Bakken Update: Third Quarter Review Of Key Players

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Includes: CRR, EOG, HES, KOG, NFX, STO, WLL
by: Michael Filloon

We have had a significant amount of information coming from the Bakken at the end of the third quarter.

There was a bit of a scare with Newfield's (NYSE:NFX) report on costs, but as others reported, all were better at controlling well costs than Newfield. I am unsure if the majority of cost increases are pressure pumping, amount of proppant and sand, or just poor time management. One thing is sure, if Newfield ever gets the Bakken figured out, it will be one of the best players. It was producing IP rates at 5,000-plus Boe/d, and its acreage by my estimates is quite good. To be clear, Newfield had a terrible quarter and probably felt like it needed to show shareholders it was going to make some changes. It missed earnings by 10.3% and had revenue of $628 million vs. the Street's estimate of $709 million. This wasn't the only problem as Newfield did a terrible job of keeping costs in check.

The Williston Basin was a disaster. Newfield estimated it would exit 2011 with production of 15,000 Bo/d, but are only half that rate at the end of the third quarter. It plans to defer the completion of 12 wells into 2012. Newfield dropped rigs in the Williston Basin, but also the Granite Wash. It plans to back off from five rigs to three or two plus a possible additional rig on order at year-end. Completions are running approximately 50% to 60% of well costs. Newfield estimates it will have an inventory of 13 unstimulated wells at 2011 exit. When it announced it was going to increase drilling in the Uinta Basin, I got a bunch of mystified emails, but in all honesty it's not a bad play.

The most troubling issue for Newfield in the Williston Basin is its estimated $11 million well cost. This is the highest number I have seen to date. Earlier this year, Newfield was able to drill a well for around $9 million. It contends the price has increased $2 million due to of a lack of well completion services in the basin and an additional "trouble cost." This trouble cost was defined as an amount over and above a base well cost estimate from anything over and above already estimated. I I don't really understand this, but let's just say its an average increased cost not already estimated. I think Newfield is scaling back in the Bakken because of its fear of another winter like last year. This extra time will allow for time to shop costs on a frac crew, complete infrastructure, and lower overall risk. One variable I would focus on in the ramp up in the Uinta is well cost. Newfield estimates a well cost of approximately $2.2 million, and IP rates at around 1,000 to 1,200 Boe/d. This provides a fast payback, but longer term more revenue will be garnered from Bakken wells, and that is why they will start ramping the Bakken in the second half of next year.

EOG Resources (NYSE:EOG) has been my favorite large cap in the oil space. It blew out earnings for the third quarter with help from what may be the best Eagle Ford leasehold in the business. EOG reported 83 cents/share vs. the street's estimate of 78 cents. Most importantly, it reported wells in the Eagle Ford having IP rates over 3000 Boe/d. Although EOG mostly spoke of its Eagle Ford acreage, it had some good things to say about the Bakken. It plans to drill 84 gross wells in the Bakken next year. EOG announced development of its sand mines. This is more of a macro statement as to how much of costs are coming from the materials used.

This demand is also being seen in proppant, with the very nice quarter by CARBO Ceramics (NYSE:CRR). Since the price of frac sand has increased so much, EOG will be providing its own initially in the Eagle Ford and Permian, but hopes to rail this sand up to the Bakken. EOG will commence plant start-up next month. It estimates 50% of its well costs come from fracking. EOG did say that its Bakken and Eagle Ford well results are the best in the industry based on sell side research. I am not sold on this, although I do believe it is true in the Eagle Ford. In the Bakken, I have done some research that is a little more field specific. My series of articles, The 3 Best Oil Fields In The Bakken And The Stocks That Are Capitalizing Parts One, Two, and Three compare Brigham (BEXP), Whiting (NYSE:WLL) and EOG Resources. Specifically Ross, Parshall and Sanish fields are compared and the results pointed to both Brigham and Whiting having better results in the short and longer term.

EOG Resources will have a Bakken rig count decrease next year, but plans a seven rig development. This decrease is explained as a "where" situation. EOG is sitting very well in its Bakken lease position, and is not forced to accelerate here, but needs to in the Wolfcamp. EOG states its Bakken well costs come in at $8.2 to $8.3 million, compared to the $10 to $12 million it had quoted from other competitors.

Hess (NYSE:HES) averaged a net production of 32,000 Boe/d in the third quarter, 7,000 Boe/d more than the second quarter. Hess exited the third quarter at 39,000 Boe/d. It estimates this number will increase to 60,000 Boe/d in 2012 and 120,000 in 2015. It is adding an additional frac crew and estimates it will not only be able to complete all newly drilled wells in a timely manner, but will decrease the number of wells awaiting completion over the next nine months. Hess is currently using a 38 stage frac, which has an approximate cost of $10 million.

In summary, the Bakken is still an attractive play. The condensate and oily areas of the Eagle Ford are probably better, but the switch in emphasis to the Uinta seems to be a result of poor cost containment and management issues. EOG and Hess are two very large and good oil production companies, and both believe this area is worth extensive investment. It will be interesting to see what Newfield does when it is able to get its cap ex in line with expectations.

Disclosure: I am long KOG, CRR.

Additional disclosure: This is a recap of results in the Bakken for the third quarter of 2011, it is not a buy recommendation.