Build Your Own Bakken ETF update

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

Sometimes looking back is the best way to figure out what to do going forward.  As such, this begins my first piece revisiting some ideas from the past year.  

Among my post popular posts was this one titled "Build Your Own Bakken ETF" which I wrote in March that outlined not only five companies operating in the Bakken, but how and where to find primary research about Bakken plays.  The companies I focused on were all small and mid-caps as those are generally pure plays or close to pure plays on the Williston Basin and carry the added potential of being bought out by a larger company.

Since March, I have been to North Dakota three times to meander around the oil patch.  On each trip I had a specific goal of what to see and learn.  Among the companies I spied and had an opportunity to talk about with people in the industry was periodic investor darling Kodiak Oil and Gas (NYSE: KOG).  

Kodiak is one of the fastest growing Williston plays.  I won't bore you with the basics that are all over the web at this point. Kodiak is growing very rapidly, showing huge year over year production and revenue growth. Visit their current investor presentation for background. Here's what is really important:

  • Kodiak's acreage is among the best in the Williston Basin situated above thicker portions of the Bakken formation and with plays in the Three Forks as well.
  • Kodiak has been rapidly decreasing costs on drilling, although the company is taking greater risk by drilling its own disposal wells. If trouble arises, investors ought to immediately reconsider having a position. 
  • The company is seeking to drill up to 75 wells in 2013 for a total cost near $740 million, which will nearly exhaust its current cash and credit facilities. 
  • The company is rapidly increasing its proven reserves, though also moving through its acreage more rapidly than many other companies, meaning it will not be in its growth phase much past the end of the decade.

My short take on Kodiak - it is a very aggressive play on the Williston Basin.  It is a drill baby drill play if ever there was one, growing rapidly right now. The company is open to both environmental and financial risks which means any investment must be monitored closely and investors need to be emotionally able to sell if there is smoke, just in case there is fire. Because of its exposure, Kodiak is also quite likely to be a buy-out candidate, though possibly not at quite as big a premium as some would hope.  Kodiak is a higher risk investment candidate than I originally thought, though it is still a potentially high reward play. I have used Kodiak as a trading stock (I know, I know) rather than a long-term investment.

Of the other stocks covered in that original article, Triangle Petroleum (NYSEMKT: TPLM) was almost an afterthought.  However, I became more interested in their operations as I read about and witnessed their transition from non-operator to operator. I have covered Triangle more completely before here on Fool, so read here to get up to speed and see their investor presentation

Triangle has a few things going for them that have made me a long-term investor.  

First of all is that Triangle has been increasing operations at a moderate pace using free cash flow to accomplish much of it - maintaining an excellent balance sheet.  They are very early in an accelerating growth phase (see presentation) which should generate impressive growth in BOE/day in 2013 and 2014.

Second, and very importantly, is that Triangle is very strategically expanding its vertical foot print. It's recent pipeline deal (see my last article) and RockPile subsidiary are important generators of revenue and are likely to add significantly to its bottom line over time.

Triangle is the tortoise to Kodiak's hare, which makes it much easier to stay on for a long ride.

Also in contrast to Triangle is former high flyer Northern Oil and Gas (NYSEMKT: NOG) which remains a non-operator.

Northern's price swings have been largely due to hitting a few speed bumps in production, but also due to investor misunderstanding about their growth prospects.  Because of their status as non-operator, the company has two drawbacks: an inability to more directly control margins and having lower leverage to the production of their wells.

Further, Northern's acreage is not as prolific as that of Kodiak or Triangle, being more diversified and not heavily in the sweetest spots.  So, despite having relatively good operating interests in wells on its acreage compared to other non-operators, generally around 9% which is a few points higher than most non-operators get, the company just doesn't have the lofty growth potential as some others.  

Oasis Petroleum and Magnum Hunter Resources were the other two companies discussed in the original article; I will be covering those two together next week on Fool.  You can also see my other watch list stocks on my American Resource Boom website.

kirkydu-- Kirk Spano is the owner of Bluemound Asset Management, LLC and publisher of the American Resource Boom Letter.  Clients of Bluemound hold stock positions in Triangle Petroleum. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus