Bakken Update: Small Caps, Part VII

by: Michael Filloon

Click here for Part 6

In the seventh part of a series of articles on the smallest players in the Williston Basin Bakken/Three Forks, I will continue to break apart the smaller companies in hopes of gaining a better understanding of which are or are not good ways to play the Bakken. Renegade Petroleum (OTC:RPTTF) is a name I have written little about. It has significant acreage in the Bakken for a company of its size. This stock looks cheap on paper, but it has most of its acreage in Canada, and untested acreage of Renville County in North Dakota. It is focused on five areas:

  1. Viking-Dodsland: 17007 acres and 146 net potential locations
  2. Bakken-Stoughton/Huntoon: 5884 acres and 9 net potential locations
  3. Mississippi-Saskatchewan/ND: 84810 acres and 87 net potential locations
  4. Spearfish-Waskada: 3640 acres and 22 net potential locations
  5. Bakken-ND: 23673 acres and 3.5 net potential locations

This is significant acreage, but some acres are better than others. A good example is Kodiak's (NYSE:KOG) Koala play in McKenzie County. It has 10000 net acres in this project. Kodiak has had some very good wells here, much better than expectations. It also has both Bakken (4) and Three Forks (3) pay zones, for a total of 7 wells/1280 acre spacing. I believe it is possible that this area could produce 5 Bakken and 5 Three Forks wells from a pad, but this will take time to know for sure. Recent Kodiak wells and results are:

  1. Koala 9-5-6-12H3: IP rate of 2327 Boe/d and 30-day IP of 1072 Boe/d
  2. Koala 9-5-6-5H: IP rate of 3042 Boe/d and 30-day IP of 1377 Boe/d
  3. Koala 3-2-11-14H: IP rate of 3412 Boe/d and 30-day IP of 1337 Boe/d
  4. Koala 3-2-11-13H: IP rate of 3021 Boe/d and 30-day IP of 1144 Boe/d

These are all very good well results, and depending on the model used, these four have EUR's of 800000 Boe. There have been three recent purchases in this general vicinity:

  1. Enerplus (NYSE:ERF) purchased 46500 net acres for $456 million
  2. Williams (NYSE:WMB) purchased 85800 net acres for $925 million
  3. Kodiak purchased 13500 net acres for $235 million

It should be noted that each deal is different, due to production, infrastructure, equipment, etc. A rough estimate of $10000/acre in this area seems fair.

Renegade's has 29557 acres in the Bakken. The majority is in Renville County, ND. This acreage has had little by the way of test wells. This area has had some vertical wells, but most seem to either be dry holes, or abandoned and plugged. Renegade's Renville acres seem to be too far north and east to be a good horizontal Bakken producer. The northern most point of good Bakken production extends into southeast Divide and southwest Burke. This is not to say there is no oil in Renville County, as there are other possible vertical pay zones. Renegade has one completion in Renville. A Trout 6H 3-14 was spud on 11-27-2010 and had an IP rate of 37 Bo/d. Keep in mind this is only the first completion in this play by Renegade. Its results could be better, and it has another well planned for the fourth quarter of this year. It is northwest of the A Trout well. An important variable is the cost of these wells. I would need to see much better production to believe this area is commercial. I will be very interested in this.

Renegade's other Bakken acreage is in Canada. It has 5884 acres in Stoughton/Huntoon and company estimates for 30-day IP rates is 90 to 130 Bo/d. Reserve estimates are 78000 to 108000 bbls of oil. These Canadian Bakken numbers are much lower than that of the North Dakota Bakken. The reason the Canadian Bakken underperforms the North Dakota Bakken has to do with shale maturity. The mature, overpressured North Dakota will significantly outperform the Canadian Bakken. The same types of performance has been see by Petrobakken (PBKEF.PK). It has SE Saskatchewan decline rates of:

  1. First year 65%
  2. Third year 45%
  3. Fifth year 22%
  4. Ninth year 17%
  5. Thirteenth year 10%

Decline rates are not that much different from the North Dakota/Montana Bakken wells by way of percent, but since production in the U.S. is greater, there is a much higher initial production. The major difference in these wells is the cost per well. If well costs are low enough it would offset the decreased production. Petrobakken's stock has performed terribly. It has fallen from $22/share to $8.66/share over the past 12 months. On a good note, it has decreased well costs significantly in the Saskatchewan Bakken, by moving from single laterals to bilaterals. This has helped to decrease payout from 1.3 years to .8.

In summary, an investor should be very careful when investing in stocks with emphasis on the Bakken. Companies with acreage in northwest Dunn, southwest Mountrail, and northeast McKenzie seem to be the epicenter of production. No matter the direction, production seems to taper off the farther away one gets from this point. To the north, southeast Divide and southwest Burke County seems to be the limit of good producing wells. To the west, eastern Richland, Sheridan, and Roosevelt county have seen some very nice activity, and I think there is more upside here than it is given credit. To the south, northern Golden Valley and Billings along with western Stark have interesting Three Forks wells. To the east, all of Mountrail and eastern Mercer and McLean should have some good wells, but much of the attention is to the western part of North Dakota and into Montana.

It is possible that some of the Bakken fringe players will be successful, but I wouldn't blindly throw money at these names, I would look for smaller companies with acreage surrounded by bigger players. Samson (NYSEMKT:SSN) just made a fringe purchase in Roosevelt County of $3.5 million for 20000 acres. Samson's acreage is surrounded by Brigham (BEXP), Whiting (NYSE:WLL), Continental (NYSE:CLR) and EOG Resources (NYSE:EOG). Triangle Petroleum (NYSEMKT:TPLM) has 43000 net acres in Station Prospect of Roosevelt and Sheridan Counties. Abraxas is a little more interesting because its acreage is so spread out. It has acreage in Williams and McKenzie counties that is good (but not great). Its Burke and Divide county acreage is also good. Its Billings County acres are not as good in the Bakken, but may have very good Three Forks exposure as seen by Whiting's results. Investigating these names is very important, as Bakken acreage values differ greatly from one end of the Williston Basin to the other. Always remember, we are investors and not speculators. Always confirm there's oil in the ground.

Disclosure: I am long KOG, TPLM.

Additional disclosure: This is the seventh part on a series of articles focusing on Bakken small caps. It is not a buy recomendation

Continue to Part VIII >>