Ramp Up Growth With Small Producers in the North Dakota Bakken

by: Michael Filloon

I recently received requests for information concerning smaller Bakken players. The interest has been in the North Dakota Bakken. This is reasonable as this is where the best returns appear to be. Confusion does exist with respect to the Bakken. The Bakken can refer to several different areas and resource deposits. The most important thing to remember when investing is location. This picture shows the Williston Basin, and the overpressured area that oil exploration and production companies are paying top dollar to drill.

Click to enlarge

The overpressured area terminates to the north at the Canadian border. Once into Saskatchewan the return diminishes. This is not to say there is no oil here, because there is. But once outside this area the returns are not as good. To be more accurate, the blue star shows what may be the best location in the Montana/North Dakota Bakken/Three Forks. Wells in the Ross/Parshall area have been the best with respect to initial production rates. One last note, I have seen additional confusion in the Alberta Bakken. This resource play is located in Northwest Montana and is outside the Williston Basin.

There are several small oil and gas plays in North Dakota. I currently own three. My favorite is Triangle Petroleum (NYSEMKT:TPLM). Triangle has been gathering acres. Triangle currently has 72,000 net acres in the North Dakota/Montana Bakken, 51,000 net acres are operated with the remaining 21000 non-operated. The majority of this 21,000 acres are in McKenzie County. Triangle plans to use its non-operated leasehold to generate revenue to fund its operated program and purchase another estimated 28,000 net acres. In the fourth quarter of this year, Triangle will begin its operated drilling program with one rig estimated to drill 2.6 net wells. Its non-operated acreage is estimated to produce 8 net wells over the next 12 months. I own Triangle for a few different reasons, but the most important is growth. This company has quickly increased its Bakken position, and if all goes well it will experience significant long term growth. Its large Bakken acreage and current cash makes for a very interesting small cap Bakken play.

Samson (NYSEMKT:SSN) became a true Bakken player after announcing the addition of Montana acres. It recently outlined its drilling program for the remainder of the year, with approximately $32 million in cash on the books. The two Roosevelt county appraisal wells will cost $6 million/well. These are very important to Samson as it is the first ever drilling in this area. Samson could ultimately purchase up to 90,000 acres in Roosevelt County if everything goes well. The first results will be in October. Its first Goshen County results in the Niobrara should be in sometime this month. Samson's acreage here will have additional upside from the right to first refusal on Chesapeake's current well program.

Abraxas Petroleum (NASDAQ:AXAS) has 20,835 net acres in the Bakken/Three Forks. It plans three net wells here in 2011. Also, 100% of these acres are held by production. And 130 net locations are possible. Its first operated Three Forks well had an IP of 1,705 boe/d. Abraxas will spend $25.5 million here in 2011. It also has acreage in the Eagle Ford (9,586 net acres) and the Niobrara (17,800 net acres). This combined with other oily plays such as the Alberta Bakken (10,000 net acres) makes for an interesting investment.

GMX Resources (GMXR) has 26,087 net acres in the Bakken/Three Forks. Thirty-four potential operating units could produce 136 locations. The Bakken has potential reserves of 30 MMBbls. Also, 1.3 net Bakken wells will come on line this year with an additional seven in 2012. In 2011, GMXR will produce 47 barrels of oil and natural gas liquids per day. In 2012, this average increases to 799 barrels per day by GMXR estimates. Its first Bakken rig will start drilling in September of this year. The second rig will begin to operate sometime in the fourth quarter of this year. There is no doubt its Bakken acreage is good, but there are much better plays on this list. GMXR also has acres in the Niobrara and Hayneville/Bossier shales.

U.S. Energy Corp. (NASDAQ:USEG) has 6,200 net acres in the North Dakota Bakken. It has a participation agreement with Zavanna. This agreement could produce a total of 93 gross Bakken and 93 gross Three Forks wells. Its participation agreement with Brigham (BEXP) includes 5,500 net acres in the Rough Rider project area. Although U.S. Energy is a small company, its Bakken acreage is a fairly small portion of its business when compared to some of the other players on this list. U.S. Energy has not traded as well as I would like to see. Hold off on this name until further catalysts.

Voyager Oil and Gas (VOG) has been beaten up recently based on its affiliation with Northern Oil and Gas (NYSEMKT:NOG). It has 28,000 net acres in the Williston Basin and is actively acquiring more. It plans to participate in six net Bakken/Three Forks wells this year and 10 next year. Some of Voyager's current partners here are:

  • EOG Resources (NYSE:EOG)
  • Oasis (NYSE:OAS)
  • Brigham (BEXP)
  • Slawson

Voyager estimates its NAV is $12 million/well. It will continue to add acreage for approximately $1,500/acre. This company has been taken to the wood shed over issues related to another company, but I do not believe any of the assertions made have any direct ramifications. I think Voyager is a value at this level.

Sundance Energy (OTCPK:SDCJF) has 8,865 net acres in the Bakken/Three Forks. Its Goliath Prospect is currently operated by Hess where Sundance has 3.2% working interest. Its Phoenix Prospect is operated by EOG Resources. Sundance has a 15.8% working interest here. The South Antelope Prospect is operated by Helis Oil and Gas, and Sundance has a 14.7% working interest. Sundance does have other plays with significant acreage, but other companies on this list seem better placed. This company is still worth watching for an entry point.

Credo Petroleum (NYSEARCA:CRED) is a small company even on this list. It has 6,000 net acres on the Fort Berthold Indian Reservation in North Dakota. It is just south and west of Parshall Field which is one of the best locations in the Bakken. Credo has several other properties, most importantly the inexpensive and repeatable acres in the Kansas Central Uplift. I am a shareholder of Credo.

Arsenal Energy (OTCQX:AEYIF) has 6,948 net acres in the Bakken/Three Forks, and 3,862 net acres are in the Stanley/Parshall area. Competitors adjacent to Arsenal's Parshall Field acreage are:

  • EOG Resources (EOG)
  • Hess (NYSE:HES)
  • Whiting (NYSE:WLL)

Its 2011 to 2012 drilling program is 3.4 net wells. First year total production is estimated to average 900 Boe/d for these 3.4 wells. Arsenal's total net locations are 74. Of this, its Bakken/Three Forks locations total 23. The rest of Arsenal's locations are in Alberta.

The last two companies are Earthstone Energy (NASDAQ:ESTE) and Stetson Oil and Gas (OTC:SSNOF). Both companies have current locations in the North Dakota Bakken, and both are companies I would not be interested in buying. Earthstone buys old wells with very low production and makes improvements to increase output. Earthstone also buys working interest in Bakken wells. These purchases can be very small and as little as 1%. Stetson Oil and Gas gave investors a reason to be careful in October 2009. Stetson announced its first middle Bakken well had produced no oil. It used $3 million in the process of drilling and came up with nothing but water. This well was drilled on the Fort Berthold Indian reservation and near some of the best initial production of the North Dakota and Montana Bakken. Earthstone is in a much better situation than Stetson is, but I am still wary of this company. When buying speculative oil companies, please thoroughly study the names before putting your hard earned money to work. Just one well failure can create significant downward pressure on a stock, reducing the value of an investment significantly.

In summary, North Dakota/Montana Bakken stocks have significant upside going forward. The companies listed are all below a market cap of $500 million. Smaller companies have better growth prospects than larger competitors, but also offer much higher risk. It is important to know what you are buying, as it would be easy to confuse an Alberta Bakken player like Rosetta Resources (NASDAQ:ROSE) with a Bakken/Three Forks player like Brigham.

Disclosure: I am long TPLM, CRED, SSN, NOG, BEXP.

Additional disclosure: This is a list of small cap oil exploration and production companies currently working in the North Dakota and Montana Bakken. It is only a list and not a buy recommendation. Be careful when investing, as stocks can have sudden and large decreases in market cap over a very short period of time. Source: Triangle Petroleum, Source: Samson, Source: Abraxas, Source: GMX Resources, Source: US Energy, Source: Voyager Oil and Gas, Source: Credo Petroleum, Source: Earthstone, Source: Sundance, Source: Stetson. I currently hold positions in BEXP, CRED, TPLM, SSN and NOG call options.

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