Williston Oil Basin: New Hotbed for Energy M&A?

by Justin Dove

Williston Oil Basin: New Hotbed for Energy M&A?

by Justin Dove, Investment U Research

Friday, October 21, 2011

On Monday, Statoil (NYSE: STO) announced its intention to acquire Brigham Exploration (Nasdaq: BEXP). The draw of purchasing Brigham was its exposure to the Williston Oil Basin in the Bakken shale region, particularly in North Dakota.

"Entering the Bakken and Three Forks tight oil plays and taking on operatorship represents a new significant step for Statoil," Statoil CEO Helge Lund said.

Statoil has exposure to Talisman Energy (NYSE: TLM) in the Eagle Ford and Chesapeake Energy (NYSE: CHK) in the Marcellus, which means that Statoil is invested in all three of the large U.S. shale plays.

"Marcellus is primarily dry gas, Eagle Ford is a combination of dry gas and liquids and [the Williston Basin] is oil. We now have a good, deep position in the United States in unconventionals," Lund told Reuters.

So What is it About Williston?

The Williston Basin is located in the heart of the Bakken formation and spans parts of Montana, North Dakota, South Dakota and north of the Canadian border. North Dakota currently has the best access to the basin and may become the second-largest oil producing state within the decade because of the shale boom in the region.

Oil was first discovered in the Williston in the 1920s, where major production began in the 1950s. Conventional oil production peaked in 1986, but since the early 2000s, oil production is booming once again.

In 2008, the USGS projected recoverable oil to be approximately 3.6 billion barrels, with much more technically unrecoverable. More recent unofficial projections tabbed the area closer to 20 billion barrels of recoverable oil.

Other Rumored Takeover Targets

Statoil will gain access to 375,000 net acres in the Williston Basin with its $4.4-billion deal to buy Brigham. The question is, which company may be next on the selling block?

  • One of the hottest rumors is Kodiak Oil and Gas (AMEX: KOG). It's a relatively small company with a market cap under 1.5 billion, but recent attention from the Brigham purchase made it a bit expensive with a P/E in the 300s. BMO Capital believes a takeover is likely. According to Flyonthewall.com, "After speaking with Kodiak's management, BMO Capital believes that Kodiak's execution risk is dropping while its growth is becoming more visible. In addition, the firm believes that recent acquisitions in the Williston Basin focused attention on the area and may indicate that acquisitions are becoming more prevalent than joint ventures."

  • Oasis Petroleum (NYSE: OAS) is another company flooded with attention after Brigham's purchase. It may currently be overbought, but its P/E is around 100 - three times less than that of Kodiak. It's also about twice the market cap as Kodiak.

  • Whiting Petroleum (NYSE: WLL) may be one of the safer bets for investors looking to capitalize on an M&A premium. It holds great position in the Bakken, with more than 500,000 net acres, has a market cap greater than $5 billion, and a P/E is only 17.67. Even if Whiting isn't acquired, it looks like a much better long-term stock than Kodiak or Oasis.

Bottom Line

While Kodiak and Oasis may very well be attractive targets for M&A, it looks like the Brigham news jacked up the price on both of those stocks. It may even be a smart move to short those companies in case nobody decides to buy.

However, Whiting offers a healthier overall stock and company, and may prove to be a solid investment for shale oil bulls regardless of an acquisition. Additionally, larger companies may find it the most attractive takeover candidate because of the better value and higher net acreage in the region.

Good investing,

Justin Dove

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