Bullish Story on Possible Further Merger and Acquisition in the Bakken

This is a very, very interesting story. Superficially it looks like just one more "human interest" story about the Bakken. Most of us would read the headline and move on.

The story was published yesterday.

This is what I find interesting about it: it's as if some people are just hearing about the Bakken for the first time, and this includes established, well-capitalized energy companies.

I don't think these well-capitalized energy companies have only recently heard about the Bakken. I think they were a) focused on natural gas (as the article suggests); and, b) were not convinced the Bakken was as good as the hype back in 2006 through 2008. Harold Hamm was one of the first to really believe in the Bakken and he quietly bought up leases. Other individuals, families, and small investment companies who had been in the Williston Basin for decades accumulated acreage as best they could.

But now, the Bakken is as good as the hype, maybe better, and the price of natural gas has fallen to lows that are not expected to reverse for years.

Here are some takeaways from the article:

"The large U.S. independents like Devon Energy and Anadarko are increasingly coming to the view that some exposure to oil is good," Frank Murphy, an investment banker with Robert W Baird, told Reuters.

Murphy said these companies were underexposed in the oil shales, so there was potential for them to move in either through joint ventures or buying companies active in the Bakken....[but the prices were too high; the companies were overvalued; as an example, BEXP is 74 times earnings].

But

Looking ahead, however, smaller operators may need to seek external funding as service costs go up and maintaining multiple acreage becomes increasingly capital intensive.

"The higher costs will squeeze some of the smaller, less well capitalized players ... they may find that teaming up with larger players or selling out is a more viable option," said Robert W Baird's Murphy.

Private players such as Tracker Resource Development Inc, or small-cap listed operators Kodiak Oil & Gas Corp -- which had end-2009 proved reserves of 4.46 million barrels of oil equivalent -- and Oasis Petroleum would be the sort of firms that could be in this position, analysts said.

"Before the year-end, we'll see one or two deals in the Bakken, maybe in the $400-$500 million range. I think we'll see large independents as the primary acquirers," said Murphy.

So, we'll see. Normally I would not expect to see this merger and acquisition activity before the end of the year (there are less than three months less) but with the uncertainty of tax-break extensions being passed, it just may happen. Especially with the low price of natural gas hurting the bottom line of some of these companies.