Bakken Update: Oil Producers Continue A Strong 4Q Of 2011

Includes: DNR, LNGG, QEP, SM, WPX
by: Michael Filloon

Bakken oil producers finished 2011 strong. In Bakken Update: Q4 2011 Results Have Been Good, But Derivative Losses Hurt The Bottom Line, several companies had very good results. Although costs are climbing and Bakken crude selling price is low, the area is still providing good revenues and earnings. Several other companies have provided earnings since the above mentioned article, and it seems we are continuing to see good numbers.

Denbury (NYSE:DNR) beat on both the top and bottom line. Its 4Q revenues were $617.2 million versus estimates of $579.09. Denbury reported EPS at $.45 versus the Street's $.33. Year over year for the fourth quarter, total revenues grew 19% while expenses increased 7%. It received $103.08/barrel of oil, which was 27% greater than the fourth quarter of 2010. This was driven by expanding WTI-LLS differentials.

From September to December of last year, Denbury completed ten Bakken wells. Bakken production rates improved 18% over the third quarter. It has five rigs running, but will allow one contract to expire, leaving four in the Bakken. Sometime in the second quarter Denbury will have a major portion of its leasehold held by production. This company plans to drill the majority of its wells on pads, and better utilize its walking rigs. It will drill 17 Three Forks wells in 2012. One major point made by Denbury was several wells it completed with higher 60 and 90 day IP rates when compared to 30 day numbers. Its operational issues sometimes affect shorter term production and in these cases initial production can be held back making it look as though the completion is not as good. Denbury seems to be well placed on higher oil prices especially with a large portion of production being LLS.

Unlike Denbury, which has always been an oil producer based on its EOR business, SM Energy (NYSE:SM) used to be a natural gas producer. SM has been working very hard to move to liquids and had a good fourth quarter. It reported EPS of $.60 versus estimates of $.57. SM is still gas heavy as it is 56% of production. It received $87.52/barrel of oil in the fourth quarter which is reflected by the majority of oil production coming from the Eagle Ford and Williston Basin. SM managed to come in well above production estimates while keeping costs in check.

One thing to keep in mind is SM's proposed sale of assets in the Marcellus. The purchaser failed to hold up its end of the agreement for $80 million net to SM. This acreage had to be marked down to its fair value at the end of the year. This is why SM reported a loss of $1.89/share. Its shares were up Thursday because there is a belief this was a breach of contract; this deal may go through (or there could be compensation).

SM is levered to the Eagle Ford as 2012 capital expenditures will total between $1.4 and $1.5 billion. Of this, $650 to $700 million will be spent on the Eagle Ford and $160 to $185 million on the Bakken. It is currently operating four drilling rigs in the Williston Basin. It has 202,000 net acres in the Bakken/Three Forks. Production increased in the Williston Basin from 5.3 MBoe/d in the third quarter to 8.2 MBoe/d in the fourth. SM plans to focus on its Gooseneck (Divide County) and Raven (North McKenzie County) prospects. It will begin drilling in Bear Den Prospect (Northeast McKenzie County). The Bear Den could be the best acreage SM has and I am optimistic of its upside potential. This is a very well run and managed company that has notoriously carried a conservative balance sheet. I would be careful with this name given its gas production.

QEP Resources (NYSE:QEP) had a 7.7% increase Thursday, and crossed above its 200-day moving average. It reported EPS of $.58 versus estimates of $.46. It also beat on the top line with revenues of $853.3 million versus estimates of $759.3 million. QEP grew liquids production by 54% in 2011, but it only accounted for 29% of net realized production revenues. Liquids were 14% of production volumes.

QEP has 90,000 net acres in the Bakken, which is in a very good area. Since the end of the third quarter it has drilled and completed 11 Bakken/Three Forks wells. It has 30 operated producing wells and working interest in 93 others. In the fourth quarter it had average production of 5019 Boe/d. It is currently drilling 2 operated wells, and completing two others. Most interesting is QEP's 10 well pad. To my knowledge this would be the first test of 5 middle Bakken and 5 upper Three Forks well. It currently has 2 rigs in the Williston Basin, and plans to add a third this year. In summary, it was a very good quarter for QEP, but it will need to increase liquids production significantly to offset the price of natural gas.

WPX Energy (NYSE:WPX) had an interesting fourth quarter. After being spun off, it is the first quarter as a stand alone oil and gas exploration and production company. In the fourth quarter it had $992 million in revenues versus the street estimate of $652 million. Estimates for fourth quarter EPS was $.19. WPX increased domestic revenues from oil and natural gas liquids 87%. Oil production was up 65% and natural gas liquids increased by 25%. WPX has reduced 2012 capital expenditures by $400 million due to the low price of natural gas. It will spend 68% of its 2012 cap ex on liquids plays. WPX is gas heavy as it constitutes an estimated 80% of production this year. This compares to 83% gas and 17% liquids production in 2011.

In the Bakken, WPX tripled oil production from the first quarter to the fourth quarter of 2011. Given its low liquids production base, it would seem a good move to purchase additional acreage in the Bakken. A company like Kodiak (NYSE:KOG) would be a nice fit in my opinion. WPX had five rigs in the play at the end of 2011, and plans a sixth at mid-year. All of its acreage will be held by production by year end. Each rig will drill 10 wells/year. Given the number of rigs, WPX is planning approximately 56 wells in the Bakken/Three Forks. It is spending more 2012 cap ex in the Williston Basin than any other of its plays. I would be careful with this stock, as it is gas heavy.

Linn Energy (LINE) is another Bakken producer that had hedging losses. Without this loss, it would have reported $.51 share, which met analyst estimates. It posted fourth quarter revenues or $326.4 million compared to analyst estimates of $360 million. Oil and gas derivative losses were more than $210 million. Linn is 100% hedged in oil and natural gas which makes its 7.5% dividend possible.

Linn has quietly built a 17,000 net acre position in the Bakken. In the fourth quarter of last year, its net production in the Bakken in 3500 Boe/d. Since mid-year of 2011, it has increased production 40%, mostly through acquisitions. Linn plans to spend another $54 million this year.

In summary, derivative losses continue to be a problem. Low Bakken selling cost has also been difficult. Denbury seems very well positioned. LLS is selling for a premium to WTI. Denbury is well positioned. Linn Energy is fully hedged and protected from price swings in the market. SM Energy continues to do well, but I would like to see it push liquids production harder. QEP and WPX both produce mostly natural gas. Since we could see natural gas prices continue to struggle, both of these companies could struggle too.

Disclosure: I am long KOG.

Additional disclosure: This article is not a buy or sell recommendation.