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

 |  Includes: AXAS, FOR, HK, MHRCQ, WLL
by: Michael Filloon

In prior articles on this topic, I have focused on Bakken producers with the best chance of being bought in 2012. This is a pretty straightforward topic, as a specific type of company would be targeted for acquisition. Earlier this year, Forestar Group made an offer to purchase Credo Petroleum (NYSEARCA:CRED) for $146 million in cash, which at the time was a 33% premium. Credo has very good Bakken acreage but it is basically a play on its Kansas and Nebraska vertical plays. It has 80,000 net acres of shallow, low-cost wells with IRR better than its Bakken acreage. It also has 15,500 net acres targeting the Mississippian.

Its Williston Basin acreage is located in Fort Berthold and is non-operated. Credo has 73,000 gross acres or 6,300 net. I have covered Credo in several articles, and noted how the stock has had value. Forestar saw the same value.

Halcon (NYSE:HK) also purchased a Bakken player in GeoResources. The majority of its acreage was in western Williams County where the middle Bakken is shallow and well costs are lower. Halcon now has 55,000 net acres in North Dakota and Montana. 40,000 net acres is operated. I don't think investors understood GeoResources and this is why Halcon was able to purchase the company at such a value.

In the first part of this series, I went over my top two Bakken buyout targets. Oasis (NYSE:OAS) and Kodiak (NYSE:KOG) would be a great fit for a large number of oil and gas producers. In part three, I covered ConocoPhillips (NYSE:COP), Chevron (NYSE:CVX) and Exxon's (NYSE:XOM) potential buys of Continental (NYSE:CLR)and Whiting (NYSE:WLL). These two companies have a very large acreage in the Williston Basin, and would be a nice addition.

Magnum Hunter (MHR) is another interest way to play an acquisition. From a production standpoint, Magnum has done a very good job. It has acreage in the Bakken, Eagle Ford, Marcellus and Utica shales. The Eagle Ford is by far its best acreage. Magnum has 26,000 net acres, all of which is in the oil window. 18,712 net acres are located in Gonzales and Lavaca counties. Gonzales County is arguably the best acreage in the Eagle Ford. It surrounds EOG Resources' (NYSE:EOG) leasehold, which has by far the best wells in the play. Its acreage in Gonzales would command top dollar to be acquired.

Its Bakken acreage is not the best in the basin with regards to production. I believe the acreage is much better than its current valuation. Magnum has 132,000 net acres in the Williston Basin, but it is important to understand where these are. 92,000 net acres are in North Dakota with the bulk in Divide. Most of Divide is non-operated. The rest of its North Dakota acreage is in Burke, Renville, and Bottineau. Its Canadian acreage is operated. The non-operated North Dakota acreage is being completed with 30 stage fracs, and IP rates have been north of 1000 Boe/d. The best well produced an IP rate of 1525 Boe/d. These results produce EURs better than 400 MBo. Results in Canada haven't been as good, but the play isn't as deep, which lowers well costs. EURs in Canada are more than 185 MBo.

The Eagle Ford is its best acreage by far, but the Bakken has value. The Utica and Marcellus are also interesting but most of the acreage is in the gas and wet gas windows. Most know natural gas prices are very low. Another issue was last quarters 25% decrease in the price realizations of natural gas liquids. Natural gas pricing may have bottomed, but we could continue to see natural gas liquids price decreases. Combo plays in the United States, like those in the Permian, continue to produce large amounts of NGLs. We may need to see an increase in demand for these prices to stabilize.

Abraxas (NASDAQ:AXAS) is another name I like with an outside chance of acquisition. This oil producer is difficult to like given its bearish chart. On February 24th of this year, it traded for $4.34/share. It now trades for $2.07/share and did not rally with other oil producers over the past two months. It also has small acreage positions spread over six different plays, which must be difficult to manage.

This is mainly a play on the Bakken. Abraxas is spending the majority of its capex on the Williston Basin. It also has a good acreage in the Eagle Ford. Other plays that have value are in west Texas and the Niobrara. The range of acreage size from the largest to the smallest is the Bakken at 20,835 net acres and Pekisko Fairway at 6880. I only reference this as Abraxas has small acreage positions in several plays which could create difficulty in another company wanting to come in and purchase it. At the very least, it could try to sell its Eagle Ford acreage. The last attempt was met with failure, but that doesn't mean it wont get done. As oil prices continue upward, we could see a new deal but that is a guess at this point. Either way, it still has 8,000 acres in this play.

Abraxas' Bakken acreage is spread throughout the Basin. It has been focusing on the North Fork/Nesson area where it has operated wells completed. Its two wells have done well as these two have produced approximately 86,000 and 76,000 barrels of oil. Here is an overview of the two wells:

Abraxas' Williston Basin Wells

Well Lateral Stages Water Proppant Choke Formation IP Rate 90 Day IP
Ravin 8289 25 44634 2215761 48/64 TF 1008 320
Stenehjem 5200 17 43545 2083052 18/64 MB 862 338
Click to enlarge

There is a definite improvement with the Stenehjem well over the Ravin. Although water and proppant volumes were lower in the Stenehjem well, the lateral is shorter and still had a better 90 day IP rate. It should be noted that Stenehjem was a middle Bakken well, which has out produced the upper Three Forks.

In summary, Magnum has a better chance of being acquired when compared to Abraxas. Its acreage is not as spread out and it has proven itself as an operator. Although this is a Bakken article, its Gonzales County acreage may be the best in the United States. There are several producers that would like to enter this area given EOG's most recent results. Magnum's market cap is low enough that there are a large number of oil producers that could make the purchase. Abraxas is less attractive and would need a company like Forestar to make the purchase. There are few companies that would find Abraxas to be a good fit, although its market cap is very low, so an acquirer would not need deep pockets to get a deal done.

Disclosure: I am long OAS, KOG. 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. Lateral length is in feet. Water is measured in barrels. Proppant is measured in pounds. All IP rates are measured in barrels of oil