By Kirk Spano
As discussed last week, improvements in hydraulic fracturing has led to vast opportunities for oil and gas service companies that can stay on the right side of the EPA. As most readers know, fracking is also providing significant growth for many oil and gas exploration and production companies in America. This rapid growth is now also creating the circumstances for increased mergers and acquisition activity.
Among the fastest growing oil and gas companies and those with the biggest potential are those involved with the Bakken and Three Forks formations in the Williston Basin of North Dakota and to a lesser extent Montana. North Dakota's rich reserves and friendly attitude towards drillers makes it a prime place for oil and gas production. As of last month North Dakota drillers reached 500,000 barrels
of oil (and equivalents) per day of production. That curve, presuming no outright shut down of fracking by the Federal Government, appears likely to hit 1,000,000 barrels per day within a few years.
Given the intermediate and longer term supply and demand picture for oil and gas, there is a clear desire for companies to control as much strategic reserves as possible. North Dakota has somewhere between 11 billion barrels of oil, according to the North Dakota Geological Survey, and 24 billion barrels of oil, according to Harold Hamm founder of the largest Bakken acreage holder, Continental Resources /zigman2/quotes/200740136/composite CLR -4.40% , that is recoverable. This is reserves for several decades even at double today's production and could provide as much as 20% of America's oil needs.
Already, acquisitions are beginning to occur. In October of 2011, Statoil purchased Brigham Exploration with its Bakken assets for $4.4 Billion. This purchase by the Norwegian major translated into about $12,000 per acre for access to the high growth area. Further deals seem only a matter of time and will likely be at higher prices per acre.
Acreage control in North Dakota is highly fragmented due to the recent and nearly simultaneous realization of the potential of the Williston Basin. Several smaller companies however are highly leveraged to the area and control acreage that is likely highly attractive to the oil and gas majors. I have four companies I am seeking entry prices for which are growing, control attractive land and are potentially likely to seek being acquired at some point soon.
The smallest North Dakota acreage holder in the group is Triangle Petroleum . Triangle has a duel strategy of developing about 81,000 acres in the Bakken region, as well as, an 87% ownership in about 474,000 acres in Nova Scotia. The company is looking at strategic opportunities with its Nova Scotia property.
It would not be a big surprise to see Triangle seek a buyer for its Bakken acreage if it believed it could use the proceeds to exploit its Canadian opportunities which are relatively low-cost. Triangle's Bakken acreage, using a small premium to the Statoil-Brigham deal could fetch the company over $1 billion. The company's market cap now is only $300 million and it carries little to no debt.
Next on the acreage list is Kodiak , itself an acquirer including some already producing tracts. Kodiak is holding about 155,000 acres in the Bakken. Much of its land is adjacent to majors which might wish to acquire it. Kodiak also has a secondary play in the Green River Basin in southern Wyoming and northern Colorado.
The company appears to have overcome some perceived financing risks and is ramping up production. Given the good weather so far this winter, if it is not acquired soon, it could see further share price appreciation as it increases production. Its acreage is valued at roughly $2 billion. The company has a market cap of about $2 billion and debt of under $100 million.
Similar to Kodiak in acreage is Northern Oil and Gas /zigman2/quotes/204572386/composite NOG -3.89% with about 160,000 net acres in the Bakken and Three Forks. Northern is focused on a low expense strategy as a non-operator by having partners handle the drilling of its property. Its return on assets is ahead of many other small cap companies nearing 10%. It anticipates adding 44 wells in 2012 to the 40 it added in 2011.
Northern's acreage is also valued about $2 billion. With a market cap of only $1.5 billion and little debt the company could be a compelling value to an acquirer. Northern already has relationships with several larger companies. If Northern is not acquired, I can see them beginning to pay a dividend in the near future.
Rounding out the four potential targets is the largest acreage holder, Oasis Petroleum /zigman2/quotes/222659909/composite OAS -5.17% with 303 acres. Oasis is a pure play on the Williston Basin. Its property is essentially right next door to the Brigham property that Statoil bought just a few months ago. Oasis has sold off some of its more difficult to develop land, leaving it about 250,000 acres that are likely to be developed over time.
Oasis is returning over 10% on assets and has no immediate liquidity issues owing to its low cost of original land acquisition at around $450 per acre. The company can choose to grow over time or be selective if suitors turn up. Due to the large acreage it controls, the 10th largest in the region according to industry statistics, it could command a larger premium than some of the smaller plays mentioned in this article, possibly fetching as much as $5 billion. The company has a market cap of a mere $3 billion. This is another company that could begin paying a dividend soon.