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Triangle Petroleum: 2012 Could Be Its Year

|Includes:CLR, EOG, KOG, SSN, STO, Triangle Petroleum Corporation (TPLM), WLL

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.

Stocks: TPLM, KOG, CLR, WLL, EOG, STO, SSN