Bakken Update: Buyout Candidates For The Second Half Of 2012

Includes: CLR, HK, KOG, OAS, QEP
by: Michael Filloon

As a general rule, I do not believe it is a good investment thesis to buy stocks on the sole basis of it being bought. If one invests in good companies, it will grow and produce decent returns. Companies that produce good returns have a better chance of being bought, which is added upside. The recent purchase of Helis operated acreage in northeast McKenzie County has started talk of further acquisitions in the Bakken. QEP (NYSE:QEP) purchased this core area along with the non-operated interests. It has on average 90% working interest in the 27,600 net acres.

QEP wasn't buying acreage blindly; it was looking for a good fit. QEP's core is in Fort Berthold. Its acreage is predominantly in two fields. Heart Butte Field is located on the west of the lake, and Deep Water Creek Bay is on the eastern shore. It also has smaller non-core acreage in Williams and McKenzie counties. QEP purchased acreage in Grail, Croff, Spotted Horn and Blue Buttes fields. Grail Field has seen the most development and would be considered the main portion of the core acreage. It is 13 miles west from Heart Butte Field. This is important as it is not far from its existing acreage. It is also off of Fort Berthold, where well costs have been approximately $500,000 more per well. It is important to remember if this deal doesn't get the approval of all selling parties, it doesn't happen.

The QEP purchase doesn't specifically effect the chances of other buyouts, but it may show us there is value. QEP's purchase shows a new trend in the Williston Basin. Given the decrease in costs, improving differentials and move to pad drilling could help to push the price per acre upward.

There has been much said as to the best way to play the next Bakken buyout. Looking for the best candidate is no simple task. There are several things that need to be known about the company. The most important is acreage. Even a poor operator could be sitting on a gold mine, if they have the right geology below their feet. In some cases, the operator could be as important as the acreage. Brigham's buyout by Statoil (NYSE:STO) was done with the intention of keeping the company together. Brigham was known for some of the best wells in the Bakken, and by keeping the key players involved, Statoil didn't have to worry about that end of the business. Operated acreage is also important, as bigger companies that purchase smaller ones want to have control of their own destiny. Although costs tend to be lower as a non-operator, the acreage is worth less as you are stuck with developing the acreage when the operator wants to. Infrastructure is important. If natural gas, oil and water can all be piped, costs decrease significantly plus there are no worries of snow or flooding causing wells to be shut in. Let's not forget, the company has to want to sell.

There have been several Bakken producers mentioned as "best buyout prospects" with little concern for the variables needed for a buyout to occur. Brigham is a good example. In the face of a difficult winter followed by severe flooding, costs were spiraling out of control. The company had gotten very big, very fast and it was also getting difficult to manage. Management wanted to keep running the operations, but essentially needed some help, and more importantly security. Rumor has it there were several companies invited to take a look at Brigham, and Statoil was one of the few that was interested. The deal went through, management was rewarded and kept on to run the Bakken program. Statoil was able to get into the Williston Basin, and do this without overpaying.

There are several names that have gotten a lot of traffic based on a buyout. Of these, I believe two have a very good chance. The first name, and the company that has the best chance to be purchased is Oasis (NYSE:OAS). Oasis has about 320,000 net acres in the Williston Basin. It has 108,000 net acres in East Nesson. When it began accumulating this acreage, it did so near the Nesson Anticline. This structure was the basis for vertical oil development in the 80s, where the Madison pay zone was targeted. Being to the east of the anticline, it was expected to be a better area for horizontal development. Its acreage in Mountrail County is very good, as it has developed a fairly large area in Alger Field. It has 8,000 acres in the Sanish Field, but most of those acres are non-operated. Another very good prospect for Oasis is in Camp Field. This is in north McKenzie County and is known as its Indian Hills prospect. It is characterized as a deep, higher pressured area that produces some very good IP rates much like Alger Field. Its Red Bank prospect in western Williams County and Cottonwood prospect in northwestern Mountrail and south Burke counties are somewhat similar. These areas are defined by geology of lower pressure at a lower depth. These wells are less expensive to drill, but do not produce the real high initial production rates seen in better areas. Although IP rates are lower, these wells are economic and still produce EURs in the 400 MBoe to 450 MBoe range. It should be noted that GeoResources was recently purchased by Halcon Resources (NYSE:HK) and had Bakken acreage in the Red Bank area. Although it doesn't get the press, it is still a good area. Its West Williston acreage totals 204,000 net acres, including areas in Montana.

Oasis is attractive on many levels, and to many different types of companies. With 320,000 acres, it is appealing to bigger international oil companies that want a big footprint in the Bakken. It also provides acreage in most areas of the Williston Basin, making it much easier bolt on additional acreage in the near future. This company is also attractive to smaller companies that predominantly produce natural gas and natural gas liquids. The price of natural gas is difficult enough, but natural gas liquids have also decreased in value significantly. Companies the size of QEP and bigger could be motivated to grab a company that will average production of 22 to 24 MBoe/d in the third quarter of 2012.

Kodiak (NYSE:KOG) comes in a close second to Oasis. Although I like Kodiak better as an operator with better acreage, this company may fit a more specific type of buyer. It has 155,000 net acres in the Bakken. 42,000 of these acres are in its Polar prospect. This acreage is in southeast Williams County and is part of Kodiak's most recent acquisition. Once Kodiak began drilling and completing wells in this prospect, it was already producing IP rates double that of the last operator. 24-hour initial production rates between 3,000 and 4,000 Boe/d have been the average, but at a much higher GOR than wells in the Koala. EURs may be higher here, but at a much higher natural gas content. Kodiak's Dunn County acreage is separated into several different prospects. Two Shields Butte is located in Mandaree Field, 10 miles west of the lake. In the third quarter of last year, Kodiak had a 90-day IP rate in this prospect at over 1,000 Boe/d. Skunk Creek is in the same general vicinity as Two Shields Butte, and also had a 90-day IP rate over 1,000 Boe/d. Moccasin Creek is approximately 10 miles south of Skunk Creek and Two Shields Butte. In 2010, Kodiak had two wells just under 1,000 Boe/d in this prospect. Of its Dunn County acreage, only Charging Eagle has been a disappointment. It is to the east of Moccasin Creek, just across the lake. Charging Eagle wells have average 90-day IP rates in the 450 to 500 Boe/d. Kodiak has 34,000 net acres in Dunn County.

Kodiak's Koala acreage is very good, and might be its best. It has 10,000 acres in this north McKenzie County prospect. Kodiak's best wells are here, and has two 90-day IP rate above 1,100 Boe/d. Its Smokey prospect is six miles west and thirteen miles south of the Koala prospect in Poe Field. The Smokey prospect is in Pembroke Field, and has had 24-hour IP rates in the 2,400 to 2,800 Boe/d. Longer-term production numbers aren't in yet, but these wells will still be quite good. In north Williams/south Divide counties is Kodiak's Wildrose prospect. It has 24,000 acres here, and its most recent well was economic. Well costs here are much lower as the play has less depth, and has lower pressure. Kodiak is not planning on doing many wells here in the near term as the rate of return is not as good. Its Grizzly prospect is in southeast McKenzie County and accounts for 27,000 net acres. These wells are Kodiak's worst and will be interesting to watch going forward. EURs are still in the 400 Mboe range.

Kodiak is an interesting company. It has some of the best acreage in the Williston Basin. It is also one of the best operators. Of its 155,000 net acres, 86,000 is considered prime. If the Smokey prospect is added to this group, the total moves to 103,000 acres. What is important about the location of this acreage is the upside to lower benches of the Three Forks. Contiental's (NYSE:CLR) Charlotte wells are in Banks Field which is only a few miles from the Koala and Polar prospects. Burlington's (NYSE:COP) Sunline well, in Clear Creek Field was a successful test of the second bench of the Three Forks and only 16 miles northwest of Mandaree Field. Kodiak's Dunn County acreage is not far from QEP's two 10 well pads. If these tests are successful, it should increase the total resource recoveries in the area.

In summary, both Oasis and Kodiak have interesting buyout prospects. Both are Bakken pure plays, and have acreage in viable fields throughout the Williston Basin. These two companies have come a long way in a short time with respect to reducing costs, and it would seem these costs will continue to head lower. Bakken oil transportation will continue to improve as well, and should see tighter differentials. Right now is one the best times to buy in the Bakken in the past couple of years.

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.

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