03
Bakken outlook in 2010
Posted by bakkenexpertThe new year is upon us and it is time to review which bakken stocks are poised for growth in 2010 and which may stall. In looking at the basket of major bakken stocks we track, they are all sharply up from their 2009 lows although I would argue that those lows were artificial due to the massive overselling during the economic meltdown and so the numbers, while dramatic, are somewhat skewed. The vast majority of the stocks are above their 50 day moving average which indicates relative bullishness as result of oil prices staying relatively steady in the $65-80 range for the 2nd half of 2009 in conjuction with overall market recovery. Oil production in the bakken region followed suit, with 188,000 barrels per day at the beginning of 2009 to an expected 245,000 barrels per day by the end of 2009, according to the North Dakota Department of Mineral Resources.
| Symbol | Last Trade | Change | Short Ratio | PEG Ratio | 52-wk Range | Pct from Yr Low | Pct from 50d MA | ||
|---|---|---|---|---|---|---|---|---|---|
| CLR | Dec 31 | 42.89 |  0.54 |
1.24% |
4.8 | 8.90 | 13.84 – 47.27 |  209.90% |
8.12% |
| WLL | Dec 31 | 71.45 | 0.75 |
1.04% |
4 | 31.67 | 19.26 – 75.65 | 270.98% |
8.04% |
| EOG | Dec 31 | 97.30 | 1.51 |
1.53% |
1.5 | 3.85 | 45.03 – 101.76 | 116.08% |
7.07% |
| NOG | Dec 31 | 11.84 | 0.18 |
1.50% |
11 | N/A | 2.01 – 12.66 | 489.05% |
14.12% |
| AEZ | Dec 31 | 4.20 | 0.03 |
0.72% |
1.1 | N/A | 0.50 – 4.50 | 740.00% |
21.50% |
| BEXP | Dec 31 | 13.55 | 0.29 |
2.10% |
3.8 | N/A | 1.04 – 14.93 | 1,202.88% |
13.22% |
| KOG | Dec 31 | 2.22 | 0.03 |
1.37% |
1.6 | N/A | 0.16 – 2.89 | 1,287.50% |
6.51% |
| MDU | Dec 31 | 23.60 | 0.44 |
1.83% |
2.4 | 4.52 | 12.79 – 24.22 | 84.52% |
2.67% |
| GEOI | Dec 31 | 13.66 | 0.17 |
1.26% |
1.7 | N/A | 4.97 – 13.85 | 174.85% |
16.86% |
So what are we to expect in 2010? Lets take a look at the expected forward PE (figure below) for this basket of stocks.
Brigham Exploration
The high PE for Brigham Exploration is somewhat expected as BEXP is heavily weighted in the Williston Basin region in North Dakota and is close to a bakken pure play and has the PE premium to match. Brigham Exploration has 274,500 net acres under lease in six project areas in the basin, and the company believes that it has 1,263 possible well locations. Brigham Exploration has lowered its finding and development costs from $34.45 per BOE in 2006, to $11.16 per BOE in mid 2009. Beware though that you are essentially paying for 2011-12 earnings in 2010 but again that premium may be warranted if BEXP can bring additional wells online in 2010. This is one of the more volatile stocks of the bunch and may see some churn throughout the year.
GEOResources Inc
The Company holds a proportionate 10% – 18% working interest in approximately 110,000 net acres in the Bakken Shale trend of the Williston Basin. Approximately 63,000 acres are located in Mountrail County, North Dakota, with the remainder located in adjacent counties. To date, the Company has realized a 100% success rate with 34 successful wells drilled by its joint venture operator. In addition, the Company owns minor working interests in more than 125 wells within the Bakken/Three Forks play. The company’s steady growth and low forward PE make it an attractive investment even though its relative working interest in its bakken wells are fairly low.
MDU Resources
The natural gas and oil production business reported earnings of $24.4 million. This reflects average
realized natural gas prices that were 34 percent lower than during the same period in 2008, and average
realized oil prices that were 47 percent lower. The decrease also reflects lower natural gas production,
which was anticipated as a result of the company’s reduced drilling activity. Oil production, primarily in
North Dakota’s Bakken play, was up 11 percent. This however is a fraction of MDU’s overall revenue and will continue to be for the foreseeable future. In addition, a bulk of MDU’s revenue comes from construction which may soften in 2010. This stock may see flat to 10% growth in 2010.
EOG Resources
EOG has amassed 500,000+ acres in the bakken region, but production in the area still is a small slice of their overall revenue. Expect EOG to drill 40-50 wells to add to their current inventory of about 120-150 wells. If they execute against their plan, EOG could rise 10-20% in 2010 but you probably will be disappointed if you are expecting anything more than that unless natural gas prices rise dramatically as EOG has large exposure there.
Kodiak Oil & Gas
KOG has approximately 80-90% of its 2010 exploration budget going towards Bakken plays that will yield between 15-22 wells. Assuming average working interest of 65% and 150k Barrels of oil equivalent per well in 2010 and 50% average online time, there is a potential for KOG to generate another $30-50 million in revenue depending on the price of oil which could buoy its stock price 30-60% from current levels if they can execute.
Northern Oil & Gas
Northern Oil expects to drill 14 to 16 net wells in 2010 with drilling capital expenditures approximating $52 Million. The 2010 wells are expected to target both the Bakken and Three Forks with a majority of wells being drilled by EOG Resources and Slawson Exploration. Northern Oil expects to own an average of 15% working interest across the approximately 100 gross wells planned for 2010. Northern Oil exited 2009 at a run rate of approximately 2,000 BOEPD with production increasing at a rate of 20% to 30% per quarter. If they can execute against their plan, they expect earnings of .40 to .50 in 2010 that would give them a PE in the 23 range. There is somewhat of a premium priced into the stock due to their low overhead. NOG typically only has a 15% working interest in their wells as they offload a number of the associated costs to their partners. This hedges risk but also may limit their growth long term. Also, they have a number of lease holds that will expire in 2011 and may require additional capital to renew.
Continental Resources
Continental Resources, a 7 billion dollar independent oil and gas company was the largest leaseholder in the Bakken Shale play, with 605,000 net acres. 2Q09 production in the Bakken was 12,391 Boepd, compared with 8,445 Boepd in the second quarter of 2008. These totals reflect reduced drilling activity in Montana and but increased activity in North Dakota since early 2008. Bakken production in 2Q09 accounted for 33% of Continental’s production. The Bakken accounted for 45.7 MMboe of proved reserves at year-end 2008, or 29% of the Company’s proved reserves. CLR has a 2010 capex budget $650 million and has planned 15 additional rigs in the bakken region. The expectation is 10% production growth, but if there could be additional production in the Bakken region. This is due to the fact that CLR has determined there could be up to 2 distinct oil deposits under 50% of its active drilling zones. the Middle Bakken and the Three Forks/Sanish formations were separate producing reservoirs. CLR already has cleared with the North Dakota oil & gas commission a special operating pad (dubbed ECOpad) that allows drilling of four wells from a single site. At a 34 forward PE, the market has definitely given CLR a premium as a result of its success in the bakken as well as its innovation. In addition, due to the historical fiscal discipline there is less risk compared to other players in the region. If CLR is able to execute on their plan, we could expect 15-30% returns for this stock.
Whiting Oil & Gas
During 2009, Whiting Petroleum (NYSE:WLL) was able to claim some bakken bragging rights by reporting the highest initial production rate of any Bakken Shale well. Their Maki 11-27H came in at 4,761 barrels of oil equivalent (BOE) per day during an initial 24-hour period in October of 2009. In addition, Whiting’s 17-mile, 8-inch diameter oil pipeline was put online December 4, 2009 at an initial rate of 6,200 barrels of oil per day. Whiting’s current gross operated oil production in the Sanish and Parshall fields is 20,014 barrels per day. By the end of March 2010, Whiting expects all of its operated production to be transported by pipeline which should yield significant cost reduction related to oil storage and transport. Based on 2009 data, It is likely that Whiting will drill and complete more than 50 wells in the Bakken region in 2010 and increase production 20-40% as well. This could send the stock up 25-40% in 2010.
Summary
To recap, we generally expect bakken oil to trade proportionally to the price of crude, but some of the bakken stocks reviewed could have upside if they exceed their production goals. Of the stocks reviewed, the risk/reward profile seems attractive for Kodiak Oil & Gas (KOG) as a small cap play due to its growth potential. If oil pushes $100, KOG could easily push to $3.50 – $4.00 from its current level in the low $2 range. In the mid cap range, we like Whiting Oil & Gas (WLL) due to it’s fiscal discipline and steady production growth over the last 4 years. The high rate wells have also been encouraging. In the large cap area, there isn’t really a pure play in Bakken, Everyone from Exxon-Mobil to EOG has significant exposure and looking at just the bakken contribution to the bottom line isn’t going to give you an accurate picture of the overall growth story of large cap oil & gas stocks. Therefore, it isn’t appropriate to recommend one here. We’ll check back again in a few months to see how our profiled companies are executing.
