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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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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