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Michael Filloon
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Michael Filloon is the head energy analyst at Split Rock Private Trading and wealth management. He is an accomplished and well respected energy analyst covering cyclical sectors including Energy & Commodities. His focus are North American shale plays including the Bakken, Permian Basin and... More
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Split Rock Trading and Wealth Management
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The Bakken Update
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  • Triangle Petroleum: 2012 Could Be Its Year
    I believe 2012, could be a big year for oil. Not all commodities will do well, but the demand for oil should continue to be strong. If problems persist for the Euro, this could have a negative effect. If not, Bakken oil producers could have a great year.

    The winter in North Dakota has been mild when compared to years past. Not only has the weather been mild, but there has been close to no snow fall. It was originally thought that this winter could be worse than last. Analysts have been guiding upward, and there is a very good chance they have not increased estimates enough. For now, I am operating on the premise that the Bakken oil names will come in at the top end of guidance.

    Triangle Petroleum (NYSEMKT:TPLM) is a top pick for 2012. This is a risky play, but the payoff could be exponential. The argument against Triangle is two-fold. These two variables are price and acreage. I would not suggest using P/E, forward P/E or PEG ratios to determine the value of Triangle. Oil companies generally use 4-6 times cash flow to determine value. This is difficult to use given it is just beginning its operating program, and only a few of its non-operated wells are online. Triangle's acreage is also in question. Station Prospect could prove to have significant middle Bakken resource. Triangle is currently looking for a JV partner in Montana.

    Triangle is a growth story, but also has value. Its Station Prospect was purchased for $385/acre. The Montana acreage is close to other oil and gas producers:

    1. Samson Oil and Gas (NYSEMKT:SSN)
    2. Statoil (NYSE:STO)
    3. EOG Resources (NYSE:EOG)
    4. Whiting (NYSE:WLL)
    5. Continental (C0LR)
    There have been several good wells in this area:
    1. Swindle 16-10: IP rate of 1065 Boe/d
    2. Rogney 17-8: IP rate of 909 Boe/d
    3. Charley 10-15: IP rate of 1069 Boe/d
    4. Tolksdorf 1-1H: IP rate of 642 Boe/d
    5. Rognas 2-22H: IP rate of 1013 Boe/d
    6. Gobbs 17-81H: IP rate of 909 Boe/d
    Whiting's Starbuck Prospect is in this area of Montana. It has over 88000 net acres, which proves Whiting's confidence in the play. Continental is running a two rig program here, and completed 6.9 net wells in 2011. Brigham had estimated its acreage in eastern Montana would produce seven wells/location. Kodiak (NYSE:KOG) is currently estimating two middle Bakken and two Three Forks wells in its Sheridan County leasehold. Station Prospect has very good thickness of the middle Bakken. Thickness in this play varies from 50 to 70 feet. The upper Three Forks is just beginning to be worked. I will be real interested in the upcoming production from this pay zone. Triangle has 54500 net acres in Station Prospect. It estimates three middle Bakken and three upper Three Forks wells per pad.

    Triangle also has operated and non-operated acreage in North Dakota. It has 29000 net acres and has an estimated 168 operated locations, and 952 non-operated locations. Triangle is estimating four middle Bakken and four upper Three Forks wells at 1280 acre spacing in North Dakota. Triangle has just begun its North Dakota operated program. These wells are approved:

    1. Dwyer 150-101-21-16-1H
    2. Larson 149-101-9-4-1H through 4H
    3. Gullickson Trust 150-101-36-25-1H through 4H
    4. Fredrick James 149-101-3-10-1H
    Whiting calls this area Hidden Beach. It has had very good results. Whiting has completed five wells in this prospect. The average IP rate as been 2669 Boe/d, with a high of 3092 Boe/d and a low of 2216 Boe/d. This area has a very good upper Three Forks payzone. To the north, Brigham (STO) and Kodiak have had excellent results. Kodiak's Koala middle Bakken wells could produce 1000 Mboe and 800Mboe in the upper Three Forks. Brigham also had good middle Bakken production to the north of Triangle's acreage, which includes two wells with IP rates over 4000 Boe/d. Other oil production companies have already de-risked this area. At this point Triangle will just need to execute.

    Its non-operated acreage is also good. Triangle has already had three very good wells operated by Newfield (NYSE:NFX). Its working interest and IP rates were:

    1. Holm 150-99-13-24-1H: 2370 Boe/d and 23.44% WI
    2. Staal 150-99-23-14-1H: 3034 Boe/d and 12.84% WI
    3. Lawlar 151-98-31-30-1H: 2789 Boe/d and 6.33% WI
    The biggest problem is valuating Triangle's acreage. Its North Dakota acreage has been purchased for an average cost of $2500/acre. Its current TEV/acres is $2618. There are reasons for this as much of its acreage has not been developed so a valuation at this point is just a guess. But the acreage to the southeast has some upside. Its Montana acreage could very well produce numbers comparable to southeast Divide County. The Station Prospect is inside the thermally mature middle Bakken, it is to the west of the Brockton-Froid Zone. The difference in TEV/acre seems extreme between Triangle and other Bakken players. This number ranges from $8000/acre to over $12000/acre.

    Triangle is growing production significantly in a very short time. In December of 2011, it was producing 800 Boe/d. By year end of 2013, Triangle has a production target of 2600 and 3200 Boe/d. In summary, Triangle has growth and value. Some may think this stock is expensive, but cash flow should increase significantly in a very short time. Its acreage is a value. I believe Triangle's North Dakota and Montana acreage is worth $10. This is without its 475000 acres in Nova Scotia, and its Rockpile Energy pressure pumping business. This stock is not for the faint at heart, and will see large pullbacks and breakouts so be sure to watch this company close.

    Disclosure: I am long KOG, TPLM.

    Additional disclosure: This article is on Triangle Petroleum and its prospects for 2012. It is not a buy recommendation.

    Feb 05 9:23 PM | Link | 15 Comments
  • Chesapeake (CHK):25/25 Plan
    Chesapeake Energy Corp. (NYSE:CHK) has made a major change to its business strategy.  What was once an aggressive driller of natural gas is getting oily.  The reason is easy to explain.  Tough to make a living in natural gas.  This is an aggressive move, but I bet the CEO can pull it off. 

    Chesapeake is currently the number two producer of natural gas in the United States.  The fourth quarter of last year Chesapeake's natural gas production was approximately 2.6 Bcf/d, with total company production of 2.9 bcfe/d.  It is the number one natural gas driller with respect to activity also. 

    Chesapeake has 154 operated, 115 non-operated ,and 15 info only rigs currently running.  This company collects over 20% of all daily drilling information generated in the United States.  Approximately half of 2011 capital is in liquids, while the other 50% is in natural gas.  Chesapeake says they will be able to shift production to 70% liquids in 2012.  It  has exhibited 21 consecutive years of sequential production growth and in 2010 year over year production growth was 14%.  This company is projecting a two year (2011 and 2012) production growth rate of 25%(net of asset sales).  Chesapeake estimates their liquids production to increase 2005, and their natural gas to grow 7%.  At the end of 2010, estimates of proved reserves were 16.9 tcfe.(*1) Unproven resource potential was 100 tcfe as recorded in 2010.  Unrisked unproven resource potential could be as high as 250 tcfe.  Chesapeake's leaseholds onshore are quite amazing at 13.6 mm net acres and 27mm net acres of 3-D seismic data. 

    In 2009, there was a big change with respect to oil and gas prices.  The "normal" 6 to 1 split has widened considerably with respect to lower natural gas prices. Chesapeake realized it's technology could be utilized in oil recovery and decided to change the scope of its business.  Due to its early acquisitions and correct as to the influx of natural gas production, they created shareholder value.  To cover their large debt they sold $5 billion in assets that had been purchased at a lower value.  Chesapeake is confident the change from 10% liquids in 2009 to approximately 70% liquids in 2012 will more than cover the sale of its natural gas properties.  It should also be noted these sales created a significantly higher value than what they were purchased for.  Chesapeake has since solidified assets in the Anadarko and Permian Basin.  The move to liquids increased positions in the Eagle Ford, Niobrara, and an undisclosed area (more than a million acres).  Chesapeake now has 100000 net acres in the Williston Basin. 

    Chesapeake's plan for 2011 and 2012 is to reduce long term debt by 25%.  They plan to increase production by 25%.  2011 estimated production is 3.13 bcfe/d.  2012 estimated production is 3.55 bcfe/d.  It also plans to deliver a 2011-2012 combined EBITDA of $10.8 billion, cash flow of $10.2 billion, and net income of 3.8 billion.(*2)  In 2010 they paid down senior notes by $1.4 billion.  That same year they also purchased $5 billion in liquids rich plays.  Since much of their oily purchases were completed at the beginning of the oil land grab, they were able to allow joint venture where the partner paid a significantly higher amount per acre.  As Chesapeake has done many times in the past, they continue to buy low and sell high.

    They have already increased liquids production from 32000 bbls/d in 2009, to 60000 bbls/d exit rate of 2010.  By the end of 2012, Chesapeake plans to have 150000 bbls/d and by the end of 2015 have and exit rate of 250000 bbls/d. 

    Bringing prominence to the Niobrara was the deal between Chesapeake (CHK), and CNOOC (NYSE:CEO).  This was a deal where Chesapeake sold 33.3% of its 800000 Niobrara acreage to CNOOC for $1.3 billion or $4750 per acre.   Up to this point, the acreage had sold for $3250 per acre, although Chesapeake had purchased their leasehold for less.   CNOOC will pay $570 million at closing and $700 million or two-thirds Chesapeake's drilling and completion expenditures, until the carry obligation has been funded.  This deal should close sometime this quarter.  Chesapeake expects to use the drilling carry by year end of 2014.  Chesapeake will remain the operator and CNOOC will have the option to purchase 33.3% of the new acreage and in the DJ and Powder River Basins.  This deal looks to be a good deal for both parties, but it raises questions as to whether Chesapeake is worried about upcoming liquidity, or if there are questions as to what the current acreage holds.  

    Chesapeake's oil land grab seems to have been a very good plan.  Shifting to liquids from gas provides an increase of $11/mcfe when comparing price equivalents.  This is why Chesapeake sees its EBITDA, cash flow and net income increasing substantially over the next four years.  This company believes its finding and production costs to be slightly higher, while unhedged revenues per unit should be approximately 3.5 times higher.  Even more important, is this company finding balance in its business.

    Chesapeake's large natural gas holding provides them, by 2015, to increase enough liquid production to be a top five producer, while still remaining a top two natural gas producer even after a $5 billion sale of natural gas assets.  250000 bbls/d is a lofty goal, for liquids production, but a compelling number none the less. Chesapeake's targeting of approximately 30 tcfe, which is 5.0 bboe by year end of 2015, shows very good growth with respect to the time frame involved.  
    With today's value metric the important numbers are the oily acreages they have attained, due to oil margins.  Chesapeake has attained acreages:
     
    Eagle Ford- 425000 net acres and 2.4 bboe of unrisked unproven resources
    Niobrara- 535000 net acres and 3,0 bboe of unrisked unproven resources
    Anadarko- 1 million net acres and 3.8 bboe of unrisked unproven resources
    Permian- 675000 net acres and 1.9 bboe or unrisked unproven resources
    Unknown- +1 million net acres, in what is called a liquids rich play

    Chesapeake states they will be cash flow positive, based on buying natural gas early and at a low price, then selling nonoperated positions off to JVs at higher levels.  It contends that they have done the same with respect to oil, and will be funded by joint ventures, like the one with CNOOC.  These JVs will essentially be funding $2.5 billion of operations on sales profits.  Chesapeake has a vast acreage in the United States.  This is 5.445 million acres with 60500 net unrisked undrilled wells, and 142 tcf of natural gas and 11 billion barrels of oil of potential net unrisked resource.  It is just a matter of time, until Chesapeake increases growth through the drill bit. 

    Chesapeake has a big move on its hands, some may be skeptical due to the scope of change.  In 2008, it was producing 13% oil and liquefied natural gas, and 87% natural gas.  In 2009, the number decreased to 10% oil.  2010 had a large increase to 32% oil and 68% gas.  This year's estimates are 50% liquids, and next year 70%.  Coupled with improvements in shale drilling (offset drilling, increased ceramic proppant, longer laterals, increased hydraulic horsepower and increased stages) rate of return should increase substantially.

    With respect to hedging, Chesapeake has shown a lucrative skill with respect to natural gas.  For 2011 they are 96% hedged in natural gas at $5.84.  In 2012 it is hedged 17% at $6.19. Since the first quarter of 2001, $6 billion in gains have been realized.  This hedging strategy has produced gains in 17 of past 19 quarters.    

    In summary, Chesapeake is working on its 25/25 plan, that should decrease long term debt by 25% while increasing production by 25%.  This company is in the process of converting from a natural gas company to one that is 75% liquids. Chesapeake has great leaseholds in some of the best play in the United States. There is no doubt that this is one of the best natural gas companies in the United States. The only question is how good they will be as a predominantly oil based company.  This company may be a very good investment long term,but I would not be exaggerating that it looks like the task at hand is difficult. .  If they pull it off, the pay out could be remarkable for investors.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: *1 Based on 12 month avg. price required by SEC rules.*2 Based on $85 oil and $5 gas
    Feb 11 5:49 PM | Link | 3 Comments
  • Great Opportunity to Buy Kodiak Oil
    The first time I checked out the Kodiak Oil and Gas website I was a little skeptical.  Looking at a stock that has doubled since December, can make an invester wary.  The PE ratio sitting at 453.  Granted those numbers only mean something when converted to a PEG ratio, but still that is a big number to lay an investment on.  When I looked a little further I saw a forward PE of 14.37.  I had to admit to myself that I really liked any oil exploration and production company with Bakken exposure only trading at 14 times twelve months out.  If there was anything that stood out about this company was their position in the Bakken formation.  They have 113000 gross acres in the Bakken,Three Forks/Sanish.  Kodiak has approximately 300 locations in this area and they seem to be developing the area quickly.  Once I started looking into their production I could see why the PE ratio was such a large number.  From the second quarter of 2010 to the end of the year they had increase production by approximately 270%.  Better yet, there production is mostly oil.  The 2011 capital expenditures are expected to be at 190 MM drilling and completion.  This includes three operated rigs and one non-operated rig.  Twenty eight operated wells and ten non-operated wells is what they estimate they will complete this year.  Almost as important is the 10 MM to be spent on pipeline infrastructure.  Currently, oil exploration companies in the Bakken could run into near term problems to get the oil out.  Oil is being sent out by train and by truck, creating extra expense.  Kodiak seems to be proactive with respect to cap ex spending as they spent 27 MM in 2009 and 75 MM in 2010.  These numbers do not include any additional acreage they are planning to add.  This with their intent to spend even more in 2011 leads me to believe they could be a big winner in the near term.  Kodiak(NYSE:KOG) estimates they could have up to 350 possible well locations.  Kodiak (KOG) has gotten good results.  They are using an increased number of frac stages and larger amounts of proppant.  They are planning that over 90% of their 2011 cap ex will be done on long laterals.  This should further increase their production results.  Going forward Kodiak (KOG) should be able to maintain adequate liquidity with the recent 150 MM equity capital raise.  Borrowing base has been increased to $50 MM.  A second lein facility of $40 MM is now available.  They have also done some hedging to protect to the downside, just in case oil does go down in the short term.  Kodiak Oil and Gas (KOG) has a very large and valuable land position with in the Bakken.  They are heavily levered to oil.  They have two rigs running with a third on the way at the end of the first quarter.  There is one non-operated rig currently drilling.  They are rapidly increasing crude production.  2010 exit rate of approximately 2700.  They will have five well completions by the end of this quarter.  In 2010 they drilled 21 gross wells and will do 38 more this year.  To give an idea of what all of this has done to the companies balance sheet, they made six cents per share in 2010, that number will increase to 41 cents a share in 2011.  In 2011, they are estimated to grow by 583.3% for the year.  Kodiak(KOG) has been getting 90 day well completions.  Lastly, they are making infrastructure improvements to help get their oil out.  In summary, I like Kodiak Oil and Gas(KOG).  That isn't much of a surprise as I like alot of names in this space like Brigham(BEXP), Northern Oil and Gas (NYSEMKT:NOG), Oasis (NYSE:OAS), and Samson (NYSEMKT:SSN).  I am still an oil bull.  Even if oil pulls back in the short term, it will give and opportunity to buy some of these names cheaper than a few weeks ago.  Last month OPEC stated they thought $100/barrel of oil was a fair price and would not increase production.  The last time oil spiked to $100, OPEC did not increase production until well after that mark.  I think on those words we can guess that oil is moving up.  Most of the other Bakken plays have a forward PE in the mid-twenties.  So as a longer term pick, this stock is a value and a great opportunity.  Watch the price action here.  Looks like $5.70 is where Kodiak(KOG) has support, I would watch this level closely.  I will be buying shares soon. Disclosure: I am long SSN.Additional disclosure: I may take a long position on BEXP, NOG, KOG sometime in the next 24-48 hours.

    Disclosure: I am long KOG, SSN.
    Tags: KOG, STO, SSN, OAS, NOG, Energy
    Jan 21 1:31 AM | Link | 5 Comments
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