Bakken Update: Buyout Candidates For The Second Half Of 2012 Part II

by: Michael Filloon

In Bakken Update: Buyout Candidates For The Second Half Of 2012 Part I, I covered QEP's (NYSE:QEP) recent purchase of acreage from Helis Oil, Black Hills Exploration and Production (NYSE:BKH), Unit Corp (NYSE:UNT), and Sundance Energy (OTCPK:SDCJF). Although the price tag was quite high, once current production and infrastructure were accounted for, this deal was fair on valuation. Helis is a good operator, and because of this had some of the best wells to date in the Williston Basin.

This purchase could be the start of Bakken buyouts throughout the play as bigger companies purchase additional acreage. Companies could also garner increased leaseholds through company divestitures. There are still several companies looking to sell non-core acreage to help fund 2012 and 2013 capex.

The most confusing factor in finding buyout candidates is the lack of knowledge in the value of one field to the next. The problem created by comparing southwestern Mountrail to Renville County is valuations are much different. IP rates for wells in southwestern Mountrail can be in the 4000 to 5000 Boe/d range. Some areas of Renville County are not even economic. There is also a variance in the upper Three Forks pay zone in results and the number of possible wells.

In the first part of this series, I went through Oasis (NYSE:OAS) and Kodiak (NYSE:KOG), comparing acreage and identifying the upside to each company. These two companies are by far the best way to play a buyout as there are a larger number of potential suitors. Both companies are alike in size, but couldn't be more different in the composition of acreage.

There are a couple of Bakken players that have been mentioned continually in buyout conversations, but do not have the interest of the abovementioned companies. I think these two companies are getting this attention due to being Bakken pure plays, and not based on acreage that will be pursued by larger companies. Triangle Petroleum (NYSEMKT:TPLM) has been a favorite of mine since I first covered it on February 2, 2011. It has increased its Bakken acreage to 83,400 net acres, which are 60% operated, from just 15,000 in February of last year. 33,400 net acres are located in North Dakota and eastern Montana. This is considered its core acreage, with the majority in northern McKenzie and southern Williams counties. Triangle has 50,000 net acres in its Station Prospect, in Roosevelt and Sheridan counties. It has very good liquidity with $120 million of notes recently purchased by Natural Gas Partners. This recent purchase allowed Triangle to increase capex from $131 to $173 million. It also has a $27.5 million in an undrawn credit facility.

Triangle has reported the results of five wells completed in McKenzie County. These wells are located in Ellsworth, Antelope Creek, and Rawson fields. These wells are roughly 15 to 20 miles south of the river, and 20 miles east of the Montana/North Dakota border. These wells are roughly 10 to 15 miles southwest of Kodiak's very successful Koala Prospect. Triangle has paid approximately $3000/acre in McKenzie County. Its core acreage is good and should be able to produce four middle Bakken and four upper Three Forks wells per pad. There is additional upside from the second bench of the Three Forks, although I am unsure as to well spacing in this pay zone.

Triangle has 50,000 net acres in its Station Prospect. This area is in Sheridan and Roosevelt counties in Montana. It recently sold 7% of this prospect for $750/acre. There has not been a lot of information on this area, as it has not seen the development of other Montana acreage such as the Elm Coulee Field. Its Sheridan County acreage has middle Bakken thickness of 75 to 100 feet. This is the same thickness as western Mountrail County. It varies in depth from 7,500 to 11,000 feet. There have been several tests of the Bakken in Roosevelt County. These results have varied as the western boundary of the Bakken is still being defined. There looks to be a second economic target in Triangle's Sheridan and Roosevelt county acreage. Whiting (NYSE:WLL) has stated it believes its Starbuck Prospect has a viable Red River target in addition to the middle Bakken. This mimics the Red River in its Big Island acreage located in Wibaux and Golden Valley counties. If Whiting is correct, conventional wells will produce 350 MBoe at a well cost of approximately $3.5 million. Estimated Red River thickness is over 300 feet and is approximately 11,000 feet deep. If the Red River does produce like Whiting's Big Island Prospect, it will significantly increase the price per acre above its current $750/acre.

Although I really like Triangle's prospects, it isn't as likely a target as Oasis and Kodiak. Its North Dakota acreage is good, but much of it is non-operated and spread out. Its Montana acreage could be the big winner for Triangle, as it has very good upside going forward as the play is de-risked. Triangle has its own pressure pumping business, and it estimates savings of $1 million/well. The problem with it being a buyout target, has to do with a small number of core acreage. It is probably too small for a large company to purchase, and the risk involved in its Station Prospect is more than companies will pay for.

Northern Oil and Gas (NYSEMKT:NOG) is another company mentioned as a possible acquisition target. Its non-operator model makes the producer unique, but also limits its attractiveness to large cap oil companies. It has 180,000 net acres in the Williston Basin. This acreage is spread throughout the play, as it has participated in over 1,100 gross wells. It has the greatest acreage in Mountrail County, which stands to reason as it is the most developed. Northern has focused the majority of its leasehold on and around the Nesson Anticline.

There are a lot of reasons to be excited about an investment in Northern. It has exposure to a large number of wells, which decreases downside risks to a poor completion. It could be thought of as a Williston Basin production mutual fund, that provides a high level of growth with downside protection. Year-over-year production growth was 117%. Second quarter of 2012 production averaged 10,400 Boe/d. This is only slightly lower than the production purchased in northeast McKenzie County by QEP. Most importantly, its production is currently 93% oil. Northern also provides a good estimate to the value of non-operated acres in the basin. In the second quarter of 2012, it spent on average $2184/acre. Over half of Northern's net wells are from four companies. Over the past few years, it has increased its exposure to these four names, which does lever it to those producers.

Northern's Main Operators
Name % Of Net Wells
Slawson 24.5
Hess (NYSE:HES) 10.0
Continental (NYSE:CLR) 9.7
Click to enlarge

Although this company is a very good investment, it poses problems when trying to figure what oil companies would want to acquire its acreage. The biggest problem is its non-operated program. Although Northern can choose to participate in any of the wells in its leasehold, it is at the mercy of when the operator would want to drill in that area. Northern is exposed to lease expiration, when operators decide to hold off on drilling to get acreage held by production. Large cap oil companies have more interest in large operated acreage, as it allows for control of acreage/leasehold. This pretty much removes most of the bigger names, but a company like Linn Energy (LINE) may be interested given its current acreage is non-operated, and given its LLC status bolt on production may be of interest. Private equity could also have interest in this name given the high percentage of oil production, large production growth and the long-term view that oil prices will increase.

In summary, Triangle Petroleum and Northern Oil and Gas both have very good growth prospects going forward. Both companies are growing production quickly, and stand to benefit from decreasing costs and the tightening of differentials. These two companies will not get the attention that other players will in the Williston Basin. Bigger players like Continental and Whiting both are interesting here, and is another way to play a buyout. I will cover those two companies in the third installment of this series.

Disclosure: I am long TPLM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not a buy recommendation.