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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