The United States Geological Survey recently reviewed earlier studies of the Bakken and Three Forks formations. Three Forks is below the Bakken formation and continued improvements in fracking are opening up these harder to reach areas. The latest government findings have a mean estimated resource of 7.4 billion barrels (BBO) of undiscovered and technically recoverable oil; a serious boost from the earlier 2008 estimate of 3.65 BBO. With such a substantial boost, some companies are looking to hit the jackpot.
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Which companies will benefit?
Continental Resources, Inc. (NYSE:CLR) is heavily involved in the Bakken and Three Forks formations. It recently updated its reserve estimates to include the lower Three Forks levels and boosted total estimated reserves by 57%. The company has drilled around 20% of all Three Forks wells and completed a 10 well coring program in 2012. The Middle Bakken and first level of the Three Forks formation is estimated to be 83% crude oil; a healthy number.
Coupled with other developments like the South Central Oklahoma Oil Province (SCOOP), Continental Resources, Inc. (NYSE:CLR) hopes to boost production from 98 thousand barrels of oil equivalent per day (MBoepd) in 2012 to 300 MBoepd in 2017. One downside is the firm’s total debt to equity ratio of 1.12, but if it is able to boost production then it should be fine. Its return on investment (ROI) of 11.0%, gross margin of 89.5% and earnings before interest and taxes (EBIT) margin of 53.6% make it one of America’s most profitable upstream producers.
Kodiak Oil & Gas Corp (USA) (NYSE:KOG) has been active in the Middle Bakken and Three Forks region since 2006. It’s a great Bakken play and a prospective takeover target. With the growth in the Three Forks formation it only becomes more attractive to an oil major looking to replace its reserves. Kodiak Oil & Gas Corp (USA) (NYSE:KOG) is hoping to produce 29 MBoepd to 31 MBoepd in 2013; a step below Continental Resources, Inc. (NYSE:CLR), but a respectable production level nevertheless. Its proven reserves are around 85% crude oil and 15% natural gas.
Its total debt to equity ratio of 1.06 is somewhat high, but its margins are healthy. Its gross margin of 79.7% and EBIT margin of 38.8% show the benefit of drilling for crude relativity close to American refineries. Its ROI of 6.2% could be higher, but it is still a profitability growing Bakken and Three Forks play.
The firm is hoping to make first production in the East Irish Sea by Q4, 2013. Together with development in the Texan Eagle Ford formation, EOG Resources Inc (NYSE:EOG) is on its path to meet its production target for 2013. The company’s debt load is healthy with a total debt-to-equity ratio of 0.48. Its gross margin of 83.2% is comparable to that of its competitors, but its ROI of 3.0% and EBIT margin of 13.2% are very low. These numbers are impacted by recent write-downs of Canadian natural gas reserves. In the next fiscal year the firm’s margins should return to healthier levels.
What about the Majors?
ExxonMobil recently increased its Bakken holdings when it purchased 600,000 acres from Denbury Resources. ExxonMobil also bought Celtic to increase its acreage in liquids-rich plays in Alberta, Canada. It wouldn’t be surprising if it went on to buy small players in the Bakken and Three Forks formations like Kodiak Oil & Gas Corp (USA) (NYSE:KOG). The reality is that ExxonMobil is so large that it needs to look far beyond the Dakotas and Montana to fight declining production. It is also active in the Gulf of Mexico, Tanzania and the Russian Arctic.
With a low total debt-to-equity ratio of 0.07, a 27.4% ROI and a 12.2% profit margin, ExxonMobil has no problem financing acquisitions. The opening up of the Three Forks formation isn’t an earth shaking development, but it will fight declining production. The company currently trades at a price to earnings (P/E) ratio around 9 and is a good investment for more risk-averse investors.
Conclusion
There are a number of firms active in the Bakken and Three Forks formations. Smaller players like Kodiak are good potential takeover targets. With a substantially lower debt load, EOG Resources Inc (NYSE:EOG) is more secure investment than Continental Resources, Inc. (NYSE:CLR) or Kodiak. ExxonMobil is a good option for investors looking to dabble in energy and invest only a small amount in the Three Forks and Bakken formations.
The article Fracking Just Keeps on Growing: The Three Forks Edition originally appeared on Fool.com and is written by Joshua Bondy.
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