Bakken Update: Small Caps, Part IV

by: Michael Filloon

Click for Parts I, II, III.

Oil production stocks have had a very difficult time over the better part of a year. Since Brigham (BEXP) was purchased by Statoil (NYSE:STO), optimism over consolidation in the space coupled with improving oil prices have helped to place a floor in many of the more popular names in this sector. The Bakken names have done better, given Brigham's acreage. Right now may be a good time to speculate on smaller oil names in the Williston Basin.

After Brigham was purchased I received a large number of emails regarding the value of other pure play Bakken names. I had already had a position in Kodiak (NYSE:KOG) when its stock sunk below $4 on October 4th. I believed this was an opportunity and was able to purchase more by selling my refining and oil service investments. I sold half my Kodiak investment just before close on October 25th. I started positions in Basic (NYSE:BAS) and Oceaneering International (NYSE:OII) a few days ago. The oil service sector is beginning to look very good. Well costs in the Bakken are still increasing as seen in Newfield"s (NYSE:NFX) $11 million total cost per well and QEP Resources (NYSE:QEP) stating an increase in costs of $1 million per well. Increased well costs bode well for the oil service sector and could be extremely negative to the oil producer.

Bakken focused companies have had a nice move to the upside since the all cash offer to buy Brigham. As a pure player it is hard to argue Kodiak is not the best choice based on results, acreage and growth. For those looking for a higher risk/reward scenario, there are smaller companies that may have a greater possibility of being a home run. Arsenal Energy (OTCQX:AEYIF) is a small cap with oil interests in:

  1. Stanley, ND
  2. Lindahl, ND
  3. Rennie Lake, ND
  4. Edgerton, AB
  5. Princess, AB

87% of its production is oil weighted. Of its 2300 Boe/d in production, 1100 is from the North Dakota Bakken. Arsenal expects the 2011 exit rate to be 2500 Boe/d. Arsenal has 7495 net acres in North Dakota. It is broken down into three areas:

  1. Stanley: 4409 net acres
  2. Rennie Lake: 2524 net acres
  3. Lindahl: 562 net acres

Arsenal has been the most active in Stanley Field, and currently has three wells on confidential status. This field is just northwest to the Parshall Field, which has had some fairly good production. Arsenal's acreage is near several big players in the area:

  1. EOG Resources (NYSE:EOG)
  2. Hess (NYSE:HES)
  3. Brigham
  4. Fidelity E&P (NYSE:MDU)
  5. Marathon (NYSE:MRO)

Arsenal currently has the only rig drilling in the Stanley Field, but there are several rigs in the general vicinity as this is one of the busiest areas in the Williston Basin. Although Arsenal has some very nice acreage in ND, including Mountrail and Williams counties, it is still a majority play on Canadian production. Its recent transaction in Alberta reinforces this assertion.

Sundance Energy (OTCPK:SDCJF) is another small Bakken player. It does have acreage in other U.S. plays, including Indiana, Oklahoma, and Colorado. Its North Dakota holdings are broken down into four separate areas. The first is its Phoenix Prospect. It has 7574 net acres in McKenzie County, and Sundance is the operator. Its South Antelope Prospect is also in McKenzie County. It has 4000 net acres in this play with Helis being the operator. The Manitou Prospect has consists of 1100 net acres in Mountrail County. Manitou is located to the north of Parshall Field. The Goliath Prospect consists of 3211 net acres in Williams County. Operators in Goliath are:

  1. Whiting (NYSE:WLL)
  2. Marathon
  3. ConocoPhillips (NYSE:COP)
  4. Evertson

Sundance has a fairly large acreage position given the company's size:

  1. Williston Basin-8667 net acres
  2. Niobrara-Over 16000 net acres
  3. DJ Southern-40772 net acres
  4. Kansas-4411 net acres
  5. Illinois-48739 net acres

It has a total of 118761 net acres in the United States. The most important aspect of this acreage are wells coming on line for Sundance. In South Antelope, Helis has two rigs running and plans a total of 18 gross wells this year. In Goliath, Hess has three rigs running and estimates a total of 30 gross wells drilled this year. In Phoenix, EOG has 14 wells planed by August of next year, with two Sundance 60% WI wells in the second half of 2012.

In summary, these small caps may be a good way to invest in this small cap rally. I like Sundance much more than Arsenal based on its Williston Basin and Niobrara acreage. Both are interesting as they are plays on the Bakken.

Disclosure: I am long KOG, OII, BAS.

Additional disclosure: This is the fourth article in a series of Bakken Small Caps. It is not a buy recommendation.