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Bakken Leasehold Value in Investment Decision
Posted by Merlin KlotzNote: The following entry was provided by one of our readers, Merlin Klotz, and provides some great insight when making an investment decision on a bakken play. Thanks Merlin!
First, I am a retired CPA with a background in Oil and Gas. I’m far from being an expert, but with my background and all the public information on the Bakken/3 Forks, my portfolio is more than over weighted with stocks of the players.
It is apparent that with horizontal drilling and today’s technology the success rate in the Bakken/3 Forks universally approaches 100% with simple payouts often below a year and a half. When this is contrasted with drilling opportunities elsewhere, there is no other place for an O&G investor to play.
Accordingly, for me the name of the game in the Bakken/3 Forks is Leasehold acreage per value of a share of stock. Brigham talks of it in terms of acreage per market capitalization. For me that is too abstract.
Realizing that all acreage is not created equal but needing a common denominator, the November North Dakota State lease sale averaged $ 1,154 per acre. Using this factor, translated to my language the market value of Bakken/3 Forks leases held by BEXP equates to $ 3.32 (24%) of the value of a share of stock; AEZ = $.88 (21%); WLL = $ 1.02 (1%); KOG = $.69 (25%); NOG = $.92 (7%).
BEXP may be selling at a projected 40+ 2010/2011 PE, disproportionate to other players, but it is the value that these leaseholds bring to the table for future drilling that drives the premium value for me.
AEZ and KOG have similar percentage factors to BEXP, but they lack the history of applied technology contributing to the exceptional IBP rates of Brigham. If either of these announced a drilling arrangement with BEXP, I’d be instantly re balancing my portfolio.
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Tags: aez BEXP KOG NOG wll
MK:Good analysis. Well payout rate is good info. What is known about the “production curve” (I think I don’t have the right description )? I have heard the dropoff in production from the initial one day flow rate is quite severe in these shale oil horizotial wells…as well as in gas shale production. If true, this would mean large acreage retention and a heallthy balance sheet to support continued production replacement drilling would be required to sustain profits for a longer term investor. What do you or others think?
BEXP presented at Credit Suisse’s 2010 Energy Summit on Feb 5. Credit Suisse has an interesting method of arriving at a valuation of the company. They initiated coverage with an “Outperform” and a price target of $17.
Some key figures:
287,000 acres in the basin
1200 net locations (Brigham has postulated three Bakken and three TFS wells per 1280 acre spacing unit)
500,000 BO over the life of a well (600 MMBoe total over 1200 wells – 50 years of drilling!)
Well pay-out in 13 months
Credit Suisse suggests that Brigham is a takeover candidate by a large cash-rich oil company that is not a current player in the Bakken-TFS.
Merlin – your use of the average current value of a mineral acre is of some value in comparing companies but as you pointed out, not all acreage is created equal. I feel that the most important aspect of Brigham’s potential is the fact that their successes to date have “de-risked” about a 100,000 acres of their position in the WillyBee. Their completion processes are the best yet and they also must have an extremely talented Petroleum Engineer at the drill rig providing superb guidance for the lateral. They obviously have some very tight management of the drill rig because they have achieved 19,000 TD in just 18 days on a recent well. At a $15,000/day rate for the rig, that’s a huge savings. Many other operators have the rig on site for over 30 days.
I would suggest that the best investments will be with companies that have already de-risked their acreage. Companies that are already there are companies like Continental, EOG, Whiting, etc. Keep in mind that these companies have a lot of infill drilling yet to come. That infill drilling will be using far more advanced completion processes than they used in the earlier field development. I expect to see a lot of 3000+ BOPD infill wells in the future.
A small E & P company that holds acreage in an area that has been “de-risked” by other operators could also be candidates for investment. If you want to assess the potential of acreage that has not been de-risked by drilling, you will have to review the isopaches of the Bakken that have been prepared by the ND Geological Survey and ND DMR. Keep in mind that the Bakken-TFS is fairly uniform over vast areas of the WB but there are “hot spots”. Absorb all you can about the geology and the genesis of the formation and the oil within it. North Dakota GS and DMR have the finest publicly accessable data bases in the world.
I would venture that most investors keen on the Bakken-TFS are not aware that the technology that made the Bakken a viable prospect is also available to explore other formations. Think of the hundreds of vertical wildcats that were drilled in the past 50 years that found “traces” or “uneconmical” oil in the Madison, Birdbear, Stonewall, Red River, Duperow, Ratcliff just as they found similar “traces” in the Bakken-TFS. There are huge areas where these formations were “uneconomical” but with horizontal drilling could provide very nice payouts if drilled. I doubt if I will live long enough to see that. Only after all the Bakken-TFS drilling has secured the leases from expiration will they do some serious exploration of these other formations. My guess is that they will get around to it after drilling 4-5000 more Bakken-TFS wells.
Phil, go to BEXP presentation http://www.bexp3d.com/IR_pres.pdf and refer to pages 8, 20 and 23 for a feel of the decline curve. First 30 days is usually more like 50% of initial peak production. Initial Peak Production is merely a comparative bench mark indicating a composite of things like porosity and hydrocarbon content that suggests the ultimate recoverable reserves.The higher the initial production the more likely the higher the ultimate recoverable.
The curve of an oil well will flatten from there and typically be economically productive for 20 or more years. Remember, initial numbers in the Bakken are “Flow” driven by down hole pressure. Pumps go on later and other stimulation and flushing techniques are applied in time with the curve reset.
The old back of the envelope valuation of an oil well was 36 to 40 times current gross monthly production. Not very scientific but a quick rough guess.
I just found out that my grandfather (who recently passed away) owns 100 acres in what is supposed to be one of the hot spots in the Bakken Formation. We are trying to decide if it will be more profitable to keep leasing out the land or sell it. Any advice?
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