On September 13th, DealReporter announced Whiting (WLL) may be exploring the possibility of a sale. On September 10th, I highlighted Whiting as a possible Bakken acquisition. This article covered a general listing of well results per field. I will break down Whiting's acreage further to help determine a proper valuation. That said, I believe Whiting deserves a better valuation as this rumor could support a higher stock price.
DealReporter's announcement is important. The reason is oil and gas producers are rarely takeover targets. Most of the sector's deals begin with a company putting itself up for sale. Takeovers can pay large premiums, but oil and gas is a much more transparent business with respect to value. If the rumor about Whiting is true, there is a decent chance it could get purchased. I would stress the word chance, as a purchaser would need to be motivated. Whiting's acreage is unique given its acreage in Montana and at the southern portion of the North Dakota play. Given Whiting's market cap, deep pockets would be needed to make this deal happen.
When Brigham (STO) was sold to Statoil, it didn't get the premium some investors expected. In fact, it was rumored that Statoil was the only company to make an offer. I don't know if this was true, but the fact remains its acreage (or I should say non-core acreage) sold for much less than expected. This reinforces acreage values do not vary significantly from one company to the next. A purchase needs to be a good fit for the acquirer. This deal was done when Brigham was thought to be the best operator in the Bakken. It had proven itself with good 24 hour IP rates, and had much better results than most of its competitors with respect to 90-day initial production. It could be argued Kodiak (KOG) was better, but this company did not have the long history of success across so many different areas of the Williston Basin. Whiting and EOG Resources (EOG) were considered in this comparison, but it did not have operations in the same fields as Brigham. These weren't apples to apples comparisons, but in this type of research results are never that clearly defined.
Why would an oil producer want to acquire Whiting? Its Sanish Field acreage is top notch, but outside of this area the results are more fragmented. I will try to cover some of the reasons Whiting is attractive at this time. I believe Bakken company buyouts could be the one of the biggest stories over the next twelve months. Bakken differentials will continue to improve and costs decrease in the short term. I would expect that bigger oil companies struggling to grow oil production, will look hard here. One thing is certain, Whiting's acreage could be developed much better as part of a company with a large amount of cash.
Sanish/Parshall 83007 Net Acres
This is Whiting's core acreage, and was once thought to be the best area in the Williston Basin. This was until Brigham's results in its Ross acreage (Alger Field), which produced better production numbers. This area targets both the middle Bakken and upper Three Forks. Some believe each pay zone could support up to 6 wells. Some estimates have a middle Bakken shale thickness of over 120 feet. Whiting EURs of its best wells in the Sanish are 950 MBoe. It's $6 million well cost (those costs are higher now) produces an IRR of 498% at $80 oil and 1303% at $100. Sanish Field upper Three Forks wells are not as good, but still very economic. Whiting's EURs in this zone are 400 MBoe. The same well cost and oil price/barrel produces an IRR of 50% and 105%. By my estimates, the Three Forks EUR is low and may be closer to 600 MBoe, but as I said this is my estimate, and can depends on variables like water, proppant, lateral length and stages. Here are some of Whiting's 2012 Sanish Field results:
|Well||Lateral Length||Choke||Stages||Water||Proppant||IP Rate||90-Day IP||Formation|
|Daryl Locken 21-22H||7575||28/64||22||25736||2077760||1596||742||MB|
Whiting also has acreage to the west of the Nesson Anticline in eastern Williams and northeast McKenzie counties. It doesn't have a large position here, but the acreage is very good. These wells have higher GORs which produces better IP rates. This is not necessarily better given the price of gas, but more resource is pulled from these wells in a shorter period of time.
Cassandra 13946 Net Acres
This acreage has only seen a small amount of Whiting development, but others have been de-risking the area. Continental (CLR), Exxon (XOM) and Hess (HES) are other operators with well results in the Dollar Joe and Ray fields. This area is not as good as its Mountrail acreage or the Tarpon prospect, but it is good just the same. From a valuation perspective, Kodiak's Polar prospect acquisition would equate well with this area in value per acre. The table below shows Whiting's limited development of Ray and Dollar Joe fields.
|Well||Lateral||Stages||Choke||Water||Proppant||IP Rate||90day IP||Date|
The table below has other operator results in the same fields.
|Well||Lateral||Stages||Choke||Water||Proppant||IP Rate||90day IP||Date|
From a results standpoint, the 90-day IP rate is very important. Using this metric, Continental's wells were the best, followed by Hess and Exxon. Whiting's three wells produced a 90 day rate lower than all six of its competitors. By using less water and proppant, Whiting hurts its longer term production, but maintains lower well costs.
The two prospects I addressed in this article cover almost 97000 net acres. The Cassandra prospect is virtually undeveloped, so it would not command the high valuation per acre that its Sanish/Parshall prospect would. This prospect is well developed and would command top dollar in today's market. QEP Resources' (QEP) purchase of Helis' 27600 net acres cost $50000/acre when production and infrastructure were figured into the deal. QEP was also buying its expertise and knowledge that produced some of the best results in the Bakken. I am not saying Whiting's Sanish play is worth the price QEP paid, but if we use half of this purchase price per acre Whiting would receive over $2 billion for its Sanish/Parshall acreage alone.
In future parts of this series I will continue to cover Whiting and its prospects for being purchased. Its acreage is large so it will take several articles to properly describe. It still has roughly 36000 net acres in McKenzie County. This acreage is also considered to be quite good. The trouble in evaluating Whiting comes from its acreage in the Lewis & Clark, Pronghorn, and Montana. Upcoming articles will cover the current valuation and upside from in current payzones.
Whiting's motivation to sell may be linked to its higher depletion rate created by less expensive completions. It is difficult to know how much greater the depletion will be, but more importantly how much quicker will it have to re-complete these wells than other producers? In the long run, it could be more expensive for Whiting, but if it plans to sell it may not feel the need to add water and ceramic proppant to its wells.
Disclosure: I am long KOG.
Additional disclosure: This is not a buy recommendation. IP rates are measured in barrels of oil per day. Lateral length is measured in feet. Proppant is measured in pounds.Water is measured in gallons.