Bakken Update: A Difficult Fourth Quarter Shows Why Companies Like GeoResources Are Outperforming

by: Michael Filloon

With Bakken oil producers having 4Q difficulties, expectations have pulled back somewhat for 2012. Oil production has increased far more than take away capacity. With all of this oil flowing south, and Cushing acting as a bottleneck, Bakken crude prices have pulled back.

EOG Resources (NYSE:EOG) has the ability to send half of its Bakken crude production by rail to be sold at WTI and even better LLS pricing. Smaller companies do not have this luxury, and are feeling the pressure of widening differentials. Several companies are pulling rigs to produce in other more economical plays such as the Eagle Ford, Delaware Basin or Granite Wash. Costs should continue to climb in the Bakken, but the price obtained for crude might rebound in the near future. A pipeline that once brought crude from the Gulf to Cushing will be reversed, and could provide short term relief. This may provide more relief to the price of Canadian heavy crude, as the complex refineries in the Gulf are able to process large quantities.

Baytex (NYSE:BTE) recently released 4Q earnings that missed expectations. It earned 48 Canadian cents/share versus estimates of 60 cents/share. It did produce record 4Q production which rose 18% quarter over quarter and 13% year over year. It produced record and annual funds from operations, increasing 32% quarter over quarter and 24% year over year.

Baytex is an interesting company as it was converted to a corporation on January 1st of 2011 due to changes in trust taxation laws in Canada. Baytex is mainly a play on Canadian oil, but has an emerging presence in the North Dakota Bakken. It has a good dividend and is executing a growth and income model. This company is a play on heavy Canadian oil. Its production is about 6 to 1 when comparing heavy oil to light. Most of its production is from Alberta, followed by Saskatchewan, with North Dakota being only 4%. Baytex is increasing production and reserves consistently, and seems to be well managed.

The problem for Baytex in the short term, is heavy oil pricing. Using Western Canadian Select or WCS as a differential to West Texas Intermediate or WTI, Batex saw these fourth quarter differentials at 11.2%. This was a significant improvement to the 19.6% in the third quarter of 2011. Now this differential is 30%, causing worries as to how commercial these plays can be with pricing so low. To be clear, much of this is being caused by unplanned refinery outages. Many of the mid-continent refiners are set up to mostly take care of light crude, but there are more refineries with higher complexity and the ability to refine large amounts of heavy crude in the Gulf. At the end of June, a pipeline reversal that was used to move crude from the Gulf to Cushing will be reversed. This should provide a significant boost to heavy crude throughput. Additional capacity will be added in 2013, as well. Baytex also is well hedged and plans to deliver up to 15% of its heavy crude via rail in March. It is my opinion that Baytex is a good long term investment, but I would wait to buy as its broken trend is currently hovering just above its 200 moving average. It could continue to pull back in the short term.

GeoResources (NASDAQ:GEOI) reported 41 cents/share in the 4Q of 2011 on revenues of $41.1 million. It beat estimates on both the top and bottom line, as the street was expecting 39 cents/share on revenues of $37.4 million. There should have been a positive reaction to these results, but the stock pulled back almost 5%. Year over year for the quarter, revenues improved 52%, EPS increased 58%, and the realized price of oil was 28% better. This stock did not react well to the good news, but most oil names were down today on the price of oil.

GeoResources has really been on a tear, and continues to execute for three straight quarters. This is a play on the Eagle Ford and Bakken, but could see some additional upside in the Austin Chalk. GeoResources' results were even more impressive given production in the Eagle Ford decreased as no new wells were completed in the fourth quarter of 2011. Quarter over quarter, 4Q production declined 37% in the Eagle Ford, increased 26% in the Bakken and increased 13% in the Austin Chalk. GeoResources made two recent acquisitions, and I believe the price was right in both cases.

In the Bakken, it purchased 3600 net acres from US Energy Corp. (NASDAQ:USEG) in McKenzie and Williams counties for $12.7 million. This increased GeoResources' footprint in this area to 4300 net acres. Although non-operated, this is very good acreage and added to current GeoResources' holdings. It also purchased 170,000 net acres in the Austin Chalk for $40.4 million. This prospect has production of 914 Boe/d as of December of 2011. Of this only 24% was oil and 28% natural gas liquids. There are multiple pay zone targets here, which could provide increased liquids exposure to the play. GeoResources recently increased its production guidance for 2012 from 6500 - 7500 Boe/d, to 7300 - 8300 Boe/d.

I really like GeoResources in 2012. The stock seems to be continuing its momentum, and is beginning a large capital program in the Eagle Ford. This acreage is excellent, and if GeoResources can get numbers anywhere close to that of EOG Resources, this stock will continue its climb.

US Energy Corp. reported 4Q of 2011 revenues of $7.1 million, compared to the street's estimate of $8.05 million. Revenue increased 41% from the 3Q of 2011. US Energy has had a busy quarter as it sold acreage to Brigham (NYSE:STO) for $13.7 million in its Roughrider Prospect. It also sold the acreage mentioned earlier to GeoResources. US Energy also purchased 3,558 net acres in the Eagle Ford from Crimson Exploration. This purchase is located in Dimmitt and Zavala counties, and will target the oil window.

I do like some of the changes US Energy is making, as they are targeting the Bakken and Eagle Ford. Its non-operated acreage with Brigham is very good, and Brigham seems to continue to be one of the best operators in the Williston Basin. Brigham recently completed its Lloyd 34-3#2H and had an IP rate of 4300 Boe/d. US Energy has a 14% working interest in this well. The downside to US Energy is there inability to execute. This company continually comes up short with respect to estimates. Its 2011 full year EPS was a loss of 18 cents/share which is well below expectations.

Abraxas (NASDAQ:AXAS) missed badly on both the top and bottom line in the 4Q or 2011. I had revenues of $16.453 million versus the street's estimate of $21.12 million. It posted a loss of 6 cents/share versus the street's estimate of a 5 cent/share profit. Excluding some non-cash items, Abraxas lost 12 cents/share.

Abraxas continues to develop its Bakken, Eagle Ford, Pekisko and Wyoming leaseholds. One well was completed in the Bakken in the 4Q, but it was a very small non-operated working interest. More importantly, it finished refurbishing its drilling rig which is now on its way to McKenzie County, North Dakota, to begin pad drilling. Its Hedgehog State 16-2 in Wyoming is currently producing flow back and results have been encouraging. Its Eagle Ford well, the Cobra 1H, is also producing flow back with promising rates. In Pekisko, Abraxas has fallen behind as it is waiting for acid to complete its current well.

Abraxas stated it missed its exit guidance due to delays in getting wells on production. This may have been the most difficult statement as several other companies in these areas have been able to do so. Given the good weather in the Bakken during the fourth quarter, it would seem execution is a problem. Abraxas has expressed some interest in the Wolfbone. This is another area I like, but Abraxas is already spread thin, and additional acreage in an entirely new play could create further difficulties.

In summary, the fourth quarter was difficult for several of the Bakken players, but some companies like GeoResources continue to execute. Costs continue to increase in the Bakken, but the biggest cost seems to be time. As bigger companies continue to contract services, smaller Bakken players continue to have problems accessing services and other necessities to drill and complete new wells. In the meantime, stick with names beginning to outperform or at least me analyst expectations.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This is not a buy recommendation.