Sunday, February 28, 2010

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.

Saturday, February 27, 2010

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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Friday, February 26, 2010

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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Thursday, February 25, 2010

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

Wednesday, February 24, 2010

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.