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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