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Michael Filloon, Split Rock (395 clicks)
Oil & gas, small-cap, research analyst, growth at reasonable price
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For the first quarter of 2012, Whiting Petroleum Corp. (WLL) missed EPS estimates by 3 cents, but it did beat on the top line. For Whiting to beat in the second quarter, it needs to find other transport methods for crude. The Seaway Pipeline reversal could help Whiting, but Bakken crude differential improvement may not happen until the second half of the year. Other producers like EOG Resources (EOG) have utilized crude by rail, to get LLS differentials. Until differentials improve, it is imperative keep costs in check, and continue to produce at the high end of guidance.

Whiting has done good job as it hit the high end of guidance for oil production in the first quarter. (See also earnings call transcript.) It increased guidance from 14 to 20% growth to 17 to 22%, with respect to total production. Whiting raised capex from $1.6 to $1.8 billion. This increase was explained as to pay for increased activity in the Williston Basin, Niobrara, and Permian Basin. It can also be explained as costs are going up in the Bakken and other areas, so it also depends somewhat on how Whiting plans production going forward in its key areas, especially the Bakken.

Whiting has 701751 net acres in the Williston Basin. It has added 20,000 net acres here since 2011 year end. Whiting is known for its development of Sanish Field. This is one of the earliest plays in the Williston Basin, and has very good shale thickness in both the middle Bakken and upper Three Forks. Sanish Field has EURs between 950 and 450 MBoe. This is a pretty wide difference, but think of the lower number as closer to the older completions, and the higher number as what Whiting is currently doing in the Sanish middle Bakken. The upper Three Forks in Sanish Field has EURs of 400 MBoe. Outside of the Sanish Field, Whiting has EURs of 350 to 600 MBoe for both the middle Bakken, Pronghorn, and upper Three Forks. The top end of this numbers seems low, as Whiting has had some wells much better than this in the Hidden Bench, Tarpon, Lewis and Clark and Pronghorn. The Pronghorn has been surprisingly good as it has almost mirrored Sanish Field middle Bakken production. Whiting has had well costs of $7 million in the play, which is very good, but better in the Sanish Field at $6 million. Whiting has stated costs are pushing upward.

Whiting will be joining Continental (CLR) and Burlington (COP) in testing the lower Three Forks (also known as the second bench of the Three Forks) in its Hidden Bench Prospect. Whiting believes the second bench could be viable from the Hidden Bench Prospect to Missouri Breaks. This could add significant recoverable resource for all players in these areas, but more importantly it could increase the value of Montana acreage even more so. It is an important variable to keep an eye on. Whiting purchased 17500 net acres in Missouri Breaks based on this assumption.

Outside the Bakken, Whiting is working its Big Tex Prospect in the Permian Basin. It has had some respectable results, which has caused an increase in its well program from 13 to 17 wells. Its first horizontal Wolfcamp well had an IP rate of 440 Boe/d, but is still producing over 400 Boe/d. Its first vertical Wolfcamp well had an IP rate of 232 Boe/d. These are low cost wells, with a less steep production curve.

Its Niobrara acreage in the DJ Basin is located in the northeast extension of Wattenberg Field. This area is characterized by increased oil production. In How to Play The Niobrara Wattenberg Field, I identified other producers in this area such as Bonanza Creek (BCEI) and Noble (NBL). This area has low well costs in the $4 to $5 million range, and Whiting's well results were in the 430 Boe/d range. The most recent well cost Whiting $4.3 million. This 8 well program has been expanded to 17 wells, due to the good results.

Whiting is also participating in 2 EOR prospects that are 21% of total company production. This production in North Ward Estes is expected to increase significantly in the next few years, and could almost triple in the next four years. It also has started a pilot program in its Ross Prospect.

Whiting has increased its second quarter production guidance. It now expects production of 76925 to 81320 Boe/d. Its margins are very good at $49.19 per Boe in the first quarter. It estimates the price of oil will average $103 for the full year of 2012.

In summary, Whiting has seen some decent returns from the Bakken and its EOR projects. It also has a good start in its Wolfcamp and Niobrara areas. Whiting's earnings miss can be attributed to several things. The first is a company wide oil differential of $12.43 per barrel from NYMEX. In the second quarter it expects this to be in a range between $12.50 to $13.50 per barrel and $12 to $13 for the full year. DD&A charges were higher than expected, but this has been seen by most if not all the operators in the Bakken. Whiting continues to be a value and sells for a discount when compared to other companies with similar assets. It has done a very good job of adding acreage in plays with lower well costs, which should help to offset higher costs in the Bakken. Look for Whiting to maintain higher margins, while increasing production.

Source: Bakken Update: Whiting's Increased Production Is Offset By Differentials

Additional disclosure: This is not a buy recommendation.