by Travis Johnson, Stock Gumshoe | October 27, 2011 12:23 pm
The recent takeover offer for Brigham Exploration (BEXP) by Statoil (STO) has rekindled interest in oil companies who have large Bakken land holdings and growth potential — so, naturally, the teasers are out in force for just these kinds of companies.
One such tease comes from Elliott Gue for his Energy Strategist newsletter — and since he was one of those (there were several, to be fair) who touted Brigham well before the takeover offer (he pitched it last December in a teaser ad, when it was around $27 or so), and since that letter currently stands atop the rankings for energy-focused newsletters per reader reviews, I thought we’d have a look and see if he can pick another winner.
Gue gets us revved up with this intro:
“Urgent! It’s started—the acquisition of “smaller” independent oil explorers in America’s hottest oilfield—the millionaire-making Bakken Shale. Norway’s Statoil just bid $4.4 billion for Brigham Exploration—and lucky investors will pocket a windfall premium. Who might be next to line investor’s pockets with a cash takeover prize? Well, there’s a NEW oil discovery—Three Forks—that may be bigger than Bakken. Best of all, it’s also on (or under) our own U.S. soil. So far, most investors do not have a clue about this exciting new discovery. So, expect the oil majors to start circling over the oil outfits already working the Three Forks fields. Read on…
“Three Forks: The Unknown Oil Treasure Beneath the Bakken”
The “Three Forks” isn’t unknown to Gumshoe readers, of course (no surprise — you’re the smartest people around. And the best lookin’), the Three Forks field, also called Sanish or 3 Forks/Sanish sometimes, is the area underneath the Bakken. There’s been some debate about whether it’s really part of the Bakken Shale or is another distinct field below the Bakken, but it’s certainly a different and deeper drilling target and it has certainly produced oil. Brigham is one of the companies that pioneered the “Three forks” drilling, for whatever that’s worth.
But regardless of whether or not it’s unknown, we’d like to make some money … right? So what is Gue teasing?
“Hidden beneath the landmark Bakken oil field lies Three Forks, a vast, separate field my sources whisper will pump out even more light, sweet crude than the first Bakken discovery.
“You can pounce on this windfall with one single trade.
“My new top recommendation (see below) owns the lion’s share of wells aimed at Three Forks oil… plus an ingenious, trademarked “secret weapon” that taps oil from both the Bakken and Three Forks formations simultaneously… from one drill site.”
Sounds impressive, no? I don’t know whether it’s a big deal to run several drills from one site or not, but it does sound like a good idea. And it actually probably answers the teaser for us already — but what fun is that? Let’s see what other clues Gue sends us …
The folks at Investing Daily (Gue’s publisher) love spinning tales of company history and management adventures as a way to get us excited about a stock — we’ve seen it time and again, from Gue’s pitch about the “Irish accountant” and his falling-backwards discovery of West African oil to the stories from Yiannis Mostrous about an intrepid British sailor and his discovery of a deepwater port that led to a Singaporean fortune. I’m not complaining, mind you, I love a good tale as much as the next guy (probably more, actually … these things get boring otherwise), so it’s no surprise that today’s teaser pitch tells us about the hardscrabble beginnings of the oil industry pioneer who runs this teaser company …
“1945. The youngest of 13 children, the future founder of my top-secret recommendation, was born to Oklahoma sharecroppers living in a one-bedroom, unpainted rural home with no plumbing or electricity….
“The eager lad worked nights and weekends. In time, helped by a friend who co-signed a $1,000 loan, he bought a truck, an old fluid-hauler. With it, he hauled drilling mud and water to rigs—and never stopped asking questions.
“At night he studied maps, searching for potential oil plays. In a remote corner of northwest Oklahoma, he found his target—an abandoned play strung across three counties. He bought the leases and struck oil. He describes the day his well hit oil in typical Oklahoma fashion: “It came in nice.”
“As luck would have it, the young man’s timing proved fortuitous. It was the 1970s and oil prices began an upward spiral. He expanded his business into a drilling firm with 13 rigs. He was on his way. Business boomed.
“But the sharecropper’s son was just warming up….
“While drilling in the Rockies, he began tinkering with an idea—drilling sideways to access tough, unconventional oil fields. Like shale formations, for example….
“In short time, the sharecropper’s son became known as a pioneer in the horizontal-drilling method, enhancing and perfecting it.
“Early in the 1990s, he brought his techniques to North Dakota, focusing on the Cedar Hills field in the far southwest corner of the state.
“His horizontal system worked, unlocking previously trapped shale oil. Cedar Hills proved to be the seventh-largest onshore oil field in the continental U.S.
“Next, the sharecropper’s son turned his attention to the Bakken, where vertical wells had for many years produced meager results. Destiny was calling.
“The Rest is History”
So our “sharecropper’s son” helped to get the Bakken craze going with his horizontal drilling ideas (I don’t know if he actually invented the technique, though that’s the implication of the ad). And Gue says his company is one of the best-positioned for the Three Forks oil as well.
Why? In part because of the land holdings they’ve got, I guess, and in part because of their “secret weapon” — that’s the multiple-wells-on-one-pad thing I mentioned above, here’s how Gue describes it:
“The ‘Secret Weapon’ That Drills Into Two Separate Oil Fields at the Same Time
“A stunningly ingenious breakthrough in drilling, the Eco-Pad allows four wells to be drilled on a single pad. Before this concept, each well required a separate pad.
“The Eco-Pad, looking like something out of sci-fi, taps oil from both the Bakken and Three Forks formations simultaneously from one single drill site.
“Reducing environmental impact on the surface of the land, it also allows my top pick to harvest more of a reservoir’s resources.
“It’s ingenious. The first hole is drilled into the Bakken level. Then the rig is moved—“walked,” is the term—on hydraulic feet about 15 yards to where the second hole is drilled deeper into the Three Forks formation.
“A total of four close-together wells are drilled, two into each formation. With the Eco-Pad concept, each pad holds 4 wells. Only 7 to 8 acres are required for the wells, rather than the 20 acres that would normally be covered for the same number of wells.”
OK, well that’s certainly enough clues — excited enough yet? Before we fire up the Thinkolator, let’s just get one final bit of excitement to make sure you’re salivating:
“…the company saves a bundle. Individual wells normally cost over $6 million to build. But with each multi-well Eco-Pad, there’s a savings of about $2.5 million.
“At present, no other company uses this concept. And my top recommendation plans to add about 40 more Eco-Pad sites in the next 2 years.
“There Isn’t Another Company Operating in North America with a Better Position or Strategy for Profiting from the Combined Bakken and Three Forks Oil Bonanza Than My Top Pick”
OK, fine, we’ll stop sniffing around and get some answers. Who is this company that Elliott Gue calls the “one U.S. energy stock I would buy if I were permitted only one pick?” Thinkolator sez this is: Continental Resources (CLR — click here for a free “where’s it going” trend analysis from Marketclub, one of our advertising partners)
And yes, if you’ve looked at all at the Bakken you’ve almost certainly run across Continental — they do indeed have a hardscrabble founder and leader in Harold Hamm, who has been effectively running the company since it was founded 44 years ago. He also owns a controlling stake, which is unusual for a firm of this size — Hamm owns about 123 million of the 180 million shares so he can do pretty much anything he wants to the company, CLR has a market cap of $11 billion (and has less than $500 million in net debt, just FYI), so Hamm’s stake is valued right now at about $7.5 billion. Not bad for a Horatio Alger story.
CLR does have that “secret weapon” in the eco-pad technology, they describe it here — it doesn’t sound like anything that’s particularly proprietary to me (I could be wrong) so other companies could either do the same or something quite similar, but it’s worth noting that they are aggressively pursuing this technique and that it’s saving them money and making their drilling more efficient.
Gue also tells us that “this stock is seriously undervalued” and that he’s telling us subscribers to expect 50-77% gains in the next year and a half. Which would be perfectly lovely (he’s basing this on their expected performance, and also on his backdrop of expectations that we’re on the brink of another oil and gas boom).
Will he be right? Hard to say — the stock is in the “sweet spot” in terms of size for a big player (ExxonMobil, etc.) to take them over to get a strong Bakken position, but since the founder has such a dominant share position and seems to have enjoyed building his baby I have no idea whether he’s amenable to takeover offers. The stock is not cheap relative to earnings but it does look reasonably priced (about 17X 2012 earnings estimates, with the expectation among analysts that they’ll grow at about 17% per year for the next five years, giving them a PEG ratio of about 1).
The concentrated insider ownership sometimes makes the share price pretty volatile for a company of this size (there isn’t much of a free-trading “float — BEXP, for example, which is about a third the size of CLR, trades almost twice as much, in terms of dollar value of shares exchanged, on an average day). And that low float also gives them a high short percentage, which may be misleading.
So … Gue is pitching Continental as his favorite U.S. stock — is it for you? Hamm has been telling anyone who will listen that the Bakken has more oil and gas than giant Prudhoe Bay, so you do certainly get a proselytizer as CEO in addition to huge insider ownership. He did also buy some shares recently, though it’s a drop in the bucket and his purchase at $50 or so in September was far smaller than his sale at $68 earlier in the year.
I know that lots of Gumshoe readers are Bakken aficionados, so if you’ve got an opinion on Continental Resources or have another favorite pick, feel free to shout it out with a comment below.
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