2 Small Bakken Companies Turning The Corner

Includes: ESTE, SSN
by: Michael Filloon

After a great start to 2012, many of the Bakken Oil Producers had pulled back on poor fourth quarter production results and a decrease in the value of Bakken crude. Both of these issues are distressing, but temporary and could be thought of as a time to purchase stock on the cheap. Kodiak (NYSE:KOG) and Oasis (NYSE:OAS) have given investors a chance to do just that. There has been good news from the Bakken also. Continental (NYSE:CLR) beat production estimates and looks to be well placed going forward. Magnum Hunter (MHR) recently beat production estimates as well and guided higher. It reported better production in the Bakken, Eagle Ford and Marcellus.

Samson (NYSEMKT:SSN) has been dogged by drilling and completion problems. The good news it needed came from the three wells it is currently drilling in its Roosevelt and Hawk Springs projects. Its Defender well in Hawk Springs is very close to determining well performance. This well will help to identify the value of its 18000 acres in the Niobrara. More important are its two Bakken wells in Roosevelt County, Montana. Both are progressing as planned.

Samson has 30% equity interest in its North Stockyard Prospect. These wells are located in Stockyard Creek Field and are operated by Zavanna. Samson has planned four infill wells this year and two infills in 2013. IP rate results from these wells are (Parentheses show IP rates released by Samson):

  1. Gene 1-22H: IP rate of 1128 Bo/d (2936 Boe/d)
  2. Leonard 1-23H: IP rate of 49 Bo/d (900 Boe/d)
  3. Gary 1-24H: IP rate of 855 Bo/d (2780 Boe/d)
  4. Earl 1-13H: IP rate of 853 Bo/d (1300 Bo/d)
  5. Rodney 1-14H: IP rate of 489 Bo/d (1100 Bo/d)
  6. Harstad 1-15H: IP rate of 58 Bo/d (NA)
  7. Everett 1-15H: IP rate of 323 Bo/d (1373 Boe/d)

Two specific wells had problems, but I am unsure of the reasons. Also Samson gives its results in two different measurements, with four in barrels of oil equivalent and two in barrels of oil. Given these wells are completed on 640 acre laterals, shows how good this acreage is. Kodiak also participates in this field as part of its Polar Prospect purchase.

Samson could pull off something big in the near future. It is a basic premise of oil and gas. Buy in cheap, and de-risk the acreage to increase its value. Next, create cash flow to purchase more acreage. Going over Samson's current plan, it is not only aggressive but also quite smart in my opinion. It initially purchased into the Niobrara for $50/acre. Samson sold a large portion of this acreage to Chesapeake (NYSE:CHK) for a large profit.

CNOOC (NYSE:CEO) paid Chesapeake $4,150/acre for part of this play. Samson paid off its debt and leased a large area in the Montana Bakken for $200/acre. The reason this was such a good move in my opinion, is this area already had commercial wells completed by Continental and Brigham (NYSE:STO). It is my opinion this acreage is quite good, and may be worth close to the amount it sold its Niobrara acreage for.

Earthstone Energy (NASDAQ:ESTE) has had a nice run since it reported third quarter earnings. This is a very small company that has gone virtually unnoticed with respect to its growth over the past two quarters. It has been making a change to its business and it seems to be working. Earthstone use to operate in oil and gas land speculation. It would buy into areas hoping to see appreciation to be sold for a profit, and also purchased old wells that were not producing, making improvements to increase production. The Bakken has changed this for Earthstone. It has made purchases of working interest in wells located in the North Dakota Bakken/Three Forks.

In November, Earthstone sold non-core properties to free up some cash. Freeing up cash was important given its new direction of investing in non-operated working interests of North Dakota wells. Here are those wells:

  1. Marathon's (NYSE:MRO) Paulson 34-9TFH: Currently Drilling (1.25% Working Interest)
  2. Marathon's Paulson 34-9H: Confidential (1.25% Working Interest)
  3. Continental's Honolulu 1-22H: IP rate of 701 Bo/d. 90-day IP rate of 408 Bo/d. (2.17% Working Interest)
  4. Continental's Montpelier 1-14H: IP rate of 345 Bo/d. 55 day IP rate of 308 Bo/d.
  5. Brigham's Enderud 9-4 2H: IP rate of 3166 Bo/d. 90 day IP rate of 710 Bo/d. (5.52% Working Interest)
  6. Brigham's Banks State 16-21 1-H: IP rate of 3179 Bo/d. 90 day IP rate of 736 Bo/d. (3.39% Working Interest)
  7. Brigham's Enderud 9-4 1H: IP rate of 2879 Bo/d. 87 day IP rate of 835 Bo/d. (5.52% Working Interest)
  8. Brigham's Gunderson 15-22 1-H: IP rate 2746 Bo/d. 186 day IP rate of 555 Bo/d. (3.94% Working Interest)
  9. Zenergy's Wold 34-27H: IP rate of 1001 Bo/d. 92 day IP rate of 331 Bo/d. (2% Working Interest)
  10. Zenergy's Berquist 33-28H: IP rate of 1587 Bo/d. 173 day IP rate of 646 Bo/d. (.18% Working Interest)
  11. Zenergy's A. Johnson 12-1H: IP rate of 1234 Bo/d. 166 day IP rate of 458 Bo/d. (.08% Working Interest)
  12. Brigham's Samson 29-32 #1H: Drilling (5.36% Working Interest)
  13. Brigham's Broderson 30-31 1H: Confidential (4.94% Working Interest)
  14. Brigham's Topaz 20-17 #1H: IP rate 2575 Bo/d. 25 day IP rate 916 Bo/d. (3.06% Working Interest)
  15. Brigham's Garmann 19-18 1H: Drilling (2.61% Working Interest)
  16. SM Energy's (NYSE:SM) Wold 15-33H: Confidential (2.29% Working Interest)

Earthstone hinted in December there could be additional wells accessing the "deeper" Three Forks formation. It seems Earthstone already thought its Banks Field working interests were better than others thought. The recent Continental and Burlington (NYSE:COP) wells show promise at the second bench of the Three Forks.

The most important factor to focus on is results. Since Earthstone has began to focus on being a North Dakota Bakken non-operator it has done well. Since no analysts cover the stock it is difficult to know how the street values it, but Earthstone has been executing. Revenue growth year over year for the quarter was 95%, with net income growing 1457%. It would be hard to determine whether this type of growth will continue, but one thing is certain, its business is headed in the right direction.

Disclosure: I am long KOG, SSN, OAS, ESTE.

Additional disclosure: This is an article on two Bakken/Three Forks oil producers that are beginning to turn things around. This article is not a buy recommendation.