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Build Your Own Bakken ETF

Kirk is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A few months ago I was searching the exchange traded fund universe for an oil and gas basket based upon or at least heavily tilted toward Bakken shale.  I knew it was unlikely I'd find one and was not surprised when I didn't find an easy way to throw money at the emerging oil play.  So I did what any would-be good investor would do -- I studied the Bakken and the companies in the Bakken for several months. 

In reading 10k reports and spending more time on the North Dakota Geological Survey and North Dakota Oil and Gas Division sites than I never considered I'd ever do, in addition to Geology.com, EIA.gov and the Oil Drum, I came to one conclusion: if the EPA does not shut down hydraulic fracturing, the purer play exploration and production companies on the Bakken are likely to be among of the best investment opportunities of my lifetime.

Extraction costs for Bakken shale are among the lowest still available in America, far lower than drilling in the Gulf of Mexico. Companies that are highly leveraged to this play, though they face start-up costs that investors frequently get bent out of shape about, should do very well (pardon the pun) as the transition away from an oil based transportation economy drags on for the next few decades.

I have narrowed the list of companies I would put into my basket of Bakken shale plays to five attractive small and mid-cap companies that all have the possibility of being acquired by oil majors in coming years.  Based upon the Statoil acquisition of Brigham in 2011, each company listed below has a reasonable floor under their share prices from the potential sale value of their Bakken acreage.  I like that sort of margin of safety when I can get it on volatile but potentially high-growth assets.

Much talked about Kodiak Oil and Gas (NYSE: KOG) and North Oil and Gas (NYSEMKT: NOG) both control about 150,000 acres in the Bakken and are rapidly beginning to exploit those tracts deriving over 85% of their revenue from oil there.  While Kodiak last week took some flack for higher than analyst expected expenses, I see the small pullback in stock price as a buying opportunity.  Northern also pulled back on an earnings miss, which I see too as a buying opportunity.

Larger acreage holder Oasis Petroleum (NYSE: OAS), with about 255,000 acres, is starting to see efficiencies play out.  Oasis issued very good numbers last week though it too paused in share price.  The management of the company, largely from Burlington and Conoco previously, holds a significant portion of the company's shares, though several participate in regularly scheduled automatic small sales.

Triangle Petroleum (NYSEMKT: TPLM) and more diversified Magnum Hunter Resources (NYSE: MHR) round out my basket of Bakken plays for my personalized ETF.  Triangle is ramping up production and is under-covered at this time, making it a bargain in my eyes.  The company also holds significant acreage in Nova Scotia, as well as the Bakken, and might use a Bakken acreage sale to finance its Canadian operations.  Magnum recently got the Jim Cramer dollar-holler of approval when its CEO essentially said on the air they were building the company up for eventual sale. 

While there are a few larger nice plays on the Bakken, these smaller companies seem to still be trading inefficiently.  As one or more of the smaller companies are bought, which I think is pretty close to a sure thing, I will look into some of the larger companies that might start to pay dividends in coming years.  I am using share price pullbacks on the smaller companies to accumulate long positions and the five mentioned companies were recent additions to my Caps portfolio which has done historically well (hee-hee another pun).

Kirk and clients of Bluemound own common stock shares of Kodiak Oil and Gas, and Triangle Petroleum, as well as, long option positions in those companies.  Neither Kirk nor Bluemound clients plan any transactions in the next 3 trading days in the mentioned company's securities. Opinions subject to change at any time without notice. Follow Kirk on Twitter @GALPinvesting or see his watch lists at www.GalpInvesting.com

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