I started thinking last night that I might be wrong regarding timing of a secondary here. Often we get used to management teams and their habits and fail to see when those habits might have changed or evolved. The Street is completely guilty of this in the case of HK where they continue to see a lack of capital discipline and a secondary around every corner despite promises that have been made and kept to the contrary of the Street's worry. Back to the case of Brigham. I had supposed that they would announce another equity offering since I've been following them for quite some time and they have more often than not exercised the public market option when good news coincided with a market/group rally. Besides, almost all of their peers have gone to the markets of late and these deals have been well received. So with yesterday's news (see our post here) of reserves and strong 4Q production growth, with more strong results in both Ross and Rough Rider, my sense was that one press release of operational items would be followed by another, post close press release announcing something along the lines 10 mm shares for sale. And that could obviously still happen Monday or anytime.
However, I went back and re-listened to a couple of their more recent conference calls and I'm now not so sure that the time is right for a deal in their eyes. They certainly don't need to do a deal now. 2011's budget is easily fundable through a combination of $315 mm in cash on the balance, blossoming cash flow from the Williston, potential non core asset sales, and an untapped and recently boosted revolver.
Given that BEXP is the second largest position in the ZLT, having grown to that status the good old fashioned way, and that we've owned it since just before they drilled their first long laterals in the Bakken (so some 40 wells back) we've had an opportunity to watch management transform the company, and of late, to see these efforts carry through to the top and bottom lines as well as the reserve report. Since, the April secondary and rig count acceleration, they really are for the first time in their recent history, under no immediate pressure to do a deal. So, I'm backing off of yesterday's concern, which appears to have been shared by many in the market as the stock barely budged on strong results and what will mean another quarterly beat in February. I also thought I'd take a moment to refresh, in a back of the envelope way of course, a few sets of numbers.
- Core acreage (Ross - East of Nesson and Rough Rider - west of it) is 205,600 acres,
- On this they think they can drill at least 590 Bakken and Three Forks wells.
- Their EUR range is 500 to 700 MBOE per well.
- If we go with the low end that's 295 mm barrels.
- Let's risk that figure a bit and call it 200 mm barrels.
- Using my simple $15 a-barrel-in-the-ground metric (which would be low in a takeout given the current strip) that would come to a value of $3 B.
- BEXP's enterprise value now is $2.98 B. Hmmm, seems fair enough.
- Ah, but then consider what BEXP didn't put in the press release. No word on the Brad Olson 9-16 3H well, their Rough Rider downspacing well. The 2H well IP'd like it was alone in the unit. I highly doubt the 590 locations will be all the field sees.
- If spacing moves to 4 wells per unit in the core for the Bakken and 2 wells per unit for the Three Forks, as I suspect will be at least the case, the well count basically doubles.
- I also doubt the low end of the EUR range holds. As the completion methods have been honed and the number stages has risen, Brigham has shown a consistent increase in IPs. Not just 24 hour rates but improved 30 and 90 day rates as well. The type curves will likely drift higher this year, leaving the 500 MBOE low end to history.
- But sticking with 500 MBOE per well for simplicity sake and assuming they double the number of wells on the core acreage, that same $15 per barrel in the ground yields $6 B in value. That's sounds better.
- Ah, but then, what else did they leave out of that press release? How about 2 wells (1 of which should be flowing) in Montana. All but 10,000 of the 147,000 net acre Montana position is notincluded in the core figure listed above.
- Given that BEXP is far from alone in thinking we will see more than 2 Bakken and 1 TFS wells per unit, the $6 B case is going to gain more and more traction over the course 2011.
- And thus, you get the rest of the company's positions for free.
- Pricey on forward cash flow? Sure, has been for a long time, but it is rapidly moving the multiple lower. Pricey on 2010 proved reserves? You betcha. They are working that down as well. But will either of those things matter to a suitor, looking for someone who has more than just delineated a large position in the Williston with some scattered wells but instead for soneone who has systematically stepped out to all parts of the position and demonstrated repeatable success? This year, BEXP will test 4 well per unit pilots in Rough Rider and Ross, drill more Three Forks wells in Rough Rider, and further test Montana. Perhaps late in the year they may even look to other zones including the Red River and Nisku.
- Could they pop off another deal Monday? Again, sure. But why do it now? Why not wait until more of the benchmark catalysts are out of the way? But if they do, my sense is there will be more than ready appetite to receive it.
Disclosure: I am long BEXP, HK.