Is the Paradox Basin the Place to be? Two Billionaires Think So
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The Paradox Basin is a potentially resource rich salt basin primarily located in the states of Utah and Colorado. It is known to be home to various resources including potash, uranium and copper. However, according to an assessment by the U.S. Geological Survey, the Paradox Basin may also be home to an estimated 560 million barrels of undiscovered oil, 12,701 billion cubic feet of undiscovered natural gas and 490 million barrels of undiscovered natural gas liquids.
The prospect of these potential resources has been enough for a company backed by billionaires Glenn Dubin and Paul Tudor Jones to put some money to work. On October 3, 2012, Louis Dreyfus Highbridge Energy, LLC (“LDHE”) announced that it agreed to be acquired by DF Energy Acquisition LLC (owned by billionaire Glenn Dubin) and an investor group that included billionaire Paul Tudor Jones, Timothy Barakett and Continental Grain Company led by Paul Fribourg. LDHE is a diversified marketer and operator of both financial and physical energy related commodities. After the acquisition, the company was renamed to Castleton Commodities International LLC (“Castleton”).
The acquisition was completed on January 3, 2013 and twelve days later Castleton announced it had acquired the Paradox Basin upstream and midstream assets of Patara Oil & Gas LLC (“Patara”). Patara is a private oil and gas company backed by Jefferies Capital Partners, Troika Resources Investment PEF, and GE Asset Management. Patara originally acquired the Paradox Basin assets on May 23, 2010.
The assets acquired by Castleton included 180 oil and gas wells, 150,000 net acres in mineral leases, a midstream gas processing facility and a 262-mile gas gathering system. According to the press release, this is just the first investment of an effort to acquire attractive upstream natural gas assets.
Public Paradox exposure
Unfortunately Castleton is a private company and will most likely remain so for the foreseeable future. So investors will need to dig deeper if interested in exposure to the Paradox Basin through a public company. One company that has its largest asset based on reserves tied to the Paradox Basin is Resolute Energy Corporation (NYSE: REN) through working interests in the Greater Aneth Field. In an alliance with the Navajo Nation Oil and Gas Company (“Navajo Nation”), Resolute acquired its Aneth Field assets through two acquisitions in 2004 and 2006.
As of December 31, 2011, Resolute owned approximately 28,122 net acres in the Aneth Field and it accounted for 86% of the company’s net proved reserves. However, in April 2012, Resolute issued a press release stating that NNOG had exercised an option to purchase 10% of the interest in the Greater Aneth Field owned by Resolute for approximately $100 million. In the same press release, Resolute announced that it and Navajo Nation had acquired all of Denbury Resources interests in the Aneth Field for $75 million. While the Aneth Field is a mature asset, Resolute believes that significantly more oil can be recovered from these properties using both standard secondary and tertiary recovery techniques.
The Aneth Field does represent a large percentage of reserves for Resolute; however the company has been recently stepping up its effort to diversify reserves into other regions. In December 2012, the company agreed to acquire 8,032 net acres in the Permian Basin which produced and average of approximately 2,468 barrels of oil equivalent per day during the third quarter of 2012 for approximately $250 million. The acquisition added to an existing acreage position of approximately 9,000 net acres already held by the company. Other active properties held by the company are approximately 32,000 net acres in the Williston Basin in the counties of Williams and McKenzie, North Dakota and additional acreage in the Hilight Field located in Wyoming of which approximately 45,000 acres is held by production.
A much more diversified play with acreage in the Paradox Basin is MDU Resources Group (NYSE: MDU). In addition to the company’s exploration and production operations, MDU Resources also owns a regulated utility, produces aggregates, offers construction services, and is involved in energy services including the ownership of both regulated and non-regulated pipelines. The focus here will be on Fidelity Exploration and Production Company, which is the oil and gas subsidiary that holds approximately 83,000 net acres and has an option to lease another 20,000 net acres in the Paradox basin.
While the company’s focus is on its approximately 127,000 acres targeting the Bakken, the company does consider its Paradox acreage part of its strategic growth plan. In fact, management believes the Paradox Basin is a “potential game changer” for the company. The company recently completed a well in the Cane Creek play of the Paradox Basin which was initially producing approximately 1,500 barrels of oil per day.
Other strategic growth properties for MDU Resources include approximately 90,000 net acres targeting the Heath Shale, 22,000 net acres in Central Texas, 65,000 net acres targeting the Niobrara, 10,000 net acres in South Texas and an option for 51,000 acres in Nebraska.
Bill Barrett Corporation (NYSE: BBG) has a very large acreage position in the Paradox Basin with approximately 366,000 net undeveloped acres. However, the company has been allocating a minor portion of its capital expenditure budget to this play over the last few years. Bill Barrett has historically been primarily a natural gas producer, but has been focused on reducing exposure to nature gas and focusing its capital expenditures on lower risk projects and oil plays.
Bill Barrett is currently focused on what management refers to as its core properties which include 121,285 net undeveloped acres in the Uinta Basin and 75,605 net acres in the DJ Basin primarily targeting the Niobrara Formation. Other exploration properties include 64,000 net acres in the Powder River Basin, 97,000 net acres in the Southern Alberta Basin and 37,000 net acres in the San Juan Basin.
The bottom line
Of course the ownership of property in the Paradox Basin in itself is not a reason to invest in a particular company and each should be evaluated on individual merits. Resolute is primarily extracting resources from its Paradox holdings through secondary and tertiary methods including CO2 flooding. Bill Barrett is allocating a very small portion of its budget to the Paradox Basin acreage. It is unknown when they will elect to explore the Paradox Basin in earnest so the company’s core properties should be the primary focus for evaluation. MDU Resources seems to be very excited about its particular holdings in the Paradox Basin calling them a “potential game changer.” The company is currently focused on both its Bakken and Paradox properties, however due to the company’s diversification; any upside from these holdings may be muted by the utility and construction segments.
ScavengerReport owns shares in MDU Resources Group, Inc. The Motley Fool has no position in any of the stocks mentioned. 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!