Bakken Update: QEP's Acquisition Of Helis' Acreage Is Fair On Valuation

| About: QEP Resources, (QEP)
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QEP Resources (NYSE:QEP) made a big announcement yesterday afternoon. It reportedly purchased 27,600 acres in the Williston Basin for $1.38 billion. This was a purchase from multiple companies 12 miles west of its Fort Berthold leasehold. This increases QEP's Bakken acreage to 118,000 acres.

The initial announcement named Unit Corporation (NYSE:UNT) and Black Hills Exploration and Production (NYSE:BKH) as the non-operated sellers. Unit Corp will reportedly get $268 million and Black Hills $243 million for 85% of its Bakken/Three Forks acreage. The third and most important seller is Helis which operates the acreage. Helis will receive an estimated $869 million for its part of the leasehold. It operates the 73 gross wells and 27,600 net lease acres. At the end of the second quarter, this leasehold produced 149 thousand barrels of oil and 171 thousand Mcf of natural gas.

This purchase looks to have a very large premium to other deals in the Bakken. Much of this price was paid for infrastructure and current production, which makes the deal look larger from an acreage standpoint. QEP adds production of 10500 Boe/d with this acquisition, and adds 125 million barrels of oil equivalent. This part of McKenzie County is gassy as it produces 10% natural gas, 81% oil and 9% natural gas liquids. This compares to EOG Resources' (NYSE:EOG) core Parshall Field acreage which is 2% natural gas, 92% oil and 6% natural gas liquids. The higher percentage of natural gas does provide better IP rates, but as a resource is not near as economic at today's prices.

Three analysts provided an opinion on this purchase, and I believe two were correct in their assessment. Jefferies analyst Subash Chandra stated that QEP "exhibited discipline and waited for a reasonably priced opportunity." Raymond James analyst Andrew Coleman stated he believed the purchase on a price per acre "appears in line." In my opinion, this acreage was by no means cheap, but given its core is prime acreage, it does deserve a premium. There have been several estimates as to the price per acre. This can be difficult to calculate given leasehold infrastructure, but this plus daily production places the core acreage in the $19000/acre range. The non-core acreage sold for roughly $12,000/acre. QEP has been vocal for some time it was interested in adding to its Williston Basin leasehold. Because of this, expectations had been Kodiak (NYSE:KOG) was the prime candidate. In my opinion, this would have been a better fit, but would have also been at a higher cost.

Looking at QEP's new acreage, Helis has had some excellent results. Helis has used a completion method much like that of Kodiak. It uses a tight choke, around 80000 barrels of water and over 3 million pounds of proppant. The only remarkable difference is its use of 27 to 28 stages in its most recent wells. Here are some of Helis' better results.

Helis Well Results (NE McKenzie County)
Well IP Rate 90-Day IP Rate
Gabbert 3-3/10H 2421 1033
Johnson 1-4/9H 2246 774
Jones 4-15/22H 2656 1101
Thompson 1-29/32H 2521 1201

To gauge the value of these well results, here are some of Kodiak's best results.

Kodiak Well Results (McKenzie and Dunn Counties)
Well IP Rate 90-Day IP Rate
Koala 3-2-11-14H 2816 845
Koala 9-5-6-5H 2526 797
TSB 2-24-12-1H3 2845 858
SC 2-24-25-15H 2698 880

To date, these Kodiak wells were some of the best in the basin, but Helis' are better. QEP estimates its new acreage will have on average EURs of 900 MBoe including both middle Bakken and Three Forks/Sanish pay zones. Keep in mind this is the high end of the EURs on its Fort Berthold acreage. QEP has been aggressive in the Williston Basin. It has two ten well pads currently drilling on the western shore of the lake.

In summary, this could be the start of a Bakken land grab. Costs are coming down and oil transportation is improving from the second quarter. There is plenty of upside to the Three Forks as Continental plans to drill four wells in the second bench and another four in the third bench this year. This could add significant reserves if successful. By year end, much of the best areas will be held by production. The increase in pad drilling should increase costs further, while using less rigs to drill those wells. Look for further deals to get done. Favorites to sell are Oasis (NYSE:OAS) and Kodiak. Look for other players to divest Bakken acreage such as Denbury (NYSE:DNR). It is impossible to know which companies will get bought, but it seems obvious this is a great time to buy in the Bakken.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not a buy recommendation