Friday, March 5, 2010

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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