Bakken Update: How Good Is Kodiak's New Acreage? Part I

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

The third quarter has been good to the oil companies operating in the Williston Basin. Initial worries of escalating costs seem to be manageable, with only Newfield (NYSE:NFX) seeing well costs as high as $11 million. These worries have been met with some very good news, as other producers reported costs in the $10 million for a 30+ stage long lateral. I find it hard to believe that oil service costs will flatten in 2012 as reported by several companies in the Bakken. I do believe that as these companies have more acreage held by production, we will see more pad drilling, which creates cost reductions of 10% to 20% depending on completion techniques.

Brigham's (BEXP) purchase by Statoil (NYSE:STO) helped validate the worth of its Bakken/Three Forks acreage. Many thought Brigham should have sold for more of a premium, but worries of increased well costs and the possibility of another difficult winter followed by flooding scared some buyers away. Plus Brigham did a very good job of drilling the best parts of its acreage early, which made the play look that much more attractive. Brigham had some very high IP rates in the Bakken. These rates taken over a 24 hour period were higher than any other player in the Williston Basin. Looking at these Brigham wells from a 60 day IP rate, there was a much quicker decline than some of its competitors. Kodiak's (NYSE:KOG) Koala wells are currently producing better than Brigham's Roughrider wells that produced more than a 1000 Boe/d in the first 24 hours of production.

Other reasons to be bullish the Bakken names has to do with additional railcars. This is important as Continental (NYSE:CLR) has been using the railroad to sell its crude in Louisiana. Louisiana Light it selling at a much higher price than WTI and should continue to do so. Hess' (NYSE:HES) railcars will be able to initially ship 54000 Bo/d, but says it will increase to 150000 Bo/d depending on demand. Frac sand shortages in both the Eagle Ford and Bakken have affected all of the oil producers in one way or another. EOG Resources (NYSE:EOG) has announced it will open a sand mine that will initially provide sand to its unconventional acreage in Texas, but hopes to add capacity in the long term. This additional capacity will be shipped to Bakken.

Although it will affect production in the Bakken very little in the short term, Continental's announcement of multiple Three Forks benches could be the biggest news long term. Continental, to my knowledge, is the only Williston Basin oil producer testing these benches. What I refer to as the upper Three Forks is what Continental calls the first Three Forks bench. Its Charlotte 2-22H in Banks Field tested the second bench at 1140 Boe/d. This well is just a few miles from Kodiak's Koala wells in Poe Field. Continental did state that tests run in Banks Field led the company to believe each bench could have up to four wells in this area. With four middle Bakken and 16 Three Forks wells, it would have significantly more resource than is being figured into the value of the companies in this area.

Other good news to Bakken investors came from Whiting (NYSE:WLL) and its Twin Valley Field well, Tarpon Federal 21-4H, which recorded a record IP rate of over 7000 Boe/d. The previous record was Brigham's Sorenson 29-32 #2H, which had an IP rate of 5330 Boe/d. Not only was this well the best to date, it was a lot better than the next best in what was considered the best field in the Bakken. So is Twin Valley Field as good as Alger Field, or is Whiting doing something special? It could be a little bit of both, but there are very good reasons to like this portion of the Williston Basin.

Whiting's Tarpon Federal 21-4H is located in an area that has had little development, but the recent wells have been quite good. Before Whiting's results, Newfield announced some very good results in its Westberg play. Not far from here, Kodiak announced very good results in its Koala play.

The Whiting, Newfield and Kodiak results have created a bullish feel to this area. This is probably why Kodiak purchased 13400 net acres in October and recently announced an additional 50000 net acres (30000 in the Polar area) to close in January. Although the price tags are high on these purchases, I believe Kodiak may have gotten a very good deal based on current production and EURs. There are two scenarios to consider with these purchases. The first is whether Kodiak was desperate to increase acreage and paid too much. The second scenario is if the acreage was bought at a low cost, then why did these companies sell? In an attempt to answer these questions I will break down the acreage in question.

In an earlier article entitled 'Bakken Update: Q3 Results', I was able to show that Kodiak had better 60 IP rates than that of Brigham's Roughrider wells. This was not necessarily all because Kodiak is a better operator, but maybe because its acreage is also more productive. The 13400 net acres purchased by Kodiak in October were located north of its Koala acreage in Williams County. Kodiak believes this acreage has EURs that of its Koala prospect. It purchased these acres from BTA Oil Producers. Kodiak added 3000 Boe/d and approximately 75 net Bakken/Three Forks locations. This acreage contains both operated and non-operated locations. It is in southern Epping, northern Stockyard Creek, Williston and Avoca Fields. BTA's most recent wells in this acreage are:

  1. 20711 Paulson 49 1-H: IP rate of 714 Bo/d (Stockyard Creek)
  2. 20711 Saccaro 310 1-H: IP rate of 1057 Bo/d (Stockyard Creek)
  3. 20711 Bibler 67 1-H: IP rate 1261 Bo/d (Stockyard Creek)
  4. 20711 Springbrook 58 1-H: IP rate of 721 Bo/d (Stockyard Creek)
  5. 20711 Kreidle 3229 1-H: IP rate of 823 Bo/d (Stockyard Creek)

BTA Oil Producers has two wells in confidential status at this time in Stockyard Creek. The five wells listed are arranged by date from the earliest in production to the latest. Here are these wells' longer term IP rates.

  1. Paulson well; 85 day IP rate of 49 Bo/d
  2. Saccaro well: 92 day IP rate of 621 Bo/d
  3. Bibler well: 86 day IP rate of 56 Bo/d
  4. Springbrook well: 99 day IP rate of 310 Bo/d
  5. Kreidle well: 95 day IP rate of 524 Bo/d

BTA Oil Producers have one well producing and another is currently being drilled in Epping Field. 20711 Erickson 3130 1-H had an IP rate of 1223, and was tested on 5-17-11. Over the first 73 days of production it averaged 624 Bo/d.

There were rumors that BTA Oil Producers were "motivated to sell", and this is probably why Kodiak was able to buy this acreage at a reasonable rate. I think the motivation had to do with the difficult winter that had reduced oil production to a standstill. Looking at the producing wells on this list, it was incredibly difficult to maintain production:

  1. Paulson well: January through the end of March had 22 days of production. This well produced a total of 3191 barrels of oil from the beginning of October until the end of February.
  2. Bibler well: Had a total of 5 producing days from the beginning of January through the end of February. From January through the end of April, this well produced a total of 537 barrels of oil.
  3. Springbrook well: March through July, this well had only 49 days of production. It produced 256 barrels of oil over this period of time.

Given the difficulties BTA Oil had last year with snow and then flooding, it would not be surprising if this company was looking to sell its Bakken acreage. With rising completion costs, this would only complicate the short term. BTA Oil also has a much lower initial production rate than that of Kodiak's Koala wells (although Kodiak states this acreage will have similar EURs to its Koala wells at 800 to 900 Mboe). This difference in production could change payback times significantly, along with well costs increasing to $10 million on average from $9 million last year.

Disclosure: I am long KOG.

Additional disclosure: This is article attempts to value the acreage Kodiak Oil and Gas has purchased this year. It is not a buy recommendation.

Continue to Part II >>