The Bakken Trend Increasing in Value

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 |  Includes: CPG, MRO, NOG, NOIGF, PBEGF, STO, TOGSF
by: Steven Ward

In an eye popping purchase, a new Canadian oil and gas trust paid a record price for producing and non-producing Bakken lands.

Canadian insurer Manufacturer’s Life, in a 50 percent interest in a partnership with NAL Oil and Gas Trust (OTC:NOIGF) on February 11, 2008, set a record in purchasing Bakken Lands in Southeast Saskatchewan.

The MLI/NAL partnership acquired two private companies, Tiberius Exploration and Spear Exploration, for a total of $115 million. The new partnership receives 3,336 acres of land, 2.1 million barrels of P+P reserves and a current 925 barrels of daily production.

The key metric in this purchase for investors to be aware of is the 120,000 dollar per flowing barrel cost the partnership paid in this transaction. This rise in purchase price for Bakken land, based on the flowing barrel metric, is right at the current estimated flowing barrel costs for oil sands start up and development operations; considered the highest flowing barrel costs in the world.

If the investor looks at Crescent Point Energy Trust’s (CPGCF.PK) January 16, 2008 purchase of Pilot Energy, you see that CPT in a very comparable deal paid 73,000 dollars per flowing barrel or 66 percent of what NAL/MLI did for their Bakken purchases several weeks later.

CPT received 24 percent more acreage with 22 identified low risk drill locations in addition to a full 1,000 BOE a day of production for 76 million dollars as compared to NAL and MLI’s $115 million purchase.

If the investor looks at Petrobank’s (OTCPK:PBEGF) recent January 28, 2008 purchase of Peerless Energy, Petrobank only paid 60,000 dollars per flowing barrel for Bakken lands and 3400 bopd production, half as much as the NAL/MLI partnership paid.

All of these purchases were adjacent to existing acreage owned by the purchaser. However, it is the willingness of NAL/MLI Partnership to significantly pay up from Crescent Point’s and Petrobank’s acquisitions in only a matter of weeks to much higher price levels. It is also significant that MLI chose the Bakken to make its first foray into direct ownership of oil and gas.

Tristar Oil and Gas (OTC:TOGSF) has done three acquisitions in and around the Bakken Saskatchewan in the last two months, taking out private and public companies for a total consideration of $510 million with TOG estimating an 8 to 1 recycle ratio on some of the lands.

The Canadian side of the Bakken is clearly consolidating and apparently with ever higher priced acquisitions.

The American side of the Bakken is purchasing land and conducting exploratory drilling and farm outs. Evident of this is Northern Oil and Gas (NOGS.OB) holding 70,000 gross (22,000 net) acres in the Bakken on the North Dakota side with two recent additions of 3,000 and 6,000 acres this month alone. NOGS has farm in agreements with Brigham Exploration (BEXP) and Marathon Oil (NYSE:MRO) with 25 permitted Bakken wells at the time of writing.

The American side has yet to see the consolidation like the Canadian side due to a much larger land area that offers plenty of “running room” for explorcos. Inevitably, it is a matter of time before drilling success is achieved in the Dakotas and Montana with increasing 3-D seismic delineation and improved technology to extract the oil source. With that will come consolidation, but not for awhile.

This gives the investor the opportunity to take a chance and get in rather early.

Again, I recommend the investor use a barbell approach to the Bakken, splitting the investment dollar between one or two larger and producing companies and 2 or 3 of the smaller explorcos. Again, do your homework on these companies. There are plenty of companies out there to choose from in both Canada and the U.S.

The future price of oil, reserve additions and the longevity of their new lands will determine whether MLI and NAL paid too much. But with OPEC considering a production cut, Chevron (NYSE:CVX) going back to drill on the North Slope in spite of a doubling of the Alaskan Petroleum Tax and Nigeria wanting a bigger cut from her offshore operations, don’t bet on it.