The 'purest' Bakken oil stock in the market today

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Bakken Oil

Keith Schaeffer, editor of the Oil and Gas Investments Bulletin, helps investors understand and invest profitably with regular, independent reports and analyses.Here's one of his portfolio stocks … a junior Bakken oil producer whose share price has climbed 105% inside the last 6 months.

COMPANY ANALYSIS:

The “Purest” Bakken Oil Stock in the Market Today
TRIANGLE PETROLEUM – TPLM-AMEX (NYSE)

Williston Basin

I am updating this report because this truly is one of my favourite junior oil producers for 2013—and I think the timing could work out well.

I expect big increases in production each quarter, and the bigger this company gets, the less it will trade onmacro events and more on its own merits—which I think will give it a smoother, and rising, stock chart.

Triangle also recently announced they are seeding a mid-stream company in the Bakken—offering a full service pipeline solution to producers for oil, natural gas, and both fresh and used water. They are already vertically integrating with their 83% owned fracking company, RockPile. The market loves this strategy.

This is already one of the most followed junior companies in the Bakken, so I’m confident that good results will get rewarded. And they have services lined up—both drill rigs and fracking spread—to continue with an aggressive program.

QUICK FACTS

Shares Outstanding: 85.4 million
Share Price: $10.61 (closing price Oct 11, 2013)
Market Cap: $548.3 million
Net Debt: $70 million
Enterprise Value: $618.3 million
2014 Estimated EBITA: $125 million

POSITIVES

  • Big land position–45,000 net acres in core area of western North Dakota and 50,000 acres in eastern Montana (still unproven)
  • $134 million cash after recent financing
  • Pure play on the Bakken which still is the market's favorite
  • Early downspacing results could eventually mean a double in the number of drilling locations in the core areas of the play
  • Only vertically integrated small Bakken producer

NEGATIVES

  • Small cap oil stock is going to be volatile
  • High decline nature of Bakken wells are difficult to manage for a small company
  • 50,000 acre Montana asset which could be huge for Triangle is still unproven

BACKGROUND

For my Canadian subscribers, the US Bakken is deeper than in Saskatchewan, and this gives it higher pressure—which gives higher flow rates. The productive geology is in two zones, the middle Bakken and now the Three Forks.

The market pays big for both raw Bakken acreage and production—because this play has been relatively consistent over a large area. Low risk, high growth companies get high valuations. And the economics on the wells are good—wells cost up to $9 million, have 30 day IP rates of just under 600 bopd, produce a total of 600,000 barrels and have IRR's of 50%.

Now, remember this is an overall statistical snapshot. Individual wells can vary quite a bit from this. But at this stage in TPLMs young growth, this is the profile the market is willing to pay for.

There have been many buyouts and asset sales among the juniors in this play, including a HUGE one—as Norway's Statoil bought out Brigham Exploration (BEXP-NYSE) for $3.6 billion in Q3 2011. Brigham went from $2 – $36 in two years as it developed its Bakken acreage. While TPLM doesn't have quite the same size land package, you get an idea of what The Prize is for this stock.

So that brought even more attention to TPLM. The stock has traded in the $5 – $8 range over the last 12 months — and I'm happy to buy it at lower levels.

TRIANGLE PETROLEUM – THE PARTS

PART 1 – WILLISTON BASIN PURE PLAY OPERATOR

NORTH DAKOTA BAKKEN

Triangle is the only vertically integrated small Bakken producer. Its main business though is still oil and gas production.

Triangle has 95,000 net acres of land in total.   45,000 of those acres are in the Williams and McKenzie counties are in the North Dakota Bakken.  The other 50,000 net acres are just across the border in Montana—on a property called the Station Prospect

Acreage in the North Dakota Bakken play actually contains four distinct zones or formations. These formations are the upper, lower and middle Bakken as well as the Three Forks

On April 30, 2013, the United States Geological Survey (USGS) released a new oil and gas resource assessment for the Bakken Formation and a new assessment for the Three Forks Formation in North Dakota, South Dakota and Montana.

The USGS found that the formations contain an estimated mean of 7.4 billion barrels of undiscovered, technically recoverable oil. This updated assessment for the Bakken and Three Forks represents a twofold increase over what has previously been thought.

The USGS found that the Bakken Formation has an estimated mean oil resource of 3.65 BBO and the Three Forks Formation has an estimated mean resource of 3.73 BBO, for a total of 7.38 BBO.

The previous assessment in 2008 included only 3.65 billion barrels in the Bakken Formation.

Back when the 2008 USGS assessment was done very little data existed on the Three Forks formation and at the time it was thought to be unproductive.

Since then more than 4,000 wells have been drilled in the Williston Basin providing a great deal of new subsurface geologic data. This data has resulted in a new understanding of the Three Forks and its potential.

In addition to oil, these two formations are estimated to contain a mean of 6.7 trillion cubic feet of undiscovered, technically recoverable natural gas and 0.53 billion barrels of undiscovered, technically recoverable natural gas liquids.

Triangle’s North Dakota properties are fairly well de-risked. How productive and profitable the Station Prospect property will be is yet to be determined.

On August 6 Triangle announced that it had acquired an additional 9,350 net acres and 1,150 Boe/d of estimated current net production (86% operated) in Mckenzie County.

This land is right beside Triangle’s existing land and increased its core Mckenzie holdings to 45,000 net acres, current production to 5,650 Boe/d, and proved reserves to 22.9 million boe.

This acquisition looks like a good deal for Triangle. If we assume that the 1,150 boe of production is worth $80,000 per flowing barrel, that means that the 9,350 acres were acquired for $1,500 per acre.

That is cheap when you consider that larger Williston basin competitor Kodiak (KOG) trades at over $14,000 per acre.

Since I first bought shares in Triangle back at the start of 2012 the company has gone from operating 0% of its production volume to operating 70% of its production volume.

That is a big and important change.

Increasing operating control is a big deal, because the market values operated production at much higher levels than it does non-operated production.

Being operator gives a company more control over its own destiny. Operatorship provides control over the timing of spending and the quality of results.

Bakken production really started ramping up in 2007. Triangle didn’t really start drilling up its acreage until 2012. That has allowed the company to sit back and watch what drilling and completion techniques have produced the best results for other companies.

Triangle has now been taking those techniques and applying them to its land base.

From Q1 of its fiscal 2012, Triangle had increased production from only 76 barrels per day to a current level 4,300 boe/day (pre acquisition).

Proved reserves (pre acquisition) had grown over that period from 1.2 million barrels to over 16 million barrels. Including the recent acquisition proved reserves will be almost 23 million barrels.

All of this production is coming from the McKenzie and Williams counties in North Dakota. These counties are not the absolute sweet spots of the Bakken, but they are very economic for an operator with good cost control.

 

STATION PROSPECT–MONTANA

Activity in the Bakken is spreading northwest up into Montana, near where Triangle's large 50,000 acre Station Prospect is located, which straddles Roosevelt and Sheridan counties.

The company says it has 360 operated drill locations at Station Prospect—enough to keep them busy for a few years.

The Station Prospect property is not a sure thing though as it is still unknown if profitable wells can be drilled on the property.

Triangle is lucky in that this property is a five year lease (three and a half years remaining) and time is on their side. They can watch other people drill around them and figure out the best drilling and completion methods before they drill.

And the industry has been drilling all around them. Companies that have drilled wells in the area include Continental Resources (CLR), Southwestern Energy (SWN), Whiting Petroleum (WLL) and Samson Oil and Gas (SSN).

All Triangle needs to do is sit and wait for one of those companies to reveal that they have “cracked the code” on the play. Once someone figures out how to drill profitable wells, the play goes from just having potential to being the real deal. Acreage land values will then increase by multiples of current prices.

PART 2 – ROCKPILE ENERGY SERVICES

What makes Triangle unique is that it is the ONLY small vertically integrated Bakken player.

RockPile Energy Services is Triangle’s wholly-owned subsidiary that provides hydraulic fracking services to Triangle and third-party customers.

“Fracking” or pressure pumping is what has made it possible to produce oil and natural gas in places where conventional technology is ineffective. This is what opened up the Bakken and Eagle Ford type plays that have revolutionized the oil and gas business in North America.

Having its own fracking division means that Triangle doesn’t ever have to worry about a shortage of fracking services. This is a very real concern, especially for the smaller producers.

The bigger producers like EOG or Continental Resources are huge customers for the services companies. If there is a shortage of fracking crews and equipment it will not be these big boys who miss out, it will be the smaller companies like Triangle left out in the cold.

The bigger producers who are the service industries best customers also get first choice of the best equipment and crews.

Having its own fracking service in-house not only guarantees access to the service for Triangle but also allows the company to have much greater control over costs and the quality of the work being done.

In the most recent quarter RockPile’s business was split 50/50 between Triangle and third-party work. Business has been strong enough that RockPile is adding a second fracking spread in Q2.

Controlling access to fracking services and cost is the primary reason for Triangle to create RockPile. If the division grows into a profitable entity in its own right, then all the better.

PART 3 – CALIBER MIDSTREAM

Caliber is a joint venture with First Reserve Energy Infrastructure Fund (FREIF) and was created in October 2012 with Triangle contributing $30 million and FREIF $70 million.

Caliber is an energy infrastructure company that provides the following services

  • crude oil and natural gas gathering and transportation
  • water treating and processing
  • produced water transportation and disposal
  • freshwater sourcing and transportation by pipeline

Caliber benefits its customers by reducing the cost and environmental impact of trucking and also reduces or eliminates the emissions caused by natural gas flaring.

Caliber began water transportation and disposal operations in January 2013 and expects to have all business lines in service by the third quarter of fiscal year 2014.

Caliber is currently constructing its Phase 1 pipeline system and central facility in McKenzie County, North Dakota. It plans to expand the Phase 1 pipeline system in McKenzie County and to build new infrastructure in other counties of North Dakota and Montana as needed by Triangle and third-party customers.

Caliber was only created in October 2012 so it is not a large part of Triangle at this point in time.

 

FINANCES/QUARTERLY RESULTS

Triangle Exploration and Production

Triangle just reported good fiscal Q1 2014 earnings of $0.10 per share which easily beat consensus estimates of $0.05.

Much higher than expected production of 2,700 boe/day was the reason for the beat.

Even more surprising (in a good way) was current production of 4,300 boe/day. That was only 650 barrels short of the high end of what Triangle’s year end guidance was prior to the recent acquisition.

On the conference call to discuss the Q1 results Triangle’s management was actually asked why they weren’t bumping up exit guidance.

 

About Oil & Gas Investments Bulletin 

Keith Schaefer, Editor and Publisher of Oil & Gas Investments Bulletin, writes on oil and natural gas markets – and stocks – in a simple, easy to read manner. He uses research reports and trade magazines, interviews industry experts and executives to identify trends in the oil and gas industry – and writes about them in a public blog. He then finds investments that make money based on that information. Company information is shared only with Oil & Gas Investments subscribers in the Bulletin – they see what he’s buying, when he buys it, and why.

The Oil & Gas Investments Bulletin subscription service finds, researches and profiles fast growing oil and gas companies. The Oil and Gas Investments Bulletin is a completely independent service, written to build subscriber loyalty.

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