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Michael Filloon, Split Rock (390 clicks)
Oil & gas, small-cap, research analyst, growth at reasonable price
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Whiting Petroleum Corporation (WLL) had a difficult second quarter coming in light with respect to both the top and bottom lines. More worrisome was the margin, as it dropped across the board. Although it missed numbers, Whiting had optimism going forward.

Whiting raised its production guidance for the third time this year, estimating 20%-23% year over year increases. It plans to drill 160 net wells throughout core areas. Second-quarter production averaged 80,700 Boe/d. 60% of this came from the Williston Basin. Whiting increased its capital budget from $1.8 billion to $1.9 billion. Of this $100 million increase, half will be used on re-completions and capitalized workovers.

Whiting currently has over 712,000 net acres, for which it paid only $503/acre. Its Missouri Breaks acreage is located in Richland County, Montana. It added 4,000 net undeveloped acres here and expects EURs in the 300M to 400MBoe range. Its Big Island play is south of the Bakken pinch-out. The Red River is the target here, with EURs of 200M to 300Mboe. Well costs are only $3.5 million.

The Sanish continues to show improvement. Whiting reported an IP rate of 2974 Boe/d, on a well with a 7,000 foot lateral and 22 stages. This is important given the short length of the lateral, especially when compared to prior Whiting completions. It continues to use pad drilling, white sand and sliding sleeves. These are responsible for decreasing well costs in the Sanish by $2 million, for a total of $7 million/well. Whiting rigs can now drill 12 wells versus last year's 10. 25% of these rigs are pad capable, and that number will increase to 50% by year end.

Whiting's production numbers since January 2009 are interesting. Whiting has drilled 131 wells over that time frame. This qualifies as fourth on the list, as EOG Resources (EOG), Continental (CLR), and Hess (HES) are the top three. EOG has drilled 215 wells, but a large number of its completions are short laterals in the 5000-6000 foot range. Its 1-month total production for those wells placed Whiting in second behind EOG. If these numbers are analyzed from a 12-month average production standpoint, Whiting is first followed by Murex, Brigham (STO) and Hunt.

I don't like these statistics as I believe it does not properly portray what is happening in the Bakken. These numbers go back three and a half years, a show which operators have been the most consistent over that time frame, but oil and gas is the here and now. It also penalizes companies like Brigham which have been much more active in working its whole acreage. Some of those areas have not been as good and hence reduces its results. It also penalizes companies that have shown a much better improvement over the past year like Kodiak (KOG). I am not saying that Whiting is being deceitful, or that it isn't doing a very good job, but would be interested to see how these numbers change if figured for those variables I listed earlier.

Outside Sanish Field, Whiting has given EUR estimates. It is a fairly wide estimate from 350 M to 600 MBoe. Even to the top of this estimate, Tarpon and Hidden Bench fields seem to have had much better results. It would not surprise me if some of these wells are close to 1000 MBoe with respect to EURs. In the Sanish, middle Bakken EURs are 950 M to 400 M Boe. The Three Forks in that field is 400 MBoe.

Going forward, Whiting has increased its third-quarter production guidance to 82,600 Boe/d. Cash costs were also reduced going forward to reflect lower numbers in the first half. The second quarter's costs were $2/Boe less than in the first quarter. It estimates a pad well will save $500,000 versus a stand alone. The most worrisome issue for Whiting is its realized price/Boe. This decreased $12 from the first quarter of this year, and is lower than the average for all of 2008.

Whiting also made some interesting comments on Starbuck. It is currently shooting 3-D in the area and believes this area is not only prospective of the middle Bakken, but also the Red River. Whiting states this pay zone could be much like it is in Big Island, which would produce EURs of roughly 350 MBoe at a well cost of $3.5 million. This is also important for companies like Triangle (TPLM), Samson (SSN), Brigham, EOG and Continental to name a few. Missouri Breaks right now will produce EURs of 300 M to 400 MBoe, with the reservoir improving from west to east. Whiting has begun adding more acid to the frac, which has and should continue to improve results.

The Hidden Bench may be Whiting's best prospect. Although there is significant talk about additional benches of the Three Forks in this area, the middle Bakken is definitely good enough to focus on. In its first 12 Hidden Bench wells, the IP rates average 2035 Boe/d. As for Whiting, it seems content to allow its competitors work the second bench as it is still focusing on the upper or first bench of the Three Forks. Currently Whiting has two rigs running in the Pronghorn Prospect. It is delineating the boundaries at this point and states the central portion is very good.

The two pad wells it drilled in the Pronghorn had costs of $6.5/well. Whiting's last six Pronghorn wells had an average IP rate of 1700 Boe/d. Those wells correspond to an EUR of 600 MBoe. Whiting believes it will be able to perform secondary recovery in the Sanish Field. The results of EOG in Parshall Field show it's possible, but Whiting still has a significant inventory of wells to drill before it starts EOR work. Given the shale in the Sanish Field is much thicker than in Parshall Field, Whiting expects results to be better. More importantly, it believes it will be able to not only use liquid, but also gas.

In summary, Whiting had a good quarter, but margins really affected results. It kept well costs in check and continues to be one of the top players. There are reasons for this, which I have documented in this article. Whiting has stated that its use of white sand, pad drilling and sliding sleeves have all helped in this area. I do think Whiting is a good investment, and there was nothing in this quarter that would say it didn't have value.

Source: Bakken Update: Whiting's Second Quarter Was A Miss But Production Was Better Than Expected

Additional disclosure: This is not a buy recommendation.