will participate in 8.5 net wells on non-operated acres.

Triangle has $110 million in cash. Its one rig program is already funded and a three rig program by the second half of next year is possible if Triangle can find a JV partner. Station Prospect is an attractive acreage when compared to other fringe leaseholds. Because of this, JV prospects are good. It estimates production will increase from 600 Boe/d to a 2800 Boe/d 2012 exit rate in best-case scenerio.

Triangle has 245 operated locations in Montana (which could easily be increased as the area is de-risked). In North Dakota it has 813 non-operated and 73 operated locations. A good portion of its acreage in North Dakota is centered in McKenzie County. This is important because of the "Bakken Kitchen." Continental (NYSE:CLR) began using this term to describe the overpressured area in the Williston Basin that follows these borders:

  • The Elm Coulee Field in Richland County, Montana to southwest the corner of Burke County in northwest North Dakota
  • Northern Billings and Golden Valley counties in the south to southwest Divide County in the north
  • From the western portion of Sheridan County, Montana in the northwest to the majority of Dunn County to the southeast in North Dakota

Within these areas, the Bakken shale is overpressured and very mature. The Bakken becomes marginally mature into Divide and Burke counties. Once into Canada the Bakken shale migrates into an immature area. IP rates are much lower, but well costs also are little more than half that of a well in Mountrail County. Triangle was able to target and obtain leaseholds in areas where oil saturation was an estimated 30%, and this includes its operated Station Prospect in Montana.

Triangle's North Dakota acreage should have the most short-term impact on the price of its stock. It has an operated well in Pronghorn Field that is still under confidential status. We should have results on this well very soon. This well is a short distance to the southeast of Brigham's (BEXP) Roughrider project. Three Brigham wells close to Triangle's Dwyer 150-101-21-16-1H are:

  1. Abelman 23-14: IP rate of 4169 Boe/d
  2. Lloyd 34-3: IP rate of 4030 Boe/d
  3. Gunderson 15-22: IP rate of 3905 Boe/d

Triangle has working interest in these producing wells:

  1. Kodiak (NYSE:KOG) Federal 4-11H: 26.25% WI
  2. Kodiak Grizzly 1-27HR: 26.25% WI
  3. Kodiak Grizzly 13-6H: 26.15% WI
  4. Newfield (NYSE:NFX) Holm 150-99-13-24-1H: 23.44% WI
  5. Newfield Staal 150-99-23-14-1H: 12.84% WI
  6. XTO (NYSE:XOM) Roedeske Federal 12x-21: 15% WI

The two Newfield wells had good IP rates of 2,370 Boe/d and 3,034 Boe/d, respectively. Triangle has interests in another 28 wells in Williams and McKenzie counties. Here is an abbreviated sample of those wells:

  • Oasis (NYSE:OAS) Stewart 5200 12-29H: 31.41% WI
  • Kodiak East Grizzly Federal 3-25-36-15H: 25% WI
  • Kodiak East Grizzly State 4-16-15-8H: 20% WI
  • Slawson Kahuna 1-7-6H: 18.95% WI
  • Slawson Crossbow #1-7-6H: 17.92% WI
  • Slawson Condor 1-36-25H: 17.91% WI
  • Slawson Gabriel 3-36-25: 17.71% WI
  • Brigham Hawkeye 16-21-1H: 15.12% WI
  • Hess (NYSE:HES) McGregor 26-1H: 10.74% WI
  • Newfield Lawlar 151-98-31-30-1H: 6.33%
  • EOG Resources (NYSE:EOG) Short Prairie 3-1415H: 4.83% WI
  • Continental (CLR) Durham 1-2H: 4.53% WI
  • SM Energy (NYSE:SM) Leiseth 1-24H: 2.81% WI
  • Whiting (NYSE:WLL) Johnson 34-8H: 2.69% WI

Triangle has attained what seems to be an experienced operations team. Three of these employees came from EOG Resources, with one from Bill Barrett (NYSE:BBG) and the last from Rosetta (ROSE). It has also formed a pressure pumping business that will provide service to Triangle and others in the Williston Basin. This company will begin operations by mid-2012. Rockpile was formed to not only save time and money for Triangle, but it is to provide service to smaller producers (4 rigs or less) that are currently paying significantly more in time and money to get completion services. Triangle estimates there is an $8 to $10 billion market in the Williston Basin for pressure pumping and ancillary services. Over 400 wells are currently awaiting frac services in the Bakken/Three Forks.

Oasis recently announced it would be starting its own well services company. Oil producers are beginning to see pressured margins. This has been the consistent theme throughout unconventional resource in the United States. The Williston Basin has felt this more due to the difficulty involved in drilling and completing. With cost pressures increasing, some companies have decided to provide those procedures themselves. More importantly, these companies will be able to get fraccing done in a more reasonable amount of time.

By the end of 2012, Triangle will need approximately $25 million in cash to fund all operations. It is currently seeking a JV partner for its Station Prospect, which would more than cover this amount. I am guessing if Triangle finds a partner it will increase to a three rig program, plus purchase more acreage in McKenzie/Williams counties. I like Triangle as it is a value on per acre basis. This company comes with risk, but it could be a home-run-type stock.

Disclosure: I am long KOG, TPLM. This is the eighth part of a series on Bakken small caps. It is just a list, and is not a buy recommendation.