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Cheap valuations make Bakken oil players takeover targets

A drilling rig

Gord Pitts/The Globe and Mail

Small U.S. oil producers with big acreage in the remote Bakken shale field of Montana, North Dakota and Saskatchewan are ripe for acquisitions due to their cheap valuations.

Companies operating in Bakken, where output is expected to double to about 1.2 million barrels per day by 2015, are cheaper than peers in other oil shales as poor infrastructure makes it difficult to transport crude to major markets on the Gulf coast.

But that is changing and potential buyers, mostly Asian companies such as CNOOC Ltd, need to move now to capture the cheap valuations before planned pipeline and railway projects are completed in the next two years.

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Price-to-earnings (P/E) ratios for companies active in Bakken are well below rivals in better-connected shale fields such as Eagle Ford in Texas.

The average 12-month forward P/E of Kodiak Oil & Gas Corp., Whiting Petroleum Corp, Oasis Petroleum Inc., Northern Oil and Gas Inc. and Continental Resources Inc. is less than half of those in Eagle Ford, according to Thomson Reuters StarMine data.

Bakken crude traded at about $17 (U.S.) per barrel discount to North Sea Brent benchmark last week. Average drilling and completion costs for wells in Bakken are among the most expensive in the United States, at about $8.5-million per well.

Oasis Petroleum's Bakken leasehold is valued at about $3,100 per net acre, while Northern Oil's is just $400, said SunTrust Robinson Humphrey analyst Neal Dingmann.

However that has changed since QEP Resources Inc. paid about $50,000 per net acre in a $1.4-billion deal to expand its presence in North Dakota.

Shares of all the Bakken operators have risen since the QEP deal was announced on Thursday.

"We believe these recent deals illustrate that the Bakken group as a whole is undervalued by investors and continues to be a primary M&A target," Dingmann said.

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Dingmann is rated three stars for the accuracy of his earnings estimates on oil, gas & consumable fuel companies, according to Thomson Reuters StarMine data.

The rich valuation paid by QEP indicates that despite the high cost of production in Bakken, drilling economics could get better with new pipelines helping ease the glut.

Enbridge Inc., TransCanada Corp., Oneok Partners LP, Kinder Morgan Energy Partners LP and High Prairie LLC are some companies planning pipelines to transport oil or gas from Bakken.

"You could probably have a (deal for) Kodiak or even an Oasis Petroleum, that's also cheap," said Sandy Villere, co-manager of investment firm Villere & Co, which had more than $1.4-billion under management as of June 30.

Villere, whose firm is the fourth-largest shareholder in Northern Oil, expects a 50 per cent premium for any deal for the company.

"Since Northern Oil is a non-operator, it may be a tougher one to buy out, they may not want it exactly," he told Reuters.

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"But I do think that it is awfully cheap."

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