How well do you know your Bakken Players? Just from a valuation and performance metrics standpoint, if you had to take a taste test of them, without having the names at the top of the charts, could you pick them out? Let's see. We'll just look at three of the pure play Bakken names, we'll call them Companies A, B, and C for lack of something more imaginative for now and we'll run through a few key measures before revealing their identities at the bottom of this piece.
Impressive production growth for all. As everyone knows, production growth has been rapid for many of the well positioned Williston Basin players accelerating as they have begun to shift from delineation to development mode drilling in the middle Bakken and as they continue to delineate and define (four benches now?) the Three Forks even as they work to define proper spacing in both plays. Here company A, which we'll tell you has never been a "flashy IP" type company, has led the pack growth via organic means. The next sets of charts show how each company paid for this growth.
Here we see one side of the capital structure with Company A choosing not to sell additional shares over this time frame (they took on debt earlier than the others opting to go with a balanced approach earlier than many of their Bakken small cap peers). Company B grew by secondary until early 2010 before turning to other means (debt plus cash flow) shown below. Company C has more aggressively tapped the equity markets to fund operations and producing property acquisitions. Surely you have them pegged by now but we'll keep going.
None of the players listed here are highly leveraged but you can see that over time they have chosen to balance their capital structures tapping relatively cheap money in the senior debt markets recently to be better positioned to move into development mode and to continue to add acreage. As a hint, all three names are looking to be largely HBP'd by the end of 2013.
Total Enterprise Value (Market Cap plus Debt less Working Capital) has jumped in all three cases … but for some more than others. I find TEV to be a much more meaningful measure of company's worth than market cap since it takes into how the world views the overall value of the firm. This is self explanatory but necessary to look at for the charts that follow. Refer back to the lack of share count growth for A and its only modest growth in debt and it's obvious this one has seen nice stock price appreciation over the period.
Flowing barrels valuation varies widely. Valued on a flowing barrel of production basis it is Interesting to see how these line up given that they are producing the same kind of oil and natural gas from essentially the same area and all have moved well out of the start-up phase. The market is paying a lot for all their barrels because they are in rapid growth mode and in fact these valuations have come down substantially over time as production growth has outpaced TEV growth, which is normal. But note the cheapness of A and especially B relative to C. It's almost like there is something very different about those Company B BOE's (there's not but more on that below).
Cash operation costs (LOE + Production taxes + G&A) for each are now in what I'd respectably call low territory and I would expect Companies A and C to see further near term reductions with their rapid growth and efforts to further streamline infrastructure [less trucking of fluids (both salt water and oil), with more of each going into pipelines, more natural gas being gathered instead of flared, etc.], getting close to where B already is or perhaps a little lower over the next year.
So how do they stack up on an EBITDA Per BOE basis? This is what we really care about beyond and above raw production growth since margins matter and this business is all about reinvestment of capital. As you can see, they all stack up pretty well. Which again makes one scratch their head as to why company B is so discounted despite its lower costs and roughly equivalent margins and decision to hold its shares in a more near and dear fashion.
Forward valuation shows quite a gap as well …
… As does market value of the companies' acreage. To be sure, not all Bakken acreage is created equally but Company B appears exceedingly cheap here as well. Surely you have them by now but here's the key.
So Who's Who?
- Company A = Oasis Petroleum (OAS)
- Company B = Northern Oil and Gas (NOG)
- Company C = Kodiak Oil and Gas (KOG)
Nutshell: So what gives with the Company B discount? NOG's only great sin is being a non-operator. When asked about the large discount to their peers, their very business model is used as justification. But ask yourself, "can I see the under-performance in the numbers and charts above?" Can you point to the production growth or the unit costs or the EBITDA generation and say "ah ha, there's the ugly girl at the prom, the non-operated Bakken player in the Basin!"? I think not. To be fair, that's been our opinion for quite some time. We answered a multitude of short seller claims over the last two, not one of which came true I might add and whose voices faded away, and we've tried to address the general bias against their model. And now, for the last two years, management has failed to dilute me at every turn while keeping the balance sheet out of over-leveraged territory, and has still managed to rapidly grow production and reserves while putting increasing amounts of their leasehold under the bit. Their well results are more than solid (as we've shown in previous posts) though they are not in the habit of announcing big IP wells like Brigham used to in the earlier days of Bakken press release writing. In past reports we've even taken on the task of showing that a flashy IP long lateral from Brigham only slightly outpaced the average short lateral NOG well for cumulative first year production (despite those NOG wells costing roughly half as much at the time). But the true test of time has been in the stand-and-deliver nature of the quarters as they have rolled out, one after another, in line with growth and margin expectations. That's part of the consistency derived from being a veritable ETF of the Williston Basin. Does NOG deserve to trade at a steep discount to its peers because they don't control the timing or location of the next well spud? Or does it matter more that the net effect of their model is that they've completed more net wells this year than some of the higher flying names in this sub group, and have consistently grown production and reserves (organically) all under the watchful eye of Deloitte on the financials and Ryder Scott on the reserves? Generally over time TEV growth is the reward of rising production and EBITDA. If the stock stays down here for long it will find an M&A bid. In the meantime, they'll just keep growing.