Bakken Update: Small Caps, Part V

by: Michael Filloon

Click here for parts I, II, III, IV.

Small caps are on a tear, as investors continue to buy risk. The Bakken has been a focus area of this move as Brigham (BEXP) was purchased by Statoil (NYSE:STO). The Brigham sale has induced investment in the remaining players as companies are inexpensive. This could cause a period of consolidation as other names, like Petrohawk, have also been purchased. One thing is certain, is there will be other companies purchased, especially those with large, concentrated acreage.

I believe investors should focus on companies working in the Williston Basin. There are several reasons for this, starting with estimated ultimate recovery. Most of the oil producers in the Bakken have average EURs between 500 and 600 Mboe. This average not only includes wells in Mountrail County, but also Divide. I believe these estimates are very low, as IP rates have improved significantly over the past year. Areas that produced just 1200 Boe/d in 2009, are now producing well over 3000 (and higher) Boe/d.

Producers like Brigham, Kodiak (NYSE:KOG), and Newfield (NYSE:NFX) have had top notch results, and since these producers are able to acheive very high production levels, other will be able to also. QEP Resources (NYSE:QEP) announced plans for its first 10-well Bakken/Three Forks pad. Continental (NYSE:CLR) is not testing the Three Forks second bench. It is possible this and other benches will be commercial, increasing production per well significantly. In summary, I believe we will continue to see increased EURs and locations.

Investment in smaller Bakken names could produce the best returns. These small caps currently have a very low production rates. Because these companies are just getting started, production growth can be exponential. The downside to these names is they carry high multiples, and if the companies do not perform or the market heads lower, larger losses may be realized.

American Standard Energy Corp. (ASEN.OB) is an oil production company with acreage in three major U.S. oil plays:

  1. Williston Basin-32300 net acres targeting the Bakken/Three Forks
  2. Permian Basin-6500 net acres
  3. Eagle Ford-1200 net acres

As a non-operator in the Bakken, it has small interests in a very large number of wells. These wells have very low working interests. It has interests in 51 gross or .69 net Bakken/Three Forks wells that are currently producing. Wells currently being drilled or completed total 27 gross or .54 net. Of these 27 gross wells, here are a few that could be significant for American. The operators are listed after well name:

  1. Drone #1-32-27H, Slawson: Dunn County and 6.25% WI
  2. Borden Federal 5300 24-34H, Oasis (NYSE:OAS): McKenzie County and 4.93% WI
  3. Charles 3-10#1-H, Brigham: Williams County and 4.68% WI
  4. Charles 3-10#2-H, Brigham: Williams County and 4.68% WI
  5. Kellogg Ranch 1-32H, Continental (CLR): McKenzie County and 3.27% WI
  6. Oren USA 31-6TFH Marathon (NYSE:MRO): Mountrail County and 2.79% WI
  7. Sidonia 26-2413H EOG Resources (NYSE:EOG): Mountrail County and 1.85% WI
  8. Harry Stroh 1-8-5H-143-96 Occidental (NYSE:OXY): Dunn County and 1.56% WI

American Standard Energy is working with very good operators. In the second quarter of 2011, it had production of 558 Boe/d. American estimates its 2011 exit rate will be about 2000 boe/d. This company continues to increase production, and seems to be able to continue this trend. In the first half of this year it spent $30.6 million on acquisitions and $18.3 million on drilling. In 2012, it plans to spend between $150 to $200 million on these activities. American believes it will be able to cover this cap ex with cash flows and its credit facility. This name is highly speculative, but it has some very good things going for it. It has begun its Permian well program with working interests as high as 100%. It continues to develop its non-operated program in the Bakken/Three Forks. Analyst estimates have this company growing 800% from 2011 to 2012.

Voyager Oil and Gas (VOG) looks to be a very good way to play an increase in the price of oil. Voyager runs its business much like that of Northern Oil and Gas (NYSEMKT:NOG). Voyager buys minority positions in oil and gas acreage. It is only responsible for direct drilling, development and operating cost per well. Non-operator negatives are a lack of control as to when these wells will be drilled and completed. The non-operator is also stuck with the operator even if the well does not produce as well as it should. Voyager has interests in four US oil plays:

  1. Bakken/Three Forks: 28000 net acres
  2. DJ Basin: 14200 net acres split evenly with Slawson
  3. Tiger Ridge: 65000 net acres (Gas Play)
  4. Heath Formation: 33500 net acres

Participation in the Bakken increased from 18 gross wells in 2010 to 70 gross wells in 2011. Average well costs of $7.5 millions on two section spacing. The majority of its acreage is in McKenzie and Williams counties in North Dakota and Richland County, Montana. It has accumulated this acreage for an average of $1500/acre. The combination of lower costs and high output Bakken wells make this a very interest investment.

In summary, both are compelling small cap, Bakken focused oil producers. Both have non-operated programs in the Bakken/Three Forks that are expanding. In a bullish environment, smaller companies will outperform, and I would expect these two will also.

Click here for part VI.

Disclosure: I am long KOG, NOG. This is the fifth part of a list covering small cap oil and gas production in the Williston Basin. This is just a list and is not a buy recommendation.