The run on land in the expanding Alberta Bakken Formation play has given a leg up to the exploration and production (E&P) companies that got in early. In this exclusive interview with The Energy Report, Senior Analyst Kirk Wilson of Calgary-based Clarus Securities details the best and the brightest prospects seeking light oil in the western Bakken.
The Energy Report: Kirk, please tell us what you typically cover in the oil and gas (O&G) sector.
Kirk Wilson: I focus on high-growth, undervalued junior and intermediate O&G names domestically and internationally. The majority of the companies I follow are based in Canada, but all companies that I follow are listed in Canada. They typically have a market cap range from $25 million to $2 billion.
TER: What issues or trends are driving Canadian E&P companies?
KW: There are a couple of trends and issues that investors need to be wary of when looking at Canadian names. One is the ability to secure land on a reasonable basis. Junior and intermediate companies need to get into plays early to get a large enough land position before prices increase dramatically.
We've seen it happen in all the main oil resource plays; if a company is not in early with a low-cost basis on land acquisitions, it gets more difficult to be able to put together a meaningful land position.
The economics are another issue. With about 75% of the Western Canadian Sedimentary Basin being natural gas-charged, finding oil plays that deliver much higher netbacks is getting more difficult. There just aren't as many of them out there. Most juniors have been weighted towards natural gas.
However, with the challenge in gas prices, it makes growth very difficult for companies that are focused on that commodity because companies don't have the cash flow to reinvest. The economics of plays are very important as well, as investors must recognize the capital that is required to participate in some of these oil-resource plays.
TER: One trend that has been under the radar until recently is the light oil play in the Alberta Basin Bakken that extends from Montana into Alberta and Saskatchewan. What's going on there?
KW: The industry is trying to find new places to exploit large oil resources. The Bakken in Saskatchewan, and even into North Dakota, has existed for decades, but it was not economically producible. Horizontal drilling, multi-frack applications and higher oil prices have made the Bakken a very economic play.
Companies have applied that technology to other known resources, such as the Cardium play at Pembina, the Viking Formation, and the Shaunavon formation in southwest Saskatchewan. Using that technology, the industry is trying to find new exploration plays. The Alberta Bakken, which stretches from Alberta into Montana, is one of these new exploration plays. I categorize it as exploration because there's been a minimal amount of drilling, so a minimal amount of data. It's still very early days.
There are a lot of analogies and similarities between the Alberta Bakken and the Williston Basin that allow companies to put it on their radar screen. It's about 4,500 to 6,000 feet deep in Alberta and into Montana. It's light oil believed to be 35 to 42 degree American Petroleum Institute (API).
The Alberta Bakken is a good term but it can involve other formations like the Exshaw, Three Forks and Torquay. It may not be precisely in the Bakken, but it's in the same geologic age. Oil prices are now pretty consistently above $65; so, with proven technology and the ability to gain a meaningful land position, companies are now exploring and making this a new play that hasn't really been talked about in the past.
TER: Tell us a little bit more about the drilling economics of heavy oil versus light oil.
KW: A key consideration when comparing heavy oil and light oil is the viscosity. Light oil flows more easily than heavy oil, which means production rates are generally higher. That obviously helps the economics because there is a larger percentage of oil produced early in the life cycle of the well.
Then there are the light oil/heavy oil differentials. A company will receive and this is a moving figure based on many variables $10 to $15 per barrel less for heavy oil than for light oil.
Investors should also consider royalty rates. In Saskatchewan and Alberta, there are advantageous royalty rates compared to south of the U.S. border. That advantage comes from royalty incentives and royalty holidays.
For instance, companies operating in the Blackfeet Nation in Montana pay ~30% royalties across the board. In Saskatchewan, the first 37,500 barrels incur 2.5% royalties if they're drilled on Crown land. In Alberta, 5% royalties are paid for 50,000 to 60,000 barrels of initial production.
TER: That's a remarkable difference.
KW: It really can be huge. Drilling and completion costs to get a well on-stream in the Viewfield area of Saskatchewan, where it's a little shallower, could be $1.7 million. The deeper plays down in North Dakota could be as high as $6.5 million per well. Alberta and Montana generally cost around $4 million per well.
The amount of developed infrastructure in those regions also plays into the economics of a play. The more developed infrastructure, as in Saskatchewan, the lower the full-cycle costs. Some areas have no infrastructure at all.
TER: The cost of doing business is lower in Saskatchewan and Alberta than North Dakota and Montana?
KW: Yes, but one must consider that production rates in North Dakota are sometimes multiples of those in Saskatchewan. While the costs are higher, the overall net-present values can also be higher in North Dakota depending on how much oil is going to be recovered and how quickly it is going to be recovered.
There are offsetting measures, but I would say Saskatchewan is probably the most developed, with North Dakota pretty close behind.
TER: What are some companies with exposure to the Bakken in Montana, Alberta and Saskatchewan?
KW: In North Dakota, there is Arsenal Energy Inc. (TSX:AEI), NuLoch Resources Inc. (TSX.V:NLR) and TriOil Resources Ltd. (TSX.V:TOL).
In Montana, there is Primary Petroleum (TSX.V:PIE), Rosetta Resources Inc. (NASDAQ:ROSE), Newfield Exploration Company (NYSE:NFX) and Anschutz Exploration Corp.
In Alberta, companies targeting the Alberta Basin Bakken include Crescent Point Energy Corp. (TSX:CPG), which has perhaps the largest land position. There is also Murphy Oil Corp. (NYSE:MUR), Royal Dutch Shell Plc (NYSE:RDS.A) and PetroBakken Energy Ltd. (TSX:PBN). On the smaller side, DeeThree Exploration Ltd. (TSX.V:DTX), Bowood Energy Inc. (TSX:BWD) and Argosy Energy Inc. (TSX:GSY) are three juniors that are playing that space.
TER: That's quite a list.
KW: In Saskatchewan, that list can be longer. Crescent Point and Petrobakken are the two big dogs there. In addition, there's Legacy Oil & Gas Inc. (TSX:LEG); Spartan Exploration Ltd. (TSX:SPE) has a big land position for its size; and Painted Pony Petroleum Ltd. (TSX.V:PPY.A) is active in the area.
Then there are the trusts: ARC Energy Trust (TSX:AET.UN), NAL Oil & Gas Trust (TSX:NAE) and Advantage Oil and Gas Ltd. (NYSE:AAV; TSX:AAV).
TER: Could you delve a little deeper into some of those companies?
KW: Primary Petroleum has 190,000 net acres in Montana on two land blocks. Its western Montana land position is 170,000 acres and eastern Montana is 20,000 acres. And the company is still adding land. The company certainly has a very interesting and highly appealing land base perspective for those formations.
Right now, investors are watching offsetting activity by some larger companies. Just north of Primary, on the Blackfeet Nation, wells are being drilled by Rosetta, Newfield and Anschutz. Rosetta has drilled a number of wells already, and plans to get to eight wells this year.
Obviously, drilling will continue into the New Year. Newfield also planned for an eight-well program this year. At least one of those wells is horizontal and is producing right now, which is a very interesting data point.
Data is being very closely held, but we do have verbal confirmation from Rosetta that the formation is over-pressured and oil-saturated. The company estimates that there are 13 15 million barrels of oil in place per section.
To put that into context, in the Viewfield area of Saskatchewan, which is shallower and not as highly pressured, there are generally 4 5 million barrels of oil in place per section. So, the Alberta Bakken could contain up to triple the amount of oil in place. The key will be recovery and production rates. However, we've seen a lot of encouraging data so far.
Alberta is a little farther away from Primary Petroleum's lands, but some drilling has taken place and there are a couple of wells producing just across the border.
Primary's stock was recently trading in the $0.65 range. A risk evaluation of their resource indicates a $5 potential value. We don't have a lot of hard data and there are a lot of assumptions being made in that analysis, but if the play turns out to be analogous to the Saskatchewan play, there is a case to be made for at least $5 per share potential value for Primary.
TER: Acquiring land can be an issue. Primary's management must have gotten in on this pretty early to purchase 170,000 continuous acres in western Montana.
KW: It's a large land position, which is a notable achievement for Primary as it can be very difficult to put together this size of land base it can take several years sometimes.
The Energy Report: Kirk, please tell us what you typically cover in the oil and gas (O&G) sector.
Kirk Wilson: I focus on high-growth, undervalued junior and intermediate O&G names domestically and internationally. The majority of the companies I follow are based in Canada, but all companies that I follow are listed in Canada. They typically have a market cap range from $25 million to $2 billion.
TER: What issues or trends are driving Canadian E&P companies?
KW: There are a couple of trends and issues that investors need to be wary of when looking at Canadian names. One is the ability to secure land on a reasonable basis. Junior and intermediate companies need to get into plays early to get a large enough land position before prices increase dramatically.
We've seen it happen in all the main oil resource plays; if a company is not in early with a low-cost basis on land acquisitions, it gets more difficult to be able to put together a meaningful land position.
The economics are another issue. With about 75% of the Western Canadian Sedimentary Basin being natural gas-charged, finding oil plays that deliver much higher netbacks is getting more difficult. There just aren't as many of them out there. Most juniors have been weighted towards natural gas.
However, with the challenge in gas prices, it makes growth very difficult for companies that are focused on that commodity because companies don't have the cash flow to reinvest. The economics of plays are very important as well, as investors must recognize the capital that is required to participate in some of these oil-resource plays.
TER: One trend that has been under the radar until recently is the light oil play in the Alberta Basin Bakken that extends from Montana into Alberta and Saskatchewan. What's going on there?
KW: The industry is trying to find new places to exploit large oil resources. The Bakken in Saskatchewan, and even into North Dakota, has existed for decades, but it was not economically producible. Horizontal drilling, multi-frack applications and higher oil prices have made the Bakken a very economic play.
Companies have applied that technology to other known resources, such as the Cardium play at Pembina, the Viking Formation, and the Shaunavon formation in southwest Saskatchewan. Using that technology, the industry is trying to find new exploration plays. The Alberta Bakken, which stretches from Alberta into Montana, is one of these new exploration plays. I categorize it as exploration because there's been a minimal amount of drilling, so a minimal amount of data. It's still very early days.
There are a lot of analogies and similarities between the Alberta Bakken and the Williston Basin that allow companies to put it on their radar screen. It's about 4,500 to 6,000 feet deep in Alberta and into Montana. It's light oil believed to be 35 to 42 degree American Petroleum Institute (API).
The Alberta Bakken is a good term but it can involve other formations like the Exshaw, Three Forks and Torquay. It may not be precisely in the Bakken, but it's in the same geologic age. Oil prices are now pretty consistently above $65; so, with proven technology and the ability to gain a meaningful land position, companies are now exploring and making this a new play that hasn't really been talked about in the past.
TER: Tell us a little bit more about the drilling economics of heavy oil versus light oil.
KW: A key consideration when comparing heavy oil and light oil is the viscosity. Light oil flows more easily than heavy oil, which means production rates are generally higher. That obviously helps the economics because there is a larger percentage of oil produced early in the life cycle of the well.
Then there are the light oil/heavy oil differentials. A company will receive and this is a moving figure based on many variables $10 to $15 per barrel less for heavy oil than for light oil.
Investors should also consider royalty rates. In Saskatchewan and Alberta, there are advantageous royalty rates compared to south of the U.S. border. That advantage comes from royalty incentives and royalty holidays.
For instance, companies operating in the Blackfeet Nation in Montana pay ~30% royalties across the board. In Saskatchewan, the first 37,500 barrels incur 2.5% royalties if they're drilled on Crown land. In Alberta, 5% royalties are paid for 50,000 to 60,000 barrels of initial production.
TER: That's a remarkable difference.
KW: It really can be huge. Drilling and completion costs to get a well on-stream in the Viewfield area of Saskatchewan, where it's a little shallower, could be $1.7 million. The deeper plays down in North Dakota could be as high as $6.5 million per well. Alberta and Montana generally cost around $4 million per well.
The amount of developed infrastructure in those regions also plays into the economics of a play. The more developed infrastructure, as in Saskatchewan, the lower the full-cycle costs. Some areas have no infrastructure at all.
TER: The cost of doing business is lower in Saskatchewan and Alberta than North Dakota and Montana?
KW: Yes, but one must consider that production rates in North Dakota are sometimes multiples of those in Saskatchewan. While the costs are higher, the overall net-present values can also be higher in North Dakota depending on how much oil is going to be recovered and how quickly it is going to be recovered.
There are offsetting measures, but I would say Saskatchewan is probably the most developed, with North Dakota pretty close behind.
TER: What are some companies with exposure to the Bakken in Montana, Alberta and Saskatchewan?
KW: In North Dakota, there is Arsenal Energy Inc. (TSX:AEI), NuLoch Resources Inc. (TSX.V:NLR) and TriOil Resources Ltd. (TSX.V:TOL).
In Montana, there is Primary Petroleum (TSX.V:PIE), Rosetta Resources Inc. (NASDAQ:ROSE), Newfield Exploration Company (NYSE:NFX) and Anschutz Exploration Corp.
In Alberta, companies targeting the Alberta Basin Bakken include Crescent Point Energy Corp. (TSX:CPG), which has perhaps the largest land position. There is also Murphy Oil Corp. (NYSE:MUR), Royal Dutch Shell Plc (NYSE:RDS.A) and PetroBakken Energy Ltd. (TSX:PBN). On the smaller side, DeeThree Exploration Ltd. (TSX.V:DTX), Bowood Energy Inc. (TSX:BWD) and Argosy Energy Inc. (TSX:GSY) are three juniors that are playing that space.
TER: That's quite a list.
KW: In Saskatchewan, that list can be longer. Crescent Point and Petrobakken are the two big dogs there. In addition, there's Legacy Oil & Gas Inc. (TSX:LEG); Spartan Exploration Ltd. (TSX:SPE) has a big land position for its size; and Painted Pony Petroleum Ltd. (TSX.V:PPY.A) is active in the area.
Then there are the trusts: ARC Energy Trust (TSX:AET.UN), NAL Oil & Gas Trust (TSX:NAE) and Advantage Oil and Gas Ltd. (NYSE:AAV; TSX:AAV).
TER: Could you delve a little deeper into some of those companies?
KW: Primary Petroleum has 190,000 net acres in Montana on two land blocks. Its western Montana land position is 170,000 acres and eastern Montana is 20,000 acres. And the company is still adding land. The company certainly has a very interesting and highly appealing land base perspective for those formations.
Right now, investors are watching offsetting activity by some larger companies. Just north of Primary, on the Blackfeet Nation, wells are being drilled by Rosetta, Newfield and Anschutz. Rosetta has drilled a number of wells already, and plans to get to eight wells this year.
Obviously, drilling will continue into the New Year. Newfield also planned for an eight-well program this year. At least one of those wells is horizontal and is producing right now, which is a very interesting data point.
Data is being very closely held, but we do have verbal confirmation from Rosetta that the formation is over-pressured and oil-saturated. The company estimates that there are 13 15 million barrels of oil in place per section.
To put that into context, in the Viewfield area of Saskatchewan, which is shallower and not as highly pressured, there are generally 4 5 million barrels of oil in place per section. So, the Alberta Bakken could contain up to triple the amount of oil in place. The key will be recovery and production rates. However, we've seen a lot of encouraging data so far.
Alberta is a little farther away from Primary Petroleum's lands, but some drilling has taken place and there are a couple of wells producing just across the border.
Primary's stock was recently trading in the $0.65 range. A risk evaluation of their resource indicates a $5 potential value. We don't have a lot of hard data and there are a lot of assumptions being made in that analysis, but if the play turns out to be analogous to the Saskatchewan play, there is a case to be made for at least $5 per share potential value for Primary.
TER: Acquiring land can be an issue. Primary's management must have gotten in on this pretty early to purchase 170,000 continuous acres in western Montana.
KW: It's a large land position, which is a notable achievement for Primary as it can be very difficult to put together this size of land base it can take several years sometimes.
