Bakken Update: What To Buy In 2012 Part IV

 |  Includes: EOG, ESPH, ESTE, KOG, NFX, NOG, STO, WLL
by: Michael Filloon

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Bakken oil producers ended the year on a high note as the weather remained mild. In fact, North Dakota is having one of its warmest winters in four decades. With no snow on the ground in the Williston Basin, drilling and completing are ahead of schedule, and it would be fair to say most will come in toward the top end of earnings estimates. This was the opposite of what was seen last winter. Completions backed up on delays, trucks were unable to transport fluids, and many wells were shut in because of it. This is bullish for all Bakken oil producers. Because of this, Northern Oil and Gas (NYSEMKT:NOG) might be the investment for you. Northern is a non-operator with smaller working interest in wells operated by some of the Bakken's best oil companies. Northern disappointed in 2011, after it missed earnings for four straight quarters. This coupled with a report on worries concerning depletion and a separate report addressing the possibility of wrong doing. Northern fell from a high in March of $33.98 to a low in August of $13.25. The stock has recovered and in my opinion could be ready for a good 2012.

Northern Oil and Gas has very good Bakken acreage. Of its 158000 net acres, a good portion are in Mountrail, northern McKenzie and southern Williams counties. Mountrail County is the home of the best developed fields in the Williston Basin:

  1. Alger Field
  2. Ross Field
  3. Sanish Field
  4. Parshall Field

For those unfamiliar, southwest Mountrail, northeast McKenzie, and northeast Dunn counties all border what I think is the Bakken/Three Forks sweet spot. This area has been a focus by some of the best players in the Williston Basin:

  1. Brigham (NYSE:STO) in Alger Field
  2. Whiting (NYSE:WLL) in Sanish Field
  3. EOG Resources (NYSE:EOG) in Parshall Field

Northern continues to add acreage and through the first nine months of 2010 it acquired an additional 30500. In the third quarter of 2010 it increased year-over-year production by 111%. In the fourth quarter, Northern estimates production growth quarter over quarter of 25% to 35%. Its non-operated program helps to maintain costs, as Northern is averaging well costs of $6.5 million, while other operators are at $9-$9.5 million on average. Since it works with public and private oil producers, Northern is the only way to get exposure to companies like Slawson, Samson and Hunt. Slawson and Samson make up 40% of its gross wells. A Whiting well in its Tarpon prospect was the best news Northern got in 2011. Whiting recorded the highest IP (initial production) rate of any well in the Williston Basin at 7009 Boe/d and Northern has non-operated working interest.

Northern is a growth story, as estimates have earnings in 2011 more than double that of 2010. In 2012, earnings growth will more than double a second time in two years. I think this growth can be attained given increased locations, better well results and faster drilling and completing. I believe Northern will have very good fourth-quarter results, and may increase guidance for 2012.

Kodiak Oil and Gas (NYSE:KOG) is the last company on this 2012 Bakken list. I was hesitant to add this name given its current valuation and two analyst downgrades. I still own Kodiak, but took profits a couple of weeks ago. I plan to add to this position, in the $8-$8.50 range. I would let this stock pull back to its 50-day moving average before buying. Kodiak could be an acquisition target, and I would not be surprised if it happens by year's end. If so the purchase price could be in the $15 to $17 range. This is only a guess, and the company has to execute, but if so, Kodiak will look very attractive. Reasons for Kodiak upside are:

  1. Koala and Polar Bakken wells have EURs of 1100 Mboe using only 20 stages
  2. Koala and Polar TF wells have EURs of 900 Mboe using only 20 stages
  3. Three additional (possible) commercial Three Forks benches

The amount of resource garnered from this area could be far more than estimated. The average Bakken well is thought to have EURs of 600-700 Mboe, with the average Three Forks well 400-500 Mboe. The best case scenario was thought to be four middle Bakken and four upper Three Forks wells per pad. If all four Three Forks benches are commercial the total number of wells could increase by six to 12. If all are commercial, an additional two to four million barrels of oil equivalent could be produced. Increased stages would also increase EURs. Other competitors in this area have de-risked acreage like Newfield's (NYSE:NFX) Westberg and Whiting's Tarpon Prospects. The Tarpon Prospect recently produced the highest IP rate in the Williston Basin (mentioned above). We will know more when 60 to 90 days of production are completed.

A couple other names to consider are Earthstone Energy (NASDAQ:ESTE), which has been increasing its Bakken acreage. Its increased non-operated working interests helped to provide very good third-quarter earnings. I am interested to see if Earthstone can build on those results. Much of its working interests are in wells operated by Brigham, and have had very good results. The second is Ecosphere (OTCQB:ESPH), which sells and leases mobile frac water filtration units. Frac water filtration can be cost effective for oil producers given the time and money invested to haul and dispose of this waste.

In summary, the Bakken looks good going into earnings. There are several ways to play this, and I hope this list helps investors find winners in the Williston Basin. The short-term outlook for oil seems good, and operators are finding ways to get better differentials from Bakken oil. The weather has been very good, initial production numbers are improving, all while time frames in drilling and completion are getting shorter.

Disclosure: I am long NOG, KOG, OTCQB:ESPH.

Additional disclosure: This is the fourth part of a list of Bakken oil producers that I believe will outperform the broader market. This is not a buy recommendation, as I would suggest investors know the stocks they invest in. I currently own ESTE.