The energy crisis of 2008 – during which oil prices climbed to $147 per barrel before falling to the low $30s – led to some big rewards for investors locked in to the right companies. But with oil prices again approaching $100 a barrel, it's important to remember that not all oil plays are profit machines.
However, one company that is worth watching is Brigham Exploration Co. (Nasdaq: BEXP).
Brigham is an oil & gas exploration company that's focused on the Bakken Formation in the Montana and North Dakota area of the United States. The company operates on an area of about 200,000 acres and says it could have as many as 1,600 drilling locations on its Bakken property. I would be shocked if it ended up drilling 25% of those locations, but it is always nice to know that there is a solid inventory of prospects waiting in the wings.
Brigham has turned the Bakken into one of the largest on shore fields in America, and the oil that's now being produced there is increasingly valuable. However, equally valuable is the proprietary knowledge Brigham has derived from the project.
There are two steps in the drilling of a well. The first is the drilling of the hole in the ground. The second, and most dangerous, is the completion of the well. During this stage it's possible to damage or even ruin a well bore that cost millions of dollars and weeks of time to drill.
Brigham has spent years working on its approach toward completing a well. And this internally generated knowledge is what helped the company unlock the true production possibilities in the Bakken.
The company has increased the number of "frac" – hydraulic fracturing – locations per well. Frac technology uses water pressure to fracture rock beds, making it easier for oil to permeate through the well. The increase in the number of multi-stage frac finishes has boosted the initial production of Brigham's wells to rates usually associated with large offshore boreholes.
As technology has advanced, the Bakken zone in the Williston basin has continued to see higher flow rates per well. Brigham has grown its net oil production from all areas to 77% of total production by focusing on oil over natural gas. While the company still has core assets in the Gulf area, the Bakken has become the future of its growth profile.
Indeed, the company is rapidly growing in a niche area in which it now has a significant amount of expertise. The company currently has a market capitalization of $3.2 billion, and its cash and debt are almost exactly equal.
Brigham has recovered from the dip in its stock, posting an increase of 114% in the last 52 weeks compared with an increase of just 12% for the Standard & Poor's 500 Index.
So, to be clear on why Brigham is a "Buy" in today's market:
- It has 200,000-acre footprint in the highly productive Bakken oil formation.
- There is a rapidly growing production curve of high value oil.
- The company has no net debt, which means its balance sheet is unleveraged.
- The company maintains a wealth of proprietary completion knowledge.
Let's buy 50% of our total holdings at market, and put in two lowball bids for another 25% more if the stock dips 10% and 20% lower(**). The stock is highly volatile so patience is essential.
(**) Special Note of Disclosure: Jack Barnes holds no interest in Brigham Exploration.
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"Buy, Sell or Hold" columnist Jack Barnes started his career at Franklin Templeton in 1997, working in the company's fund-information department – just as the Asian contagion infected the Asian tiger countries. He launched his own RIA shop in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008. Barnes – the author of the popular blog, "Confessions of a Macro Contrarian" – retired to the beach in the summer of 2009, and continues to write from there now.]
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