David And Goliath Of The U.S.-Based Bakken Formation

by: Value Digger

As the "Goliaths" of the U.S.-based Bakken formation like Kodiak (NYSE:KOG), Whiting Petroleum (NYSE:WLL), Oasis Petroleum (NYSE:OAS), Northern Oil (NYSEMKT:NOG), Enerplus (NYSE:ERF), QEP Resources (NYSE:QEP) and WPX Energy (NYSE:WPX) have always been looking to expand in their core areas, I thought to dedicate my time and write an article about the "Davids" of the U.S.-based Bakken formation as these juniors have been largely ignored by the other contributors of SeekingAlpha. However I believe that some other profitable oil producers like Canacol (CAAEF.PK) and Rock Energy (OTCPK:RENFF) are even more undervalued than the juniors of the U.S.-based Bakken formation. This is why I have already written an article about Canacol and another one about Rock Energy, but time will tell whether I am right or wrong.

Some of these Bakken juniors have also significant growth but there are some laggards too. I also believe that some majors of the Bakken formation, primarily those whose core area is in North Dakota, have run too much and have priced in a perfect execution of their exploration program. Hopefully the hypothetical high rates will show up but if not then we may see some significant corrections at the valuations of the major Bakken players as several of them have loaded a lot of debt like Kodiak, which trades for more than 200,000 $/boepd. It seems that nobody cares that KOG has a long-term debt, which is almost 5x the funds from operations annualized currently. David White, another contributor of SeekingAlpha, has also expressed his concern about some of these majors and how much higher their upside can be. In my opinion, this upside is also limited but time will tell as a significant premium has already been factored into current valuations.

The thing with the horizontal Bakken wells is that they are very expensive as they often cost more than $10M (drilling and completion) and they have a significant decline rate that hits 60% sometimes. Consequently, the productivity has to be higher than average for them to be commercially viable. The good thing is that we have seen some small declines at the total cost per well lately partly due to the increased competition from the energy services companies, which switch from drilling natural gas to oil. However I think that the further downside of the total cost per well is limited as the drilling depth of the Bakken wells has been rising.

"David" oil players

Arsenal Energy (OTCQX:AEYIF) has a growing stake into the Bakken formation (Rennie Lake, Lindahl, Stanley) as the company keeps buying land in that area. It currently holds almost 9,000 net acres there at the North Dakota Bakken with a 1,400 boepd production (95% oil and liquids). Arsenal has 10 gross (1.3 net) non-operated Bakken wells currently that have been drilled and are awaiting fracture stimulation. It is anticipated that most of these wells will be fracked and placed on production over the next two months. The total production of the company is 3,800 boepd currently with 75% oil and liquids. On July 5, 2012, this profitable company announced its intention to make a normal course issuer bid that commenced July 9, 2012, and ends July 8, 2013. Bruce Mitchell, one of the legendary investors and fund managers with a proven track record, holds a significant stake in his portfolio that also includes a few other juniors, like the profitable Second Wave Petroleum (TSX-SCS) for instance. The insiders ownership is 13%. It trades for only 39,000 $/boepd (75% oil and liquids) and almost 4x its funds from operations (FFO) annualized. The long-term debt/FFO annualized ratio is 2.

Mountainview Energy (OTCPK:MNVWF) has currently 36,000 net acres in the Williston Basin and 70,000 net acres in Alberta Bakken in Montana. The company focus is on drilling its acreage position in the 12 Gage Prospect in Divide County, North Dakota, and the Stateline Project in Sheridan County, Montana, in the Williston Basin. The insider ownership is very high and it stands at 62%. The current production of the company is 192 boepd (80% oil and liquids). The company targets a 2012 capital program of $15,5M and plans to drill 12 gross horizontal wells in the Williston Basin.

Samson Oil and Gas (SSN) holds 35,000 net acres in Montana, along with land in several other U.S. States like North Dakota (7,200 net acres), Wyoming (18,000 net acres), New Mexico, and Texas. Its production is 300 boepd (70% oil and liquids) from its North Dakota Bakken in Williams County and the company has zero debt. The market cap is $85M currently so it trades with pbv=2 and thus it has already priced a good premium in its valuation although it has losses and its annual funds from operations are only $3M.

Compton Petroleum (TSX-CMT) has been a real disaster for its shareholders as its chart shows. The company was sold recently to MFC Industrial at a dirty low valuation of 18,000 $/boepd (84% natural gas). This very low price tag triggered the interest of some law firms, which initiated actions for possible breaches of fiduciary duty by the company's officers and directors. Why do I mention Compton as it has already been sold? I mention Compton because it should be a study case for those folks who keep spreading the Bakken hype inflating the respective valuations. Why? Compton holds 79,000 net acres of Bakken land in Montana among others. The company could not find any major or even intermediate player willing to drill into this Bakken land in Montana despite the fact that this land is close to Quicksilver (NYSE:KWK) and Newfield (NYSE:NFX) Bakken land in Montana. Finally the tiny Guardian Exploration (TSX Venture-GX) showed up and decided to go for a farm-in deal in 2011 but the drilling never materialized as expected since Guardian could not find the cash to drill these properties. This story means that the Bakken label may hide some poor drilling results sometimes and the investors should always put a grain of salt on the Bakken hype.

Primary Petroleum (PETEF.PK) holds over 300,000 net acres in the Southern Alberta Bakken Basin in NW Montana. It does not have any production yet but it expects the first results from its three well horizontal drilling program and one vertical well by November 2012. The insiders ownership is 19%. It has zero debt. It is a speculative play that has to prove its land. The buyers have to be cautious with this land as it is close to Compton's Bakken land, which has not been a desirable land as mentioned above. The results of the neighbors like Rosetta (NASDAQ:ROSE) and Newfield are not exciting either according to the corporate presentation. However time will tell as the results from Primary Petroleum are coming soon too.

Earthstone Energy (ESTE) is a very small profitable company that has gone unnoticed. It has made purchases of working interest in wells located in the North Dakota Bakken/Three Forks after selling some non-core assets to free up some cash. Since Earthstone has begun to focus on being a North Dakota and Montana Bakken non-operator it has experienced some growth year over year both in production and in reserves. The company is debt free and its current production is almost 350 boepd (93% oil and liquids). There is no analyst coverage on this stock currently.

GMX Resources (GMXR) is a natural gas weighted producer with assets in the East Texas Basin and the Williston Basin of North Dakota. The company is on the transition to an oil focused producer through the exploration of its Bakken and Niobrara positions. It produces only 750 bbl/d currently but it plans to increase it by drilling primarily its Bakken properties. Its Niobrara position of over 40,000 acres with almost 600 locations could be another upside opportunity for the company. The company has received the majority of the seismic information - over 300 square miles and the engineering team is in the midst of an evaluation that is highlighting the presence of joint and fracture networks needed to identify specific targets. However GMX holds significant debt and the stockholder equity is negative as of Q2 2012. Consequently it is being pressed to sell something to reduce its high debt levels and this is why it sold some assets in Texas and Louisiana for $69M few days ago. I guess it will have to sell some more assets by year end to ease the debt pain further. If the remaining asset base proves to be as productive as the well of June 2012 and the revenue stream rises, then the company may come out from the current strained balance sheet gradually. If not, then it may follow ATP Oil (OTC:ATPAQ) into bankruptcy.

HKN Inc. (HKN) is a debt-free energy company engaged in the management of energy-based investments. HKN's current investments are its investments into BriteWater International, Global Energy Development and Gerrity Oil. During the second quarter 2012, HKN completed its due diligence on Gerrity Oil, a joint venture which will be engaged in all phases of the oil and gas business in the Niobrara Basin and the Williston Basin of North Dakota, including the acquisition of oil and gas leases, fee mineral interests, overriding royalty interests, participating and non-participating royalty interests and production payments, and participating in the drilling, completion, operation and maintenance of oil and gas wells. During July 2012, the company contributed $4 million to the newly formed joint venture in return for the receipt of a 50% ownership interest in Gerrity Oil. The second wholly owned subsidiary BriteWater pursues opportunities to commercialize its patented emulsion-breaking technology and has began the planning and design of two plants, which will utilize this technology. These plants will allow the recovery and sale of oil volumes from refinery and oilfield emulsion waste materials, which are lost through current waste disposal methodologies in the industry. Global Energy (34% owned by HKN) is a petroleum exploration and production company focused on Latin America. It is also worth noting that HKN holds $25M cash currently.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in WPX, ERF over 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.