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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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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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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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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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