Triangle (NYSEMKT:TPLM) has been one of my better stock picks in 2013, but had a bottom line miss in Q3. This was a big disappointment after two straight quarterly bottom line beats. Triangle's integrated model has been the reason for that success. It is an exploration and production company but also offers a pressure pumping and a midstream business. These businesses working in concert have value. The quarter was a bit confusing, and when the numbers are looked over in detail, we find this was a very good quarter.
In Q3, E&P generated $55.5 million of stand alone revenue. This was an increase of 431% year over year. E&P has a current production of 7,400-plus Boe/d. Triangle has proven itself as a top notch operator. Its wells continually outperform the competition, some of which have more experience. Production over the quarter was approximately 6,800 Boe/d. This is a 60% increase from the previous quarter. It continues to see and increase in productivity per rig. Changes to its completion design has shown improvements in EURs. Downspacing has proved better than expectations. Triangle has been innovative at the pad, with Rockpile seeing significant demand. It has been focusing on maintaining simultaneous operations, enabling offset wells to remain on ine during drilling and completion operations. It achieved incremental production of 550 Bo/d as a result of this. This is the key to remote fracs as it allows downspacing without shutting in offset wells. Its three rig program drilled 9 gross or 6.3 net operated wells. It also saw 29 gross or 1.5 net non-op wells in Q3. Triangle revised up its production guidance for the end of the year from 70,00 to 8,000 Boe/d. It now is on pace to hit 7,500 to 8,500 Boe/d.
Rockpile generated $66 million in stand alone revenue. This was an increase of 177% year over year. Rockpile completed 9 Triangle operated wells and 19 third party wells. Its current backlog is 21 wells, 10 of which are Triangle wells. It will bring on its third spread in the next few months. Rockpile has been testing new types of completions. Its slick water flushes decrease gel damage in the formation, at a lower cost. Pump rates are up to 30 barrels per minute versus just 24 the previous quarter. This increases stimulated rock volume. Rockpile is also doing liner tests. It added Team Well Services this quarter for $9 million. This added another service to Rockpile, which is starting to become a spin off candidate. It currently has 3 workover rigs. It will add a fourth in Q4 and a fifth in Q1 of next year. Rockpile has a second cased hole wire line scheduled in Q4, with a third unit on order.
Caliber Midstream generated $4 million in standalone revenue. This was an increase of 8% quarter over quarter. It delivered fresh water to 8 Triangle fracs in Q3. It secured its first 3rd party contract to supply fresh water for fracking service. It has put 75 miles of pipe in the ground to date. Over 60% of its wells are hooked up to natural gas. This is a direct benefit of its midstream business as it is more capable to get pipe in the ground. It is an added benefit in the winter as it can set its time frames to turn natural gas to sales. Power connections in the core McKenzie County has decreased Q3 LOEs by 2% as there is less of a reliance on diesel powered generators. The combination of Caliber and Rockpile has saved Triangle $30 million in well costs this year alone.
Triangle's top line beat and bottom line miss would suggest declining margins through rising costs. Expansion of current services coupled with the addition of new businesses seem to be the reason. Rockpile brought on a second frac spread and wireline. This increased overhead costs on the income statement. It includes new employees and equipment. Its third frac spread will be coming online in Q1 of next year.
Well design improvements have increased production significantly. Like other operators Triangle is using cemented liners. It does not have enough data to talk about those results, but it looks promising. Triangle has been able to increase production while decreasing well costs. Downspacing is more promising here as its acreage has a unique geology. Currently it has downspaced the middle Bakken and Three Forks to 600 feet. Well results are getting better with its 9 most recent wells being 40% to 50% better than its previous 29. Well costs average $11 million for the first well, but this decreases to $10 million for the third and fourth well on the pad. Triangle is currently using up to 12 well pads. Triangle only has one Three Forks well with meaningful production. It had a lower EUR, but it was Triangle's first operated Three Forks well. Look for those number to increase as Triangle gets more comfortable with the interval. Below I have provided Triangle's well results to date.
|Average Daily Production (BOE/d)|
|IP 30||IP 60||IP 90|
|Gullickson Trust 150-101-36-25-1H||12,259||19,342||32,514||409||322||361|
|Gullickson Trust 150-101-36-25-3H||18,468||28,158||40,981||616||469||455|
|Frederick James 149-101-3-10-1H||22,376||36,034||43,110||746||601||479|
|Skedsvold Trust 151-101-32-29-1H||17,453||32,169||45,136||582||536||502|
|Skedsvold Trust 151-101-32-29-3H||19,020||30,730||43,727||634||512||486|
|Little Muddy 11H||26,969||46,858||n/a||899||781||n/a|
|Little Muddy 13H||28,135||48,848||n/a||938||814||n/a|
The above wells provide a good picture of improvements Triangle has seen over the past year. 90-day IP rates have improved from 400 Boe/d to 750 Boe/d. Over the past year, Triangle has been tweaking this well design and improving recoveries. It has increased water usage by about 15%. Over that period, it is using roughly the volumes of proppant. The difference is type, as it has switched from approximately 70% sand and 30% ceramic to almost all ceramic. It has upped maximum treatment pressure and maximum treatment rate. Triangle has increased production by 40%, and it is possible cemented liners have something to do with this. Production improvements mirror other operators using this new, improved design.
A good acreage comparison to Triangle may be Oasis (NYSE:OAS). It has a substantial acreage position in southwest Williams and northwest McKenzie counties. As a comparison, I have provided Oasis' IP rates and how that equates to longer term production in the area.
|EUR 450 MBoe||EUR 600 MBoe||EUR 750 MBoe|
|Cumulative 30 Day||14||19||23|
|Cumulative 60 Day||25||33||41|
|Cumulative 365 Day||85||111||138|
No model is perfect as recoveries can be affected by several variables. The resource mix, choke and interval depth are just a few. Just the same, it gives an idea of how Triangle's wells will produce. When we look at its two Arnegard wells we see an average 90-day IP rate of 743 Boe/d. This is significantly higher than the 750 MBoe model. It is very possible these two wells will produce approximately 1,000 MBoe. Emerald (NYSEMKT:EOX) has also had good results near Triangle's acreage. Although this company is quite young, it has began its operated program with excellent results. Some of this may be due to its use of slickwater fracs, which have been successful in this general area.
|Well||24-Hour IP Boe/d||30-Day IP Boe/d|
|Arsenal Federal 1-17-20H||1638||768|
These are short-term production numbers, but quite good. As Emerald refines its well design, we could see much better results 2014.
There are several other operators working southwest Williams and northwest McKenzie counties. Just a year ago, many thought these areas weren't economic with WTI pricing at $80 or below. Recent changes to well design have shown this geology required a differing design. Emerald used slickwater fracs to garner more resource. Liberty did the same and produced some of the best wells in the area. Kodiak (NYSE:KOG) has since acquired the company as it realized the area had significant upside from the lower Bakken Silt. Those results are listed below.
|Well||Date||County||30-Day IP||90-Day IP|
Some thought Kodiak paid too much for its new Ursid acreage, but these results prove different. Operators have generally used a well design more like Triangle's as slickwater fracs can get expensive. The table below provides the volumes of water and proppant used on the above wells.
Liberty's long laterals used around the same amount of proppant as Triangle, but over 3 times the water. This is a more expensive but produces favorable economics. I believe this acquisition will prove to be positive for Kodiak in the short and long term.
EOG Resources (NYSE:EOG) also modified its well design in western Williams. This design has revolutionized recoveries, and was initially used in Gonzales County of the Eagle Ford. The majority of the best unconventional wells in the United States have been here, operated by EOG. After extensive testing in the Eagle Ford, it used this in the Bakken. Its first wells were tested in its Parshall and Antelope prospects. These produced excellent results, and is why EOG then used it in western Williams. The results below rival Liberty's, and given a slower depletion rate could ultimately be better. These wells are listed below.
|Well||Choke||Lateral||Stages||H20||Proppant||IP 90||IP 180|
Instead of using the large amounts of water seen with slickwater fracs, it has focused on larger volumes of proppant. The success seen with this design is why I believe frac sand pricing could go parabolic. Longer term, EOG's wells will probably be better as this design focuses on a lower depletion rate. We should be able to clarify this later in 2014 as more wells with this design will be turned to sales.
Geology is a focal point of Triangle's acreage. It differentiates itself from other areas due to the lower Bakken Silt.
As you can see above, the Hidden Bench area has an additional interval, not existing in other of Whiting's (NYSE:WLL) prospects. This is one of the main reasons for its most recent large acreage purchase in northwestern McKenzie County. The map below highlights this purchase.
Whiting focused on this area because it is prospective of the lower Bakken Silt. It knew this because of the successful wells and downspacing in the Hidden Bench Prospect. All of this is very bullish Triangle's acreage. TPLM's North Dakota acreage is shown in the map below.
This geology has proven Triangle has accumulated its acreage at a value. Even without testing the lower Three Forks benches, it could still provide up to 15 wells per section.
Oil price realizations continue lower, and will be very important in 2014. Triangle's WTI/Bakken Light differential has widened to $14/bbl. This happened quickly as just three months ago we had seen this below $5/bbl. In 2014, I estimate Bakken Light will trade between $12 and $14 less per barrel than WTI (NYSEARCA:USO). This differential had improved as rail capacity moved more crude to the northeast and southwest. PBF (NYSE:PBF) significantly increased its use of Bakken Light as a feedstock to its northeast refineries. Tesoro (TSO) has done the same in the southwest, while using this at its Mandan refinery and Anacortes in Washington. These added barrels reduced flowing barrels to the Cushing bottleneck and allowed for better parity with WTI. Production has started to outpace infrastructure again, and will probably continue to do this in 2014. There are several big projects next year to help get barrels out of North Dakota, which should help. I have listed this increase in capacity below.
|Project||Increased Capacity (Bbls/d)|
|Plains Bakken North||40000|
|Hiland Partners Double H Pipeline||50000|
|Northstar Transloading Fairview, MT||100000|
The increased capacity should help to tighten WTI/Bakken Light differentials. I still have an average differential of $12 to $14 per barrel. Over the same time frame, I believe WTI will sell for $10 less than Brent. We have seen this differential tighten up on the news TransCanada's Keystone XL pipeline will start up in January. This will help to get more oil to the large, complex refineries in the Gulf Coast. This will probably be a short-term move as differentials continue to widen. We continue to see well design improve. This has improved total recoveries per well. Some of these technologies have increased this by up to 40%. This is just the beginning, as only a small number of operators use this design. Not only are recoveries improving but wells are being drilled and completed faster. Even with the lower number of rigs, we will see additional wells drilled toward year end as costs will continue lower. This won't happen if the price of oil heads lower in a significant way, but I would guess current estimates are close to correct for 2014.
Over the next 12 to 18 months, Triangle believes all three of its businesses can double in value. This is possible, as it continues to perform well. Its bottom line miss caused a pullback, which I believe is a buying opportunity. In reality, Triangle had its fourth consecutive production beat, as well results continue to impress. Expenses missed estimates by a large margin. This included Rockpile, DD&A and G&A. These costs were artificially inflated as the company continues to add services and expand its businesses. Realizations also missed by approximately $3/Boe. All in all, Triangle had another good quarter. It missed EPS, but on a consolidated EBITDA basis Triangle posted strong numbers. There is quite a bit of confusion surrounding Triangle. Its intercompany eliminations of Rockpile and Caliber make it difficult to estimate quarterly earnings. I believe this also added to the sell off as most investors did not understand margins had do with early hiring as it starts is new services. These are one time events, and should not alter Triangle's forward growth. Triangle was a little ahead of itself going into earnings. That said, the pullback is excessive and there is 20% upside with respect to it 12 month price target.
Disclosure: I am long TSO. 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.
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