Continental Resources (CLR) plugged by Analyst Note

Today, Deutsche Bank analyst Shannon Nome came out with a negative note on Continental Resources (CLR) stating in a note to clients that shares have seen a 167 percent jump year-to-date, which outpaces the average section gain of 37 percent during the same period. She also reiterated her target of $53 which is more than 20% below the current share price. Furthermore, she outlined the “downspacing potential” within the important Woodford Shale and North Dakota Bakken plays and stated that the stock discounts much of this potential.

So lets take a step back and analyze this risk by looking at downspacing. Downspacing is a spacing unit defined as the area which one well can effectively drain. If you put too many well close together, you could effectively drain a portion of your well and reduce the pressure of adjacent wells.

Now in looking at recent CLR reports, It appears they are using 640 acre spacing for ND Bakken
and 80 acre for Woodford Shale which look to be sufficient for that region and has not caused any saturation as yet. I don’t see any evidence that this spacing is a major concern given necessary adjustments can be made if they run into a problematic section. As conspiracy theorists and message boarders like to postulate, it looks like the Analyst is just trying to bring down the stock price so DB clients can load up. Or a more reasonable theory is that she simply thinks that the stock has gotten ahead of itself and needs to be put in the corner for a while with the Dunce cap on.

The important take away for any type of short or mid term CLR investor is that ANY analyst can bring this type of disaster to your holdings at any time. Expect a negative note or downgrade if one of your stocks has made a good run in a short period (0-3 months). Taking a good portion off the table may mitigate this risk and prevent you from throwing up a little in your mouth when you see a downgrade at 7:30 AM and there is nothing you can do about it.

Daily Roundup (6/10/2008) – Bakken bloodbath?

Today’s spiraling market and negative market sentiment put heavy pressure on the Bakken related stocks after solid runups during the last 2 months. Light, sweet crude for July delivery fell $3.04 to settle at $131.31 a barrel on the New York Mercantile Exchange. In addition, Fed Chair Bernanke put out some strong words about inflation which strengthen the dollar and added additional pressure on oil stocks.

For the better part of the day, major bakken players such as BEXP and CLR were showing 6% and 12% losses respectively, but were able to claw back in the last 2 hours of the trading session to pare their losses in half as shown in the chart below:

June 10 2008 -  Bakken Stock Performance  BSIC, EOG, BXP, NOG, CLR

Is this the beginning a negative downtrend for Bakken stocks? Not necessarily, the volume was fairly light during the course of the day and picked up considerably during the last hour of trading where the stocks recovered. The sector was due for a pullback after its recent run and we should expect more capitulation over the next few weeks that may provide better entry points for long term holders. We still like the mid term outlook (2-6 months) and expect continued growth as long as oil stays above $115 a barrel. BSIC, BXP, NOG, KDKN, KOG are all small cap stocks and have the potential to outpace their larger counterparts as they are less susceptible to short term gyrations in the price of oil and more affected by their ability to grow their respective fifedoms.

Basic Earth Science (BSIC.ob) – Ready to break out?

Basic Earth Science Systems, Inc. (BSIC) is an independent oil and gas exploration company. Basic is involved in the exploration, acquisition, development, operation, production and sale of crude oil and natural gas. The Company’s activities are focused in the North Dakota, Montana portions of the Williston basin, the Denver-Julesburg basin of Colorado, the southern portions of Texas, and along the onshore portions of the Gulf Coast.

The Williston basin continues to be the Basic’s primary area of focus. From a drilling perspective, Basic has three areas within the Williston basin. The Company has acquired a 20% interest in 13,000 acres in its Banks prospect in McKenzie County, North Dakota. It has acquired leases on approximately 4,200 gross acres in northern Sheridan County near the Flat Lake Field. Basic has acquired a 1.075% working interest in the TR Madison Unit.

In the latest quarter, Basic Earth Sciences, (BSIC) reported net income of $562,000, nearly three and a half cents ($0.033) per share, on oil and gas sales revenue of $2,080,000 for the third quarter ended December 31, 2007. Most of their revenue comes from their other wells in Colorado at their Antenna

Federal Property as evident by a recent press release that outlined flow data below which shows the initial production rate reported to the Colorado Oil & Gas Conservation Commission for these five new wells:

Well Name Bbls. Oil/Day MCF/Day NRI
USA 2-36 51 350 0.52500
USA 21-36 0 638 0.16375
USA 24-36 22 109 0.16375
USA 25-36 73 348 0.16375
USA 41-36 67 358 0.02000

Recently, BSIC has acquired 2000 net acres in the Bakken region and have a small NRI (<10%) in some drilling efforts in the region. Basic has a 1.2469% working interest (0.9975% net revenue interest) in the well which is operated by Marathon Oil Company. In addition, the horizontal well drilling required in the Bakken region is quite expensive potentially running into the millions of dollars per well to bring it online. We are watching on the sidelines to see how BSIC does over the next few months as it is approaching 52 week highs and volume may dry up if oil pulls back after July 4th as is expected. Our price target for BSIC is $2.50 but that does not include any Bakken related revenue as that is marginal at this point. The positive thing this company has going is that it is conservative and well managed so the Bakken portion of their portfolio will probably grow, just not at the rate that short term investors would like.

Northern Oil & Gas – Our price target $24

UPDATE (6/16) – NOG has been under selling pressure lately and is currently around $13.20. Don’t panic if you are already in, there was a large runup from 10-14 and this is profit taking combined with sector pressure. We are still holding long term. If you are not in yet, this may dip into the low $12’s before a bottom is formed.

UPDATE (6/10) – We do now have a position in NOG @ 14.20

Northern Oil and Gas is an exploration stage company that is involved in the acquisition, exploration, exploitation, development, and production of oil and natural gas properties primarily in the Rocky Mountain Region of the United States. It owns various oil leases covering approximately 20,000+ acres in Sheridan County, Montana. The company also holds approximately 62,000 net mineral acres in the Bakken region.

Northern Oil’s (NOG) core focus is the Middle Bakken resource formation in the Williston Basin of Montana and North Dakota. The company controls a significant leasehold position in Mountrail County, North Dakota, directly adjacent to EOG Resources’ Parshall Field which has yielded a large amount of output. The Parshall Field is the largest Bakken reservoir found to date.

As of June Northern and its partners had completed four wells, most of which were put online in the first quarter. Northern Oil realized an average sale price of $92.10/bbl of oil during the quarter. Since the end of the quarter, Northern Oil has added production from two additional Bakken wells, is completing two additional Bakken wells and is currently drilling six Bakken wells. Northern is also participating in an additional well in Sheridan County, Montana, targeting the Red River formation.

We expect that NOG will be involved in approximately 15 wells by end of 2008 and 30 by 2009. Given the success of other players such as EOG in close proximity to the NOG assets, we are confident that a good number of these will be producing wells.

In addition, Northern further strengthened its cash position by accelerating the exercise of outstanding warrants held by institutional investors in late April, increasing the company’s cash position by nearly $10 million. This should help fund operations for the next 6-12 months.

As of this posting, the market cap of approx $450 million, they would need a value of approximately $7000 leased per acre on their land holdings to justify the market cap. We see the number of acres leased and cost per acre will continue to climb as well as incremental oil share revenue which could be ramping up by the end of 2008. I wouldn’t be surprised if this hits $35 by 2009 but for now I believe $24 is very achievable in the next 6 months.

Disclaimer: At the time of this posting, we have no position in NOG but may open one in the future.

The Bakken Landscape

Lately, there has been a lot of news about “The Bakken Formation” as it related to oil and the seemingly parabolic price curve oil has taken. This formation was described by geologist J.W. Nordquist in 1950’s as a rock unit occupying a substantial part of the Williston Basin in Montana, North Dakota and Saskatchewan.

Bakken Formation

It is estimated that there are significant reservoirs of oil shale a few miles beneath the Bakken’s 200,000 square miles (520,000 km²). These reservoirs were first discovered in 1951, but have long frustrated efforts to extract oil due to the huge capital expenditure and technical complexity required to do so.

An April 2008 USGS report estimated the amount of technically recoverable in the Bakken Formation at 3.0 to 4.3 billion barrels and informal estimates in the 10 of billions of barrels. The state of North Dakota also released a report that month which estimated that there are 2.1 billion barrels of technically recoverable oil in the Bakken.

This online publication is dedicated to tracking stocks that are poised to benefit directly and indirectly from the Bakken Formation and the oil that can be derived from it. In our opinion, there are a number of companies currently drilling or leasing in the Bakken Formation that could easily double or triple in value in the next 1-2 years.  There are a number of companies operating in this space that we follow:

  • Northern Oil and Gas (NOG)
  • Kodiak Energy (KDKN)
  • Kodiak Oil and Gas (KOG)
  • Continental Resources (CLR)
  • Brigham Exploration (BEXP)
  • EOG Resources (EOG)

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