The Bakken Update: Small Caps, Part III

by: Michael Filloon

<< Return to Part II

In the third part of this series on smallcaps operating in the Bakken/Three Forks I am working through names in this play with a market cap of one billion dollars or less. Credo Petroleum (NYSEARCA:CRED) is not well known, but has acreage in some of the best Williston Basin areas. It has acreage outside the Williston Basin:

  1. Nebraska and Kansas-145,000 gross acres (82,000 net acres)
  2. Oklahoma and Texas-70,000 gross acres
  3. Colorado-3500 net acres

Credo's acreage is in the Fort Berthold Indian Reservation. It has 8000 gross or 6000 net acres here. Credo believes the fourth quarter will achieve another record with a total 18 gross wells drilled. In late September, Credo had two Bakken wells drilled and awaiting completion. It plans an additional five wells drilled in the fourth quarter of this year. Credo recently worked with Marathon (NYSE:MRO) on two wells in Dunn County. These two wells are very interesting as they were drilled on 2560 acres spacing. I have started to see more wells drilled on four mile long laterals in these areas. This would decrease completions costs, but I have not seen any impact on IP rates. Credo owns approximately 15% in each well. These wells are an estimated four miles southeast of a well that has produced 150000 barrels of oil in eight months. As a non-operator in the Williston Basin it is scheduled to work with respected oil production companies:

  2. Brigham (BEXP)
  3. Williams (NYSE:WMB)
  4. Marathon
  5. PetroHunt
  6. QEP Resources (NYSE:QEP)

Credo's Nebraska and Kansas wells are profitable even with the low production rates, as well costs are low. There are multiple pay zones, and Credo has stated they continue to look for additional zones. It has drilled approximately 100 well here and plans to drill 30 or 40 wells per year for the next two years. Credo also has its Calliope Gas Recovery System. There have been orders, but due to the low price of natural gas, many companies are not interested and are pursuing liquids. I would like to see this marketed internationally, where gas prices are higher.

GMX Resources (GMXR) recently bought into the Williston Basin. In the second quarter of this year, it purchased an additional 11,449 net acres for a total position of 35,524 net acres. The $28 million dollar price tag breaks down to $2448/acre. Looking at its chart, it would be difficult to own this name. This stock was selling for over $84/share in July of 2008, and now it sits at $2.31. GMXR was late into this and the Niobrara. This is another gas orientated company that is trying to move to liquids. Looking at its Williston Basin acreage, much is not prospective of the middle Bakken, but the upper Three Forks. Whiting explains this geology the best as it has a significant acreage in the Lewis & Clark. The southern border of the Lewis & Clark travels just north of the Bakken Pinch-Out. The Bakken Pinch-Out is just like it sounds, as it is where the Bakken shale thins into estimates of 0 to 10 feet thickness. At this point, in this location it is impossible to get unconventional resource from a horizontal well in the Bakken. Further southeast from the Lewis & Clark, is what Whiting calls the Pronghorn. Recently there have been very successful Three Forks wells in this area. The Three Forks could extend to the eastern border of Stark County or beyond, but the big question is how productive these wells will be. Chesapeake (NYSE:CHK) has accumulated 300,000 net acres in the Williston Basin. It has two rigs drilling to the southeast of the Pronghorn and a third well permitted. I am unsure as to how much of this acreage is in this area of the play, but if I had to guess I would say the majority is in this area.

GMX Resources also has acreage in southern McKenzie County just south of Whiting's Hidden Beach acreage. Hidden Beach has been an excellent area with both middle Bakken and Three Forks wells being very good. I would guess this area would have similar to a little worse numbers than Hidden Beach. The problems with this company is it has been so late in switching to oil production. Its Williston Basin and Niobrara plays are good, but the majority of cap ex will not be spent on liquids until next year.

GMX Resources has had a long history of disappointing shareholders. Its stock has fallen from a high of $84/share to a $2.31 yesterday at close. It was also late to acquire acreage in liquids dominant acreage. It has over 35000 net acres in the Williston Basin and 40,000 net acres in the Niobrara. I do like this acreage, but I would stay away from this name until it can prove its heading in the right direction.

In summary, Credo is an interesting company with larger interests in Kansas and Nebraska than North Dakota. These wells have low costs and are repeatable projects. I would like to see Credo spend some of its cash flow increasing its non-operated program in the Bakken/Three Forks, as this may be the best way to spend cash flow. I do not currently own Credo, but would if it was to expand its Bakken interests. GMX Resources is a difficult company. It has very good assets, but may have spent too much too late in these liquids plays. I think that it is interesting at this level, but would wait to see if it has ample cash to meet its lofty estimates.

Disclosure: I am long BEXP.

Additional disclosure: This is the third installment of articles focusing small caps in the Bakken/Three Forks. It is not a buy recommendation, but an overview.