Sunday, August 19, 2012

Whiting Petroleum: A Bakken bet


Whiting Petroleum (WLL) is an independent exploration and production; the company is active in the Gulf Coast, the Permian Basin of West Texas, and Colorado's Niobrara Shale. Combined, it's sitting on 305 million barrels of proved reserves.

Whiting has perfected the enhanced oil recovery (EOR) technique of injecting carbon dioxide into wells to breathe new life into reservoirs that others left for dead.

Just as there's always some toothpaste left in the tube, there's always oil left behind in mature fields that are past their prime -- and Whiting knows how to get it.

The Postle field in Oklahoma is a prime example. When Whiting acquired the field in 2004, it was limping along, producing less than 3,800 barrels per day. By 2010, Whiting was coaxing out more than 10,060 barrels per day -- an impressive 165% increase.

But Whiting's chief selling point is its leading position in North Dakota's Bakken/Three Forks Shale.
The company was an early mover and amassed 683,000 net acres in the overall Williston Basin at a rock-bottom average lease cost of just $421 per acre. For context, the firm just sold off some assets in Texas' Eagle Ford Shale for $12,542 per acre.

Whiting has reserved half of this year's $1.7 billion in capital investments to further develop its properties in the Bakken Shale/Three Forks.

The Bakken Shale is considered by many to be the largest and most economically attractive oil play in all of North America. It is brimming with an estimated 24 billion recoverable barrels of crude -- about 10 billion more than Alaska's legendary Prudhoe Bay.

I prevously singled out Brigham Exploration as my favorite way to gain exposure to the Bakken Shale. That investment paid off nicely when Statoil acquired Brigham.

The private market valued Brigham's 375,000 Bakken Shale acres at around $12,000 each; as such, you could make the argument that Whiting's 683,000 acres (not counting valuable assets in Texas, Colorado and elsewhere) could fetch around $8.2 billion, should another foreign oil giant decide to go shopping in the Bakken Shale.

Right now, Whiting has an enterprise value of just $6.8 billion. And again, that says nothing about the hundreds of thousands of acres that Whiting owns in other reservoirs.

Action to Take --> I think WLL could yield a quick 20% to 30% profit on a takeover, and the stock would make an attractive target in the next round of consolidation.

But the shares could be worth far more on their own over the next few years. Whiting has a large inventory of future drilling sites.

But even without a single additional well, the company is already churning out record quarterly free cash flows of $316 million, or $1.2 billion on an annualized basis.

That's a huge number for a mid-sized company with a market cap of just $5.5 billion. You don't often see free cash flow yields of 21.8%.


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