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Tuesday, November 6, 2012

For Investors Only -- Investment Opportunities in the Bakken

I don't remember if I posted  Part I of this 2-part series. I know I have not yet posted Part 2. Enjoy.

Two themes:
  • Bakken companies will do well if WTI-Bakken differential narrows, as expected
  • increasing debt for some companies as they continue to increase CAPEX
Folks talk about the high cost of completing a well in the Bakken, but I don't think it's a lot less expensive to complete a well in the Eagle Ford.

From the link, NOG:
During the current year Northern is boosting its drilling program by upping capital expenditures to over $400 million. A substantial part of the benefits of this will flow through to earnings in 2013. By edging capex higher again in both 2013 and 2014 the company should be able to generate healthy earnings growth for both years. 
The projections for 2014 in the above table assume that oil prices will remain unchanged from 2013. However, as with Kodiak, Northern will benefit further in 2014 if Bakken differentials versus WTI come down. Additionally, the 2014 data assumes that total cost of production (LOE, taxes, depletion) will only improve from 2013 levels by 1%, not a big ask. Suffice to say that Northern's 2014 EPS of $2.20 should be attainable without too much of a stretch.
Oasis:
Oasis is predominantly a Bakken driller and, like Kodiak and Northern above, its 2014 estimates do not incorporate any assumed improvement in differentials versus WTI. In either case - better differentials or not - OAS should have 2014 EPS above $3.00 per share, possibly a fair amount higher with better differentials. An ongoing theme to watch with Oasis is the level of its borrowings. Even a small increase in capex from 2012 to 2014 would leave the company with a high debt/equity ratio during the next two years
The shares, now $30.40, would be on a next year p/e of 9.6 in early 2013 using 2014 EPS of $3.15. That leaves upside potential but, considering the projected high level of debt, that upside may be capped unless it can be demonstrated that earnings should be even stronger in 2014 and/or that better inroads will be made into reducing the debt.

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