Prowling Oil Stock Bears Presenting Opportunities

Yesterday, I was buying E&P (exploration and production) stocks as they took a tumble of 2% to 4%. Talking heads are blaming low natural gas prices, which fell 3% yesterday. However, I suspect that the E&P bull market may be over. Most of these stocks barely react to positive news and are significantly weak on negative news. As I warned in the past, the DJIA as the driver of E&P stocks now appears to be failing. It may be a whole new ballgame.

Williston Basin stocks that I bought yesterday are Brigham Exploration (BEXP) at $15.59 and Continental Resources (CLR) at $37.33. I bought natural gas E&P firm Petrohawk (HK) at $19.57. All of three of these are doubling down on positions that I already hold.

Drilling Services Industry: Yesterday, I looked at contract drilling firms, the firms that E&P companies hire to actually drill the wells. This is a very cyclical business.

The demand for drilling rigs today is largely limited to rigs that can drill horizontal wells in shale plays. These “unconventional” rigs are best described as new (or recently rebuilt) big, electric rigs with top drives that are equipped for underbalanced drilling.

Today and for the next few months, at least, unconventional rigs can find work. Conventional rigs are in such oversupply that many of them are idle. Drilling contractors are rapidly converting conventional rigs to become unconventional capable. So the supply of horizontal-capable rigs is increasing.

Yesterday, drilling contractor stocks were in full retreat, I looked at three of them: Helmerich & Payne (HP), market capitalization = $3.8 billion; Pioneer Drilling (PDC), MktCap = $378 million, and tiny Union Drilling (UDRL), MktCap = $134 million. HP and PDC have some international operations, some non-drilling operations, and still have significant number of unconventional rigs. Normally HP is the only of these stocks that I follow.

Union Drilling (UDRL) is tightly focused on the kind of shale plays that I’m interested in. It has no international operations and no non-drilling operations. 55 of its 71 rigs are unconventional rigs. Yesterday in the last five minutes of trading, I tried to buy UDRL at $5.80 but only got a fraction of the shares that I wanted. Union Drilling is very thinly traded; always place a limit order. Had I placed a market order, I easily could have paid $6.20 or much higher for the remaining shares.

Exciting Market Close: E&P stocks vacillated all day but hinted at a buying opportunity. At 3:30 EDT, with only 30 minutes left, the DJIA began sinking, and driving E&P stocks into a panic. What is strange is that the DJIA ended almost unchanged, but E&P stocks were down 2% to 4%, mostly in the last 30 minutes.

By 3:45, several stocks were in my buying range. After that, I was so busy making and modifying orders that I was caught unaware at 4:00 that the market had closed. I made all four of the trades described above in the last 5 minutes of trading.

I made two minor mistakes. I bought twice as much Continental Resources as I had intended to, and I put my Union Drilling order in at 3:58 when it had very little chance of completely filling. Had I stuck to my rule to follow only a few stocks and to focus on only one or two in any given day, I would not have erred. But these are tiny mistakes, and providence always intercedes in my favor.

This is the only excitement that the market has provided in the last two weeks.

Recommendations: I am still 90% in cash. In fact, Wednesday I bought more TIP fund at $103.30; TIP owns treasury inflation protected securities. I am still waiting for a major pullback in E&P stocks and am preserving most of my cash for that. However, I can’t be assured that the pullback will come. Thus I’m making selective investments.

In addition to the stocks that I mentioned above, I’m looking for buying opportunities in Quicksilver (KWK) at $13.50 or lower; it closed at $13.38. Quicksilver is a good (but not great) Barnett Shale natural gas stock. However, its attraction for me is that it also owns large tracts of speculative oil acreage in Western Montana and in the Horn River Basin in NE British Columbia.

Newfield Exploration (NFX) closed at $48.35 only 1.7% above my initial target price to buy at $47.50 (or lower). Although I have concerns about Newfield’s management and its lack of focus, they have a very large undeveloped oil acreage position in the Williston Basin, and large blocks of speculative acreage in Eagle Ford play and in the oil play in Western Montana.

I already hold a bit of Arena Resources (ARD), and will probably double down (buy some more) at $30.80 or lower. Natural gas E&P giant, Chesapeake Energy (CHK) is at it 30, 90, and 180 day lows. The temptation to buy is strong.

I remain gloomy about natural gas. There is so much of it and E&P firms have gotten so good at drilling for it that the current oversupply may last indefinitely. That said, no one is very good at forecasting natural gas prices, either in magnitude or timing.

Philosophy: The trend is not your friend.
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News Briefs: American Oil & Gas in Bakken; Eagle Ford Activity

American Oil & Gas Scores Average Hit in Williston Basin

On 23 March 2010, American Oil & Gas (AEZ) announced that the Tong Trust 1-20H well tested at 1,421 BOEPD (barrels of oil equivalent per day) – 1,114 BOPD and 1.84 MMcf of natural gas from North Dakota’s Bakken horizon during an early peak 24-hour period. AEZ used a 25-stages frac stimulation. American only owns a 27% working interest (WI) in the well but has much acreage in the vicinity.

This is a good well, but hardly a great well. For American Oil & Gas, it has largely derisked surrounding acreage, essentially legitimizing AEZ as a successful Bakken explorer. AEZ has yet to demonstrate that it has the money or management expertise to transition into a production firm.

AEZ drilled their second well, the Viall 1-25H (95% WI), with a 9,223' horizontal lateral targeting the Bakken horizon. AEZ scheduled fracing for mid to late April.

AEZ owes 6% Heidi 1-4H well, which is being drilled by Newfield Exploration and i+s targeting the Three Forks horizon. The Heidi well is in a better location than Tong Trust. Completion results from this well are currently expected in late April or early May.

American started drilling the Summerfield 15-15H well which is outside the Goliath Project and is relatively unimportant to AEZ. It is a short-lateral well with only 640-acres spacing, rather than a 1280-acre long lateral.

Recommendation: AEZ remains speculative. The Tong Trust well is not the 3,000 BOEPD gusher that would have sent AEZ’s stock into the stratosphere. In general, I’m still looking for a pullback in North American oil exploration and production (E&P) stocks. Then I first be looking at Denbury (DNR), Brigham (BEXP), Continental (CLR), and others.

Effect on Other Operators: The Tong Trust well test is moderately positive news for Newfield Exploration (NFX) and Brigham Exploration (BEXP), which own acreage between Tong Trust and Brigham’s better acreage to the WSW.

Natural Gas Stocks Beaten Down by Low Gas Prices.

On Tuesday (22 March), NYMEX natural gas prices fell from about $8.00 per MCF to $7.35 to $7.50 per MCF.

Chesapeake (CHK), the great aggressive beast of natural gas firms, was hit hard; its stock has fallen 9% in the last week. CHK is the number one acreage holder and number one driller in several major shale plays. It currently is using 118 drilling rigs. Smaller firms like Brigham Exploration are stretched just to keep 4 rigs drilling.

Chesapeake’s sheer size normally makes it unattractive for me. But I’ll be tempted if it continues to drop.

I purchased two gas stocks. I bought Petrohawk (HK) at $20.62 on 18 March and tried to buy more on 22 March. I got too greedy and tried to buy at $19.00; HK bottomed at $19.25. Also on the 18th I bought EQT at $20.62.

Natural Gas is a seasonal commodity, with lows in the spring and fall. Whether this pattern will repeat this year is not clear. Natural gas E&P firms hold massive acreage and have the capital to drill to the extent that they may be flooding the natural gas market. Much of the current drilling is either just to hold those leases or to produce from the very best land. Technology has advanced to the point that the cost of drilling and fracing wells has fallen on a per MCF basis.

Recommendation: I may continue to buy Petrohawk and EQT if they continue to fall, and I may get my feet wet in Chesapeake and some other gas stocks. However, I consider all natural gas stocks more a speculation than an investment. Most of my money I’m saving for oil stocks.
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EQT a Pure Play in the Marcellus Shale

EQT Corporation is a pure natural gas play in the Marcellus Shale. EQT holds 3.4 million acres in the Appalachian region including 500,000 acres that have potential for the Marcellus Shale.

The Marcellus shale is the hottest gas play because it combines excellent production with nearness to the eastern market. Do not underestimate the importance of Marcellus to America’s energy security.

EQT is Appalachia’s second largest natural gas producer behind coal giant CONSOL whose $3.5 billion purchase of Dominion Resources on 16 March 2010 made CONSOL number one. EQT has an established natural gas processing and pipeline system connecting it to the Pittsburg market and to several key interstate pipelines.

EQT is very aggressive. In 2010, it will drill up to 278 new wells and expand its pipeline system to move new production to market.

EQT’s market capitalization is $5.5 billion, which is a little large, but competing in the Marcellus shale is requires investment in processing plants and pipelines as well as in drilling new wells.

EQT is a low cost operator with both low finding and development costs and low operating costs. For its new Marcellus wells EQT claims: “At an average cost of $3.0 million per well, EQT's development cost is estimated to be less than 75¢ per MCF, which is among the lowest in the industry. The 30-day-average initial production rate for the company's seven wells completed in 2010, averaged 7.0 MMCFE (million cubic feet equivalent) per day; ranging between 2.7 MMCFE and 15.8 MMCFE per day.” [Those are great numbers.]

A small negative is the EQT, which was once called Equitable Gas, owns a gas utility that sells gas to homes, businesses, and industry. The utility business essentially requires no new capital commitment.

EQT’s Recent Capital Events

Marcellus Shale Purchase: On 2 March 2010, EQT bought 58,000 net acres in the Marcellus Shale from a group of private operators and landowners. The acreage is located primarily in Cameron, Clearfield, Elk, and Jefferson counties in Pennsylvania. The purchase includes a 200 mile gathering system and approximately 100 producing vertical wells.

EQT will pay approximately $280 million, 90% with EQT stock and 10% with cash.

New Shares Offered: On 10 March 2010, EQT offered 12,500,000 shares at $44 and gave underwriters a 30-day option to purchase 1,875,000 additional shares.

Dilution of EQT Common: Total dilution for the new stock offering and for the above purchase of Marcellus acreage with stock is about 15%.

Recommendation: I bought some EQT yesterday at $42.56. I’m still expecting a major decline in E&P stocks; so proceed with caution.

Other Buys Yesterday: Prices of E&P stocks, especially natural gas stocks, declined sharply after morning inventory figures showed more gas surplus than expected. I bought Brigham Exploration @ $16.18, and Petrohawk @ $20.62. EQT and Petrohawk are natural gas E&Ps, while BEXP is an oil E&P.
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News Briefs: Bakken, Three Forks, American Oil & Gas, Continental Resources

St. Mary Land & Exploration

Further information on St. Mary Land & Exploration’s North Dakota Divestiture. SM received at closing $120.0 million; previously SM received an earnest money of $7 million. SM management still has not stated how many acres it retains in North Dakota.

American Oil & Gas

In 15 March American Oil & Gas (AEZ) has clarified that it will receive $44 in cash on or before March 31, 2010 from the sale of its Wyoming properties. This is good news as AEZ need to cash to drill on it North Dakota, 76,000 net acre, Bakken / Three Forks Goliath project. American Says they plan to drill seven to nine gross (five to seven net) wells at Goliath during 2010.

Recommendation: American Oil & Gas (AEZ) remains a highly speculative investment. I am not buying at the current price of $6.11.

Continental Resources

On 16 March 2010, Continental Resources (CLR) announced 7 North Dakota Bakken horizon wells, whose one-day-test production averaged 1262 BOEPD (barrel of oil equivalent per day).

Obert 1-13H (41% WI = working interest or ownership) a Three Forks horizon well in Williams County tested at 896 BOEPD. The Obert is the first test of the Three Forks in this area; the well is clearly economic but weak.

The Obert test is slightly negative news for Brigham Exploration (BEXP), which owns its large Rough Rider acreage block just to the east of the Obert

well. BEXP will drill Three Forks tests in Rough Rider this summer.

Lodgepole Formation Discovery: Continental announced its second Lodgepole formation discovery in Stark County, ND, the Gruman 18-3 (33% WI), which flowed at 474 BOPD from 11 feet of perforations. The well was a vertical test, and a relatively inexpensive well to drill.

This is a followup well to the Laurine Engel #1 (33% WI), which was completed in September 2009, flowing at 463 Bopd, and has produced 76,200 barrels of oil to date.

Analysis: These two Lodgepole wells are very good wells that payout in less than a year and have a slow decline rates. Continental did not disclose how much acreage it has in this area. The Lodgepole is a formation that lies just above the Bakken.

Michigan's Trenton/Black River play: In Hillsdale County, Continental completed was the Abraham 1-6 (83% WI), which flow-tested at the state allowable of 200 barrels of oil per day through a 12/64ths (small) choke.

A second well, the Gordon 1-36 HD (83% WI), which flow-tested 50 barrels of oil per day through a 7/64ths (very small). This well is producing from an unstimulated 1,360-foot horizontal well bore drilled in the Van Wert zone within the Black River formation. Continental plans to stimulate the well in May 2010.

Continental’s three Trenton/Black River play discovery wells in late 2007 and early 2008 continue to flow at the state allowable 200 Bopd. These Continental's wells in the field have been assigned gross proved EUR (Estimated Ultimately Recoverable) reserves of 1,469,000 Boe. These vertical wells cost less than $1 million to drill and complete.

Continental has leased 51,000 net acres in the play. So far, CLR has identified 23 additional potential well sites will drill six of these in 2010.

Anadarko Woodford: Continental reported promising preliminary test results from the Ballard 1-17H (99% WI) in Grady County, Oklahoma, in the Southeast Cana area of the Anadarko Woodford. It appears to be a condensate well, one that produces liquid petroleum as well as gas.

Recommendation on Continental Resources: Continental continues to prove that it can find oil, perhaps better than any other company. I own the stock, and will buy more on significant market weakness. In general, I’m waiting for a major downturn in the Dow Jones Industrial Average and/or oil prices.

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Bakken Oil in the Horn River Basin? QuickSilver, KWK, EOG, Apache, Devon

Location: The Horn River Basin is in far northeast British Columbia, Canada.

Quicksilver Resources (KWK) and others have been drilling in the Horn River Basin for natural gas in Shales. Now Quicksilver says it will test a shallower zone, the Bakken shale for oil. The Bakken lies 4,000 feet below the surface and an 80-foot section of core shows mature, mobile oil.

In 2010, Quicksilver plans to reenter an old well and drill a horizontal section to test the Bakken for oil. Quicksilver holds 130,000 acres in one block. Other nearby block acreage holders are EOG 140,000 acres, Devon 153,000 acres, Apache 207,000 acres, Nexen 123,000 acres, Columbia, and EnCana.

This is very early in exploration cycle and this acreage must be considered highly speculative for the Bakken, even though some of it is already proven for natural gas from a deeper shale.

The possibility of finding vast reserves of Bakken oil in the 12,000 miles northwest of North Dakota’s Williston Basin bodes well for U.S. oil supplies, but not for U.S. balance of payments.

Recommendation: None

NW Montana’s Southern Alberta-Basin Oil Play: Bakken, Three Forks, Banff (Lodgepole) new play. Updated 17 March 2010

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Location: Northwest Montana: from Cut Bank to the Canadian border and west to Glacier Park.

Major Players:
Rosetta Resources (ROSE) 254,000 net acres, and still leasing
Newfield Exploration (NFX) 221,000 net acres, and still leasing
Quicksilver Resources (KWK) 130,000 net acres (+more in a JV with Mt Power)

We don’t know much, as only three 2010 vertical wells have been drilled (all by Rosetta), and Rosetta tried to complete only one with a horizontal. Rosetta said that three producing zones (Bakken, Three Forks and Banff) taken together are equal to the Williston Basin’s Bakken. That’s a concern as Rosetta’s first attempt to frac all three through one horizontal failed.

This play will likely be slow in developing. Rosetta will only say that it intends to drill at least one well this year and Newfield says they will move a rig in April.

Quicksilver (KWK) looked at the Bakken four years ago with vertical wells on its 130,000 acres, which is held by production. With 2006 technology, Quicksilver found the Bakken to be uneconomic. However with technology’s great leap in 2008 and 2009, its says it will try again. The geology looks good, it only a question of whether 2010 technology fits the local Bakken horizon.

Quicksilver will probably complete or recompleted two horizontal wells in the Bakken in 2010. Quicksilver’s acreage is east of the other operators. The Bakken is only 3,000 to 4,000 feet deep.

Eventually, the Southern Alberta-Basin Oil Play will get developed as technology advances and oil prices increase. Whether it means a major bonanza for any of these, I cannot say.

Assuming all the acreage has equal value, Rosetta is the purer play as its mktcap (market capitalization) is only $1.4 billion. Next is Quicksilver, (mktcap = $2.3 B). And then comes Newfield (mktcap = $7.3 B). Quicksilver the most expertise in horizontal drilling and Newfield is second.

Not of these firms is tightly focused or a pure play. All are natural gas heavy and oil poor.

Recommendation: I’m not hot any of these stocks, especially at current prices. If one has a major decline, I might buy. But, if there is a major pullpack, then other petroleum exploration and production stocks might be even a better buy.
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Brigham Exploration (BEXP) News, Bakken Horizon; Petrohawk (HK) Sells Reserves

News from Brigham Exploration (BEXP) per their Press Release Yesterday afternoon,

Acreage Acquisition: Brigham purchased over 10,000 net acres in the northeastern portion of its Rough Rider project area; the purchase will close on April 10th, 2010. Assuming 3 wells per 1280-acre spacing-units, this will yield 23 wells in the Bakken horizon, and more speculatively another 23 in the Three Forks horizon. Unless, BEXP brought something to the table other than money, they likely paid full value for this acreage.

New Ross Area Well: Brigham’s Jerome Anderson 15-10 #1H Bakken had an early 24-hour peak-rate of 2,678 BOPD (barrels of oil per day) and 2.62 MMCF/D of natural gas. Brigham has a 50% working interest in this well, which was completed with 30 frac stages. The Ross Area is east of the Nesson Anticline in Mountrail County, North Dakota, this well helps delineate the northeastern porton of BEXP’s Ross acreage.

Two New Rough Rider Area Wells: Rough Rider is BEXP’s largest project and is to the west of the Nesson Anticline.

The Papineau Trust 17-20 #1H was completed with 29 frac stages and tested at 2,616 BOPD and 2.55 MMCF/D (early 24-hour peak-rate). This well is in the southern portion of Rough Rider, only two miles west of BEXP’s Mrachek well.

Kalil 25-36 #1H was completed with 30 frac stages and tested at 1,334 BOPD and 1.51 MMCF/D during its early 24-hour peak flow-back period. The Kalil well is in the center of BEXP’s large, solid block on its acreage in NW Rough Rider. When adjusted for the number of stages, this well is consistent with BEXP’s wells in this area.

BEXP Recommendation: All this news is good news, but not unexpectedly good news. These wells show progress from previous wells, confirming the steady progress of completion technology.

Petrohawk Sells Terryville Field for $320 Million:
$500 Million Raised So Far

15 March 2010: Petrohawk Energy Corporation (HK) today announced it has sold its interest in Terryville Field, located in Lincoln and Claiborne Parishes, Louisiana, to a private company for $320 million. The sale is the second of four asset packages expected to be sold by the Company during 2010.

Petrohawk has raised $500 million from the sale of older proven assets this year. It's intent is to use the cash for drilling higher return wells in the Haynesville/Bossier Shales and the Eagle Ford Shale. The stock is a little weak due to poor natural gas prices (now $7.90 MYMEX).

Recommendation: Petrohawk is a natural gas stock, not an oil stock. I'm looking to buy a some below $21.00, with the intent of picking up more in the event of a major drop in HK stock price.
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News Briefs: Brigham Exploration (BEXP), Petrohawk (HK), Whiting (WLL)

Bud Brigham (CEO, Brigham Exploration, BEXP) sold 275,000 shares at $17.52. I don’t consider it a major negative; nonetheless is shows selling by the guy who knows more about Brigham than any one. He still owns about 1 million shares.

Petrohawk Energy (HK) is selling its Oklahoma WEHLU natural gas property for $155 million. This is the first of its four property sales planned for this year. Proceed will be used to drill more wells in the Haynesville and Eagle Ford shales.

The move is an excellent one, which allows Petrohawk to concentrate its capital in its most profitable plays. I was looking to buy HK for about $20.50, but this news has driven

Whiting Petroleum (WLL): I remain very positive on this company, but suspect that its overpriced at $78.00. Whiting apparently feels that its new and large North Dakota “Lewis and Clark” project is largely derisked. It is a Three-Forks-horizon-only project as the Bakken is not present there.

Whiting paid only $200 an acre for the leases, but drilling costs will be a bit higher. Lewis and Clark wells are likely to be a little below average, but still highly profitable. Whiting has only 1 drilling rig there now but could have 9 rigs by year end.

Hedging Oil Is Necessary for independent E&P (exploration and production) firms. Continental Resources (CLR) was one of the few firms that refused to hedge oil. In 2009, when oil prices fell from $130 to $30 per barrel, CLR suddenly face a cash flow emergency. It was drilling with 32 rigs, and was forced to cut that to 2 rigs as fast as it could.

Now Continental hedges its future oil prices out as far as two years, like other small-cap E&P firms do. CLR found out that a conservative balance sheet is no substitute for a guaranteed cash flow. Banks that loan money almost force E&P firms to hedge some of their oil; after all, loans are serviced by cash flow.

I’m Cash Heavy: I’m about 90% in cash. Don’t take my blog as a suggestion that you should put every last dollar in to small oil stocks. I’m just playing with the riskiest part of my money, and waiting for oil prices to make a major retreat. I do not predict a major drop in oil prices but think it is more likely than a major advance.
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American Oil & Gas (AEZ): Goliath's Last Stand in the Williston Basin’s Bakken & Three Forks

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American Oil & Gas (AEZ) is now a pure play in the Bakken and Three Forks horizons in North Dakota. Since AEZ sold its Wyoming interests for $44 million (terms very unclear), it has become an interesting bet.

History: Like many tiny publicly-owned independents, American Oil & Gas has fled from play to play, like a polar bear abandoning one melting iceberg after another. AEZ bet the farm on the Powder River Basin and its notoriously difficult Niobrara formation, which should be called the Graveyard formation. AEZ leased 68,500 net acres of very marginal North Dakota Williston Basin “moose pasture,” while the prices were cheap.

AEZ’s Goliath Project: American calls its 68,500 net acres, the “Goliath Project,” and Goliath’s far SW corner is six miles northeast from Brigham Exploration’s largely derisked Rough Rider Project. For the two wells closest to Goliath, Brigham claims 24-hour peak initial production rates averaging 3,500 BOEPD (barrels of oil equivalent per day).

In December 2009, a desperate AEZ traded 7,500 net acres to Halliburton Energy Services for the cost of drilling one well plus $1 million in cash. This acreage cost Halliburton only about $700/acre; a real steal, even considering the traded acreage is on the east side of AEZ’s block (furthest from Brigham).

The well Halliburton agreed to drill is the Tong Trust 1-20H, a Bakken horizon test, located 21 miles from Brigham’s State 36-1 well, a 3,800-BOEPD IP discovery. Halliburton has finished drilling that well, and completion operations should commence any day now (weather permitting).

AEZ is also drilling the Ron Viall 1-25H, which is 14 miles from Brigham’s State 36-1. (AEZ’s closest property to Brigham’s well is 8 miles.) Ron Viall is also a Bakken test.

A third well of interest is Newfield Exploration’s currently-drilling Heidi well (8 miles to the WNW of the Ron Viall. Heidi will test the Three Forks horizon, which is a few hundred feet below the Bakken.

Tong Trust, Ron Viall, and Heidi will determine if American Oil & Gas is boom or bust. If those wells are strong, Goliath easily could be worth $1 billion, making AEZ stock worth $16 per share within a couple years. (AEZ has only 62 million diluted shares.) If those wells fail, AEZ sock will sink to $2, or perhaps as low as 50¢.

AEZ Champion versus BEXP Mrachek: American Oil & Gas likes to point out that its Champion well, like BEXP’s Mrachek well, was initially poor. AEZ blames the initial stimulation treatments that used obsolete single-stage technology.

Mrachek was only 70 BOEPD using single stage, but when BEXP recompleted it with a 7-stage frac, Mrachek jumped to 700 BOEPD. One could then guesstimate that if Mrachek had been completed with today’s 28 to 32-stage technology that Mrachek would have had an initial production rate of 2300 BOEPD to 3500 BOEPD.

Therefore, we are supposed to assume that AEZ’s Champion well (initial rate was only 170 BOEPD) would have also been a great well with a multi-stage completion. I buy the argument. At least, I’ll say that there is a 75% chance that the parallel is correct. American Oil & Gas’ Goliath property is a hot prospect, but only a prospect.

AEZ Management Quality: I rate American Oil & Gas’s top management down there with Kodiak Oil & Gas’ top management and Arena Resources’ top management. The very top men appear to be promoters who know very little about being successful oilmen. But even a broken clock is right twice a day. {I feel sorry for the actual operating management who work for these guys.}

But in the short run, AEZ doesn’t need good top management. All it needs to do is copy Brigham Exploration’s drilling and completion methods. Halliburton is a real expert in completing these wells, and AEZ has Halliburton Energy Services as a partner.

Recommendation: AEZ is a crap shoot, but one where the odds are in your favor. Buy on weakness; then hold until you make a good profit or until about three days after the results of two of the three wildcats are known. Don’t blame me if you lose most of your money; this is a high risk bet.
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Continental Resources (CLR) sizzling hot in the Bakken, Three Forks, and Woodford Shale

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Caption: The yellow shows CLR’s acreage in the Woodford Shale of the Anadarko basin. The gray band is the Woodford Shale. In the far NW corner, the yellow near the word Dewey shows the Northwest Cana Field just discovered by CLR. Toward the SE, near the word Grady, is where CLR is trying to prove is acreage with the Ballard wildcat.


Main Article:Continental Resources (CLR) sizzling hot in the Bakken, Three Forks, and Woodford Shale
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Continental Resources (CLR) is a $6.8 billion independent exploration and production firm highly focused on the Williston Basin, and, to a lesser extent, the Woodford Shale in Oklahoma. 67% of Continental Resources reserves are oil, and it is almost exclusively focused on horizontal (unconventional) drilling.

Billionaire CEO Jack Hamm built Continental Resources from scratch. He is highly entrepreneurial and understands all the details of CLR’s activities. Yet he has developed a large capable staff. In short, Jack Ham is a real oilman.

Williston Basin (North Dakota & Montana)

CLR’s Williston Basin Rig Count: Continental Resources rig count in the Williston Basin will rise from the current 12 to 16 at midyear (15 in North Dakota and one in Montana). About half of the Williston Basin wells will be in the Bakken and about half in the Three Forks (which CLR considers a separate horizon).

These rigs will drill 218 gross wells, which is only 80.5 net wells to CLR. This means that CLR has only an average 37% WI (working interest or ownership) in these wells. Sometimes independent E&P (exploration and production) companies drill lower WI wells to conserve their own cash. CLR will only have to pay 37% of the drilling and completion costs. CLR did state that the number of rigs that they are running in North Dakota is constrained by cash flow.

Multi-well Pad & Simul-frac Technologies: Continental Resources is bringing in “walking rigs” from SW Wyoming for use on “ECO-Pads(TM),” where up to four wells will be drilled on one location. These are more commonly known as multi-well pads. The drilling rig drills one well, then the rig “walks” a few feet and drills another.

Continental estimates that the multi-well pad method will save 10% on each of the four wells. At $5.4 million per well each multi-well pad saves CLR $2.16 million ($5.4 million x 0.10 x 4). Six of the 16 rigs will be on multi-well pads; these are development wells. The other ten rigs will mostly be delineating Bakken and Three Forks acreage. Two drilling rigs are already drilling on multi-well pads. Two more will be added within 45 days, and the final two by midyear.

Multi-well pads also offers the possibility of saving money through simul-fracs, a method where the same set of high pressure pumping trucks facture two wells at the same time. This has only been done a few times in North Dakota.

Multi-Stage Technology: Continental started 18-stage completions in September 2009, and now considers them standard. They are experimenting with 20-stage and 24-stage completions. This puts them in the pack, because the frac-stage technology leaders are already in the 28-32 stage range. CLR has increased their sand to 100,000 pounds per stage.

Hawkinson Three Forks Well: Continental Resources announced an important discovery in the relatively new Three Forks Formation, which is below the Bakken. CLR’s Hawkinson 1-22H (48% Working Interest) in Dunn County, North Dakota produced 1,667 BOEPD in its initial seven-day test period from the Three Forks horizon. The Hawkinson's strongest single-day production total was 2,338 BOE. It is currently producing 1200 BOEPD at 3200 PSI FTP (flowing tubing pressure) through a 14/64-inch choke. According to CEO Jack Ham, it is highly restricted “to capture the entire gas volume.”

Obert Well: This Three Forks test was just fraced. CLR will know the results within a few weeks. It is important to both CLR and Brigham Exploration (BEXP), whose large Rough Rider project is just to the east of the Obert test. The Three Forks horizon has not been tested in this area.

CLR’s Williston Basin Net Acreage: Net acreage refers to the actual acreage that Continental owns and excludes any acres in CLR operated wells that is owned by other oil companies.

Continental owns 652,000 acres in the Williston Basin, of which 489,000 acres are in North Dakota. About 70,000 North Dakota acres are now of questionable value, because the Traxel wildcat was a dry hole (uneconomic).

Only 7% of Continental’s undeveloped acreage in North Dakota expires in 2010, and they will either drill on it before expiration or pay renewal fees.

Well-Spacing Density: Continental Resources is planning on drilling four wells per each 1280-acre unit in each horizon (320-acre spacing).

CLR’s Montana Williston Basin Activities: Continental will use one drilling rig in Montana this year. It will alterative between (1) infill wells in Elm Coolee Field, and (2) steps-out wells and Wildcats to the north.

CLR completed the Rognas 2-22H, which is just a minor stepout from the prolific Elm Coulee Field. Continental used with a 14-stage frac with a high proppant (frac sand) load. The Rognas 2-22H averaged 841 BOEPD during its initial seven-day test period, but its best single-day production rate was 1,014 BOE.

Some operators like Brigham Exploration (BEXP) report only the “best single-day” IP (initial production rate), which is always much higher. One has to be careful to compare apples to apples. In the future, CLR plans to release only the “best single-day” rate.

The Rognas well gives us no information on the value the acreages further to the north, controlled by BEXP, EOG, and CLR.

Woodford Shale: Arkoma Basin and Anadarko Basin

CLR’s Woodford Shale in the Arkoma Basin: This is the older Woodford natural gas pay and is less important to CLR’s future. CLR has 47,500 net acres in the Arkoma Woodford; 47% is HBP (held by production). CLR will use one drilling rig here in 2010.

CLR’s Woodford Shale in the Anadarko Basin: This Woodford Shale play is new, larger, and to the west of the one in the preceding paragraph.

Continental Resources has added 51,500 net acres to its Anadarko Woodford leasehold, increasing its total position to 200,000 net acres; it is still leasing, especially in the “Northwest Cana” extension to Cana Field. CLR is already a major leaseholder in this area.

CEO Jack Ham said, "We think the Anadarko Woodford Shale play will be capable of competing with the economics of any shale play in the United States." This is important because of intense competition between with natural gas plays in shales. The plays that can produce gas the cheapest will make the most profit.

Keep in mind that CLR could use its cash to drill in the Williston Basin. CLR says Cana wells will produce a 30% return on gas prices below the current gas price.

CLR’s new discovery well in Northwest Cana is the Brown 1-2H (100% WI), which is Dewey County, Oklahoma, 40 miles to the northwest of what usually is called the Cana Field. It produced 4.2 MMCFD (million cubic feet) of natural gas and 102 BOPD in its initial seven-day test period. Anadarko Woodford Shale wells have a somewhat better (slower) decline rate than most gas wells. This well could easily still be producing 2 MMCFD at the end of one year.

Continental is currently drilling a step-out confirmation well, the Doris well, five miles south of the Brown 1-2H. The Doris will help “derisk” Northwest Cana Field.

35 miles to the southeast of Cana Field, Continental is trying to prove its 76,000 net acres in that area. Its McCalla well was a mechanical failure but showed strong promise of making a natural gas will with considerable natural gas liquids. Continental is now completing its second test well, the Ballard 1-17H (99% WI), also in Grady County.

During 2010, Continental will have three drilling rigs (up from one currently) in the Anadarko Woodford. Woodford wells cost about $5.4 million each.

Other CLR activity: CLR continues to spend insignificant sums on its Red River waterfloods and its Michigan oil wells. Both are economic but unimportant to CLR. It also holds 26,000 acres in the Haynesville Shale play.

Miscellaneous CLR Information

CLR’s Bakken rig time is now 26 days from spud to release.
Simulation time (fracing) = three hours per stage.
Total company-wide rig count is now 15 rigs, going to 24 at mid year.

Recommendation: Continental Resources is as close to perfect as an oil company can be. It is large enough to do anything that the big guys can, yet has the focus and agility of smaller firms. It is still entrepreneurially driven. It is oil focused. Is 100% U.S. onshore.

At $40.26 per share, it is a good buy. Today, I’ll be looking to buy CLR, and hopefully at a below $40.26. Then if it falls, I’ll buy more. I’ve had a buy order in for some time at $37.13, but, perhaps, that is being too optimistic. The target range for these great firms goes up with time.

Of course, if you expect a major market pullback, and if you are buying for the long term you should wait. I couldn’t find a published beta for CLR, but it must be 2 or higher.
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Arena Resources (ARD) Stock Falls 17.5% on Infrastructure Collapse, Furman-Masco

The image portrays the complex geology of its Furman-Masco leases where Arena Resources has “bet the farm.”










Arena Resources (ARD) stock closed on 1 March 2010, at $42.69 and then collapsed $7.47 to $35.22, as company released fourth results and answered questions during its conference call.

Arena Resources has never made my list of worthwhile stocks because it is not involved in any of the hot oil booms and because its founders appear to be promoters rather than real oilmen. Below is the blurb from Arena’s website on the background of these two men.

Lloyd T. (Tim) Rochford, Chairman of the Board / Co-founder For the past 35 years, Mr. Rochford has managed both public and private oil and gas operations. His expertise has resulted in the formation and ultimate sale and merger of 3 oil and gas companies, one of which was listed on the NYSE.

Stan McCabe, Director / Co-founder, For the past 29 years, Mr. McCabe has secured oil and gas leasehold interests, drilled numerous wells, and managed their operations. His expertise was critical in the formation and development of a public oil and gas operator which was listed on the NYSE.

Executive Bonuses: The oilfield is full of promoters; some of them stumble into the big time. Even blind boars find a black gold acorn once in a while. To add executive insult to stockholder injury, during the fourth quarter, Arena Resources executives paid themselves “stock based compensation” of $1.0 million when the earning of the firm were only $9.3 million. Stock compensation was 10.8% of earnings. This is in addition to regular executive compensation.

Fuhrman-Mascho Infrastructure Collapse: The Furman-Mascho is Arena Resources’ great little property where they can still drill hundreds San Andres zone, sour gas (H²S) wells per year. The Furman-Masco is Arena’s main asset; its production is 85% of ARD’s total production.

In the oil patch, infrastructure refers to items necessary to carry supplies to wells and carry production away; these include: roads and electric lines into the field, and natural gas sales pipelines and oil pipelines out of the field.

During the forth quarter of 2010, Arena Resources’ oil purchaser cut them off, its gas purchaser broke down and was down for 21 days, and its electric supply shortages worsened. Combined, these disasters cost ARD a large portion of its revenue. Arena is building a new oil sales pipeline and has already connected a number of their wells to it.

The gas-sales situation will take 18 months to rectify. Apparently, the current purchaser of this sour gas is operating old, junky, and unreliable pipelines and processing plant. The $16 million that it will cost Arena Resources to build their own gas-gathering system and plant is money well spent, but it’s like buying a gun after your store has been robbed.

Their electricity supply horror story sounds like something out of Mexico or even Zimbabwe rather than West Texas. Every time that ARD connects another well to the system, it adds one more 50 horsepower motor. In 2008 they added 221 wells and in 2009 they added 176 wells. In 2010, they will add about 300. Those 697 50-HP motors require a huge amount of electricity.

The electricity supplier’s substation is too small, and it refuses to build a bigger one. I’ve never heard of such a thing. In any event, Arena’s solution, which is probably the correct one, is to spend $4 million to build their own substation. Of course, during the 18 months it takes to build the substation Arena Resources will continue to face the brownouts (and lost production) that it has faced for the last several years. Right solution, but too late.

Bakken Boondoggle: What really burned me up about Arena Resources’ web conference was that at the end of the question and answer period, Arena Resources volunteered that they are considering entering the Bakken play.

Arena knows nothing about the Bakken, and the players already in that league include: (1) giants like ConocoPhillips (COP) that have endless cash to invest, (2) huge aggressive independents like EOG Resources, and (3) a host of smaller highly-Bakken-focused niche players like Brigham Exploration (BEXP). Entering the Bakken four years after the pros entered, would follow Arena’s pattern of being late.

Arena Resources’ Strength: ARD drills shallow San Andres zone gas wells on its Furman-Masco property for about $500K each. These wells have an “estimated ultimately recoverable” (EUR) of 28,000 equivalent barrels of oil. That’s enough to make Arena a great little company, if they stick to it. Concho Resources (CXO) follows a somewhat similar low-risk, medium-reward strategy and does quite well at it.

Present Value of Reserves: For the exciting exploration stocks that I usually cover, present value of reserves discounted at 10% (PV10) is unimportant. For a purely development firm like Arena Resources, PV10 is more important.

ARD’s market capitalization (at last night’s close of $35.22) was $1.36 B, down from $1.65 billion at the previous closing.

ARD’s reported PV10 at $38.30 per barrel of oil is $0.65 billion, and at $57.63/Bbl is $1.12 billion. PV10 calculations assume no oil price increases in the future.

With NYMEX crude selling for about $80 this morning, Arena looks interesting, as the value of the reserves – assuming no long term oil price increases – probably exceeds the price of the stock. I may buy some ARD, if it falls more. If it recovers, I’ll sell taking a trader’s profit. If it does not recover, I hold the stock.

In the long run, owning oil in the ground in Andrews County, Texas, is better that having dollars in the bank or gold buried in the garden.

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Miscellaneous information on Arena Resources:
The company has very little debt; it’s not going to go broke.
Insiders own only 2% of the stock; institutions own 91%.

Eagle Ford Shale: St Mary Land & Exploration, Acreage Leader

Table shows that relative to market valuation (MktCap), St. Mary Land and Exploration leads the pack in leasing Eagle Ford Acreage. Quality of acres leased probably varies dramatically, and most of the Eagle Ford is unexplored.

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Key:

SM = St. Mary Land & Exploration

PXD = Pioneer Natural Resources

SFY = Swith Energy Company

ROSE = Rosetta Resources

HK = Petrohawk

APC = Anadarko

Mur = Murphy Oil

CXPO = Crimson Exploration

EP = El Paso Corporation

CHK = Chesapeake Energy Corp

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Source for the acreages is St. Mary land & Exploration Feb 2010 Presentation.

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EOG is also believed to be actively leasing in the Eagle Ford.

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Petrohawk is months, pehaps a year, ahead of the pack as far as actually exploiting the Eagle Ford Shale.

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Petrohawk (HK) focus on the Haynesville, Lower Bossier, and Eagle Ford's Hawkville and Red Hawk

HK’s Strategy: Petrohawk (HK) is rapidly converting to a company focused on exploiting (drilling) already acquired leases in two shale plays: The Haynesville/Lower Bossier play and the Eagle Ford play.

In 2009, Petrohawk spent $450 million on new leases, which now need to be drilled. HK has so much Haynesville acreage that they are drilling to hold leases rather than drilling safe PUD (proven undeveloped) locations.

To get more money for drilling these two new unconventional (meaning horizontal drilling) plays, Petrohawk is selling (divesting or monetizing) large parts of Hawkfield Services and all its conventional production. This shuffling of the deck is fairly common among very fast independent petroleum exploration and production (E&P) companies.

Haynesville/Lower Bossier Shales: The Haynesville/Bossier gas play (Louisiana and Texas) is Petrohawk’s largest exploration target. Petrohawk has 360,000 net acres leased in the Haynesville play and claim that they own the 60,000 acre core (the best acreage) in northwest Louisiana.

In 2010, HK will spend 62% of its drilling budget and 85% of its midstream budget on the Haynesville. They are betting the farm on the Haynesville, but it looks like a safe bet.

Petrohawk has budgeted 17 of it 24 drilling rigs to exploit the Haynesville. The gas wells that Petrohawk is drilling are very large and extremely profitable producers. In 2009, they drilled 64 new Haynesville producers, which averaged an initial production (IP) rate of 17.8 MMCFD (million cubic feet of gas per day), and which will pay for themselves within one year.

In 2010, the 17-drilling rig program will drill 110-120 operated Haynesville wells.

HK’s cost per well in the Haynesville has declined mostly due to drilling faster. Petrohawk’s 2009 cost per Haynesville well was $10.5 million; 2010 cost per well is expected to be $9.5 million. The “learning curve” in new plays like the Haynesville yields cheaper wells with higher yields as operators learn the most efficient and effective ways to drill and complete the wells.

The Lower Bossier Shale, lies 200 feet above the Haynesville is even a newer play. HK has 1220,000 net acres that are potentially economic in the Lower Bossier Shale.

Petrohawk’s hot Lower Bossier Whitney Prospect is apparently on the Texas side of the play; HK’s first Lower Bossier test will be in the first quarter of 2010. Petrohawk is delaying Lower Bossier drilling while Hawkfield Services builds midstream (gas-gathering and gas processing infrastructure) in the area.

Leasing Stopped: Petrohawk has stopped almost all their leasing. They still are doing a little leasing in Eagle Ford, and some mop up leasing in the Haynesville/Lower Bossier, especially in the SW extension, which is the Lower Bossier core.

Midstream Hawkfield Services: 85% of Petrohawk’s midstream budget for 2010 is for the Haynesville play; the other 15% is for Eagle Ford. Midstream refers (1) to the processing plants that strip valuable liquids from natural gas, and (2) to the gas-gathering lines that connect wells to these processing plants. Without midstream, natural gas cannot be sold to the large gas pipeline companies.

Large gas explorers, like Petrohawk, often build their own midstream systems in new gas plays such as the Haynesville. This helps get their wells “on line” (selling gas to pipelines) faster.

Petrohawk’s midstream is known as Hawkfield Services. Midstream is often very profitable, especially in new plays such as the Haynesville. However, Petrohawk’s new Haynesville and Eagle Ford wells are even more profitable. Thus, Petrohawk is trying to sell part of their Hawkfield Services in the Haynesville in order to reinvest the money to drill more gas wells.

Eagleford Shale Shale (310,000 net acres): Hawkville pioneered the new Eagle Ford Shale play in South Texas and has two very large, solid blocks of acreage: Hawkville Field, and Redhawk Field.

As the pioneer, Petrohawk was able to acquire their acreage at very low costs.

HK will spend 24% of its drilling budget and 15% of its midstream budget in the Eagle Ford Shale.

Hawkville Field (in LaSalle and McMullen Counties) is ready for intensive drilling and connecting to gas sales. HK considers this field to be derisked, and will use 6 drilling rigs here in 2010.

The 22 wells that HK has drilled so far in Hawkville Field cost less than $5 million each to drill, complete, and connect. Each has averaged 10.4 MMCFD. HK is still on the learning curve in Eagle Ford and with improvement – such as longer laterals (longer horizontal sections), better stimulation, etc. – future wells will continue to get better.

Redhawk Field: HK has drilled the first Redhawk wildcat and is waiting on stimulation (fracing) treatment. Petrohawk says Redhawk is an oil prospect, which potentially makes it a hotter prospect than Hawkville.

Fayetteville Shale (157,000 net acres): Petrohawk has deemphasized this play and will commit only one drilling rig here in 2010. HK’s leases here are held by production, and thus do not face the expiration problems that their leases in the

Haynesville/Lower Bossier and Eagle Ford face.

HK’s Fayettville Shale assets are not up for sale, but they would sell them. They plan on moving more rigs into this play in mid-2011.

Petrohawk’s Hedging: Most petroleum exploration and production firms hedge their oil and natural gas. They must have money to drill new wells and they (and especially their bankers) are not willing to take chances on fluctuating oil and gas prices.

Petrohawk has 68% of expected 2010 natural gas production hedged, and 50% of its 2011 natural gas production hedged.


News we’re looking for:
1. Initial production rate of the Redhawk wildcat. Could be anytime after March 1st.
2. Divesture progress report; promised to us by mid year.

Brigham Exploration 25 Feb 2010 Earnings Conference Call, Bakken, Three Forks, Rogney

My Notes:

BEXP is currently running four drilling rigs, which will yield them 25.7 net wells for the full year 2010. In Rough Rider and Ross areas combined, they have 422 derisked locations yet to drill. Therefore, at the current rate of 25.7 wells/year, it would take BEXP 17 years to drill the 422 locations. Obviously, they plan to do it much faster; this just illustrates how much proven potential Brigham has.

Updated acreages by area:
Rough Rider 105,000 acres
Ross/Parshall 99,000 acres
Ghost Rider (Eastern Montana) 84,000 acres

Brigham Exploration has started to lease again, and have put $15.6 million in their 2010 capital expenditure (CapEx) budget for leasing.

Brigham management is optimistic about both the Three Forks Formation wildcat in the Rough-Rider area and the Bakken Formation wildcat in the Ghost Rider area. BEXP believes both targets have good porosity (8%-10%).

Rogney Wildcat: BEXP’s Eastern Montana wildcat will be the Rogney well, which is in the middle of their 84,000-acre Ghost Rider prospect. A couple of wells to southeast were economic completions, even though they used archaic single-stage frac jobs. One had an Initial production (IP) of 500 barrels of oil per day (BOPD). In my opinion, unless that operator got real lucky on his single stage frac, that well could have easily IP’ed at 3,000-4,000 BOPD using a multi-stage frac stimulation. Ghost Rider is a red hot prospect!

BEXP will be able to glean some information from two wells currently being drilled to the east and south east, because Brigham owns a small percentage of both wells. BEXP will spud the Rogney well in mid-March, but BEXP is unlikely to give us any information on initial production until mid to late June. Much of the delay will be due to coring the Bakken and Three Forks and the 30-day delay in getting those cores examined.

Lance Langford commented on Geosteering, which he said gives them the ability to keep the drill bit within ten feet of where they want it. This keeps them drilling in the highest quality rock. [That is truly amazing].

Each time that Brigham Exploration completes one net well, the value of BEXP goes up $9.5 million, assuming a present-value discount rate of 10% (PV10) on future oil. In other words, if you take the PV10 value of the complete well and if you subtract all the drilling and completion costs, you net out $9.5 million. ‘‘Net well” is a term needed because, if BEXP drills a well in which they own only 60%, they have only drilled 60% of a net well because their partners own the other 40%.

Non-Williston Basin Properties Updates: Brigham Exploration is currently drilling a Vicksburg gas well. This is down on the Gulf Coast where BEXP has some good leases that they would like to sell. In response to a question, Ben Brigham said they have no plans to drill a Mowry shale well (Wyoming, Powder River Basin), and, instead, are watching nearby drilling. They have been looking at some other oil plays in the Rockies, but haven’t budgeted any money to acquire leases there.

No Lease Expiration Proplems: One man asked BEXP what percentage of BEXP’s North Dakota leases are “held by production.” Oil leases have an expiration date. If BEXP hasn’t drilled and found production by a certain date, the leases expire, or sometimes BEXP must pay a large renewal fee. “Held by production” means that BEXP already has a producing well on the lease, and so the lease cannot expire.

The value of Brigham is not their existing oil wells but their leases on which they can drill more oil wells. Obviously, expiring leases and renewal fees are to be avoided. So BEXP drills first on the leases that will expire first. Bud Brigham’s answer was all important leases that would have expired in 2010 are either help by production or being drilled now. Currently, Brigham is drilling mostly 2011 leases.

The AFE cost to drill and complete a Williston Basin well is $6.825 million.

BEXP defines Initial Production (IP) as the peak oil 24-hour early flow rate. [This is a liberal definition, and BEXP is sometimes accused of overstating their IPs.]
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What Drives Oil-Stock Prices for Bakken & Eagle Ford Firms?

Current the drivers of oil and stock prices are:

1. Company-Specific News. Example: On 24 and 25 February 2010, BEXP reported positive news on a Three Forks discovery in its Ross Prospect. That helped drive BEXP’s stock 8% higher on 25 February. Most news on these firms is good news.

2. News about close competitors in the Williston Basin can be a quite strong driver. The positive news on BEXP probably helped drive American Oil and Gas (AEZ) 10% higher on 25 February 2010. AEZ has unproven oil land leased close to BEXP’s proven leases.

3. The wider market is the chief driver of most oil E&P stocks on most days. I measure the wider market with the Dow Jones Industrial Average (DJIA); the Standard and Poor’s 500 (S&P 500) is probably better. When there is no company specific news the wider market is the strongest driver of oil stock prices.

When the DJIA moves, oil stock prices usually move in the same direction. If an oil stock does not quickly follow the market, you may have a window of a few seconds (or a couple of minutes) to act. That doesn’t always work, but it has worked for me more than 50% of the time.

Before the market opens, the wider-market futures will usually tell you the direction of oil stocks. The listed 5-year beta for BEXP is 3, and the listed beta for AEZ is 2.2. But these are based on the last 5 years. I believe the current actual beta for AEZ is more than 3. Stock price for AEZ and BEXP generally move with the market but three times as fast. You don’t need leveraged market ETFs. BEXP and AEZ work better for me. Just look at the volume in these tiny stocks.

If oil prices get too high, all bets are off. Really high oil prices cause oil stock to rise and the DJIA and S&P 500 to fall. Thus the DJIA no longer drives oil stock prices.

4. Currently, oil prices are a driver of oil stock prices, but not nearly as much as most people imagine. For one thing, most of the small oil companies are heavily hedged, one to two years out. Keep oil prices in mind, but the DJIA is usually a much better predictor on most days.

5. Natural Gas prices are a driver for NG producers (e.g., Petrohawk, HK) but usually not as strong as the market in general.
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Brigham Exploration, BEXP, Pure Williston Basin Play, Main Fact Sheet

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Brigham Exploration Company (BEXP) is a pure oil play in the Bakken Shale and Three Forks Sanish Formation in the Williston Basin of North Dakota and Montana.

Brigham Exploration was formed in 1997 by CEO Ben M. “Bud” Brigham, an entrepreneurial geophysicist. BEXP is a one-man company with Bud involved in the details of geophysics, exploration, leasing, drilling, completion, finance, regulations, production, and marketing. This works very well as Brigham is almost exclusively focused in the Williston Basin oil boom in Western North Dakota and Eastern Montana.

Brigham stock price has had four major up spikes: 1997-98, 2005, 2008, 2009-2010. Both in 1999 and again in 2009, BEXP stock was down to about $1.10 per share suggesting that the firm was on the edge of collapse. Unless oil prices fall below $50 per barrel and remain there for several years, BEXP will not collapse.

BEXP was natural gas-focused until 2006, when it began acquiring Bakken Shale acreage in the Williston Basin. By May 2009, BEXP was focused almost entirely on oil in North Dakota where it holds 190,000 acres which is enough to drill over 700 wells. Currently BEXP has about 20 completed wells in North Dakota.

Ross Prospect, 26,400 acres: Just under the Bakken Shale is the Three Forks (sometimes called Sanish) formation. BEXP has made enough Bakken and enough Three Forks discovers in its Ross prospect, to suggest that Ross has been “derisked” for both. Derisked means the oil is there; and it only a matter of drilling wells to produce it.

Rough Rider Prospect, 105,000 acres: During 2009 BEXP drilled and completed enough Bakken wells in Rough Rider to essentially derisked most of that acreage for Bakken production. BEXP will drill its first Three Forks test in Rough Rider in about May 2010. The only surprise will be if the Three Forks is not commercial under most of Rough Rider.

BEXP’s Ross and Rough Rider properties in North Dakota are reasonably profitable (returns of 30%) at a NYMEX oil price of $50 per barrel and are extremely profitable (returns of 70% - 100%) at a NYMEX oil price of $70 per barrel. BEXP has about 430 derisked undrilled oil well locations in Ross and Roughrider.

Ghost Rider, Eastern Montana, 86,300 acres: The value of BEXP’s acreage in Montana is essentially unknown. BEXP’s first wildcat well will be drilled soon, with results known by early summer 2010.

BEXP has four operated drilling rigs in North Dakota, and may add a fifth soon. [BEXP does not own the rigs but contracts for their services. “Operated” means that BEXP is the oil firm in charge of the drilling if the well is partnered with other oil firms.]

It takes about one month to drill a Bakken or Three Forks well. Then the drilling rig moves out, and the fracking crew moves in. However in winter, fracking is often delayed do to extreme cold.

BEXP is trying to sell (monetize) almost all of its non-Williston Basin properties, some of which are valuable natural gas properties.

BEXP heavily hedges its oil and gas, as much as two years out.

BEXP has been the brightest star in the oil patch for the last couple years.

Williston Basin, Bakken and Three Forks in North Dakota and Montana

Reserved for Work in Progress

Wildcat Bob's Investment Philosophy

Why Oil & Gas E&P: Oil exploration and production stocks are important to every American who has discretionary income, because much of our non-discretionary income is spent on gasoline. If gasoline prices go up, you are hurt, unless you own oil stocks.

Oil stocks are your most important personal hedge: U.S. (domestic) E&P stocks are a good hedge against inflation, high oil prices, oil shortages, and a weak dollar. Some of you spend more on food than on gasoline, but I’ve never found a good way to hedge against high food prices.

In my view, oil stocks are a more important hedge than owning gold.

Peak oil or just short supply with high prices? I don’t know whether “peak oil” has occurred or if it will occur within the next few years. I do strongly believe that increased demand for oil and increasingly hard to find oil will result in higher oil prices. In my view, the peak-oil question is irrelevant to the decision to own oil stocks.

Domestic, Foreign, or Offshore? I focus only on U.S. onshore petroleum companies. Offshore (even in the Gulf of Mexico) is harder to analyze and more subject severe weather. Foreign exploration is harder to analyze, subject to political risk, war risk, and risk of sabotage.

Integrated versus E&P. The huge firm – like ConocoPhillips (COP) and Exxon Mobil (XOM) – are not oil exploration and production firms. They are huge, international conglomerates that are involved in refining, plastics, oil pipelines, natural gas-gathering systems, plastics, retail gasoline stations, credit cards, and a host of other things in many countries. Finding oil in the U.S. occupies less of their top executives’ time than does lobbying in Washington.

I generally don’t invest in super-large independent oil firms such as XTO Energy (XTO, market capitalization $26 billion) or Chesapeake Energy (CHK, MktCap = $17 Billion). They are too big to give much information on individual wells or lease holdings in various exploding oil fields. Also, these firms are natural gas heavy and oil light. I do study what they say, and they are potential takeover targets for the integrated oil firms. Exxon recently moved to acquire XTO.

Firms like Petrohawk (HK, MktCap = $6 billion) are about as big as I go.

Diversified portfolio versus accepting non-systematic risk. Except for cash, I don’t own anything but oil stocks. Yes, that subjects me to what professors call non-systematic risk. I bet on oil stocks and the professors bet on “the market,” as represented by the S&P 500 or the Dow Jones Industrial Average (DJIA). I am negative on the long-term prospects for the economy. Why should I invest in banks stocks, retail stocks, etc. when I think their long-term prospects are poor!?!

This focus allows me to actually learn something about the stocks I own.

Non-Technical Analysis: I am not a technician. All those graphs are pure gobbledygook to me.

Non-fundamental Analysis: I’m not a fundamentalist. I do not look at PE’s, try to predict earnings, etc. The only financial thing I look at for these small oil exploration companies is whether or not they can cover their CapEx E&P budget. Most of them are experts are predicting and adjusting CapEx to fit cash flow. I also do not look at proved reserves; the Wall Street geeks study this and I believe it is built into the price of the stock.

What I do Focus on: An oil company leases unique land, drills, and it either hits oil or it does not. If its new wells are excellent, the stock will go up. I focus evaluating their claims for leasing, discoveries, and production. Leasing and drilling are the blocking and tackling for oil companies.

I listen to all the management webcasts (often I listen to it twice) and try to evaluate management quality. Are they real oilfield guys or just promoters? In a webcast, they must handle themselves well, be knowledgeable, and honest. This is subjective.

For objective analysis, I study the firm’s “presentations” on their websites, and their press releases. They present past leasing and drilling success and their plan for the near-term future.

Definitions, Abbreviations & Conversion Factors

A key link for oilfield terms and definitions is the Schlumberger Oilfield Glossary. You might want to bookmark it.

http://www.glossary.oilfield.slb.com/

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Definitions, Abbreviations & Conversion Factors

BOPD = Barrels of oil per day

BOED = Barrels of oil equivalent per day. This includes natural gas on an equivalent BTU basis.

Barrel = 42 gallons U.S.

MMcfe

M means 1,000, MM means one million, B means 1 billion

Natural Gas BTU is usually assumed to be about 1000 as it exits a natural gas plant. It is often about 12 BTU as it exits the well. Natural gas plants remove natural gas liquids NGLs (propane, butane, ethane, etc) that are more valuable than the main component of natural gas which is methane.

TD

E&P

NYMEX oil

Monetizing

Unconventional means horizontal drilling in the target zone.