Statoil Buys Into Bakken

By most standards, Norway's Statoil (NYSE:STO) is a quality name in the world of major energy companies. Unfortunately for its shareholders, the company's stock price has been bedeviled by worries regarding the company's production volumes, reserve growth and dependence on Norway's offshore energy fields. With Monday's announcement that the company is acquiring Bakken specialist Brigham Exploration (Nasdaq:BEXP), Statoil management is making a solid argument that the company is not sleeping on opportunities to leverage its balance sheet into solid reserve growth.

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The Terms
Statoil and Brigham announced that the companies had reached an agreement whereby Statoil will acquire Brigham for $36.50 per share in cash, for a total enterprise deal value of $4.7 billion. That price translates into a roughly 20% premium to Friday's close.

As far as valuation goes, it is always a little challenging to evaluate a "fair" price for an energy company where so much of the value is in the ground. Energy investors typically try to establish a net asset value for these companies, making certain assumptions on the amount of oil or gas in the ground, the future price of those resources and the likely cost of accessing them.

In the case of Brigham, most analysts and investors projected a value per share in the high $30s to low $40s, with the company's rising costs per well representing something of a drag on future value estimates. Accordingly, and in the context of the BHP Billiton (NYSE:BHP) acquisition of Petrohawk earlier this year, Brigham shareholders are getting a reasonable deal, but certainly aren't fleecing Statoil.

What Statoil Is Getting
As Brigham produced only about a million barrels of oil equivalent in the second quarter, this deal is not going to make a huge near-term impact on Statoil's production. That's fine, though, as this is not why Statoil is doing this deal.

What Brigham has is a very appealing acreage position in the Bakken - one of the hottest areas of oil and gas exploration in the United States today. Bakken controls more than 365,000 net acres in this area, and could have potential reserves upwards of half a billion barrels of oil (versus only about 67 million barrels in proven reserves as of year-end 2010).

A Good Deal for Statoil
Statoil is not the most popular stock with analysts today, but I will argue that this is the sort of deal Statoil needs to do. The company needs to improve it reserve position and buying a company like Brigham is arguably a better use of its balance sheet than trying to expand through the drill bit. Moreover, this will eventually help to reduce the company's overly high reliance on Norwegian fields (which are roughly 80% of production today).

However, Statoil will need to prove itself with this deal. Brigham has seen some troubling well cost inflation, and Statoil will need to demonstrate that its skills in technologically complex formations can be relevant here as well. Statoil will also need to prove that it's not spreading itself too thin - prior deals with Chesapeake (NYSE:CHK) in the Marcellus and Talisman (NYSE:TLM) in the Eagle Ford do have it in the hot places, but risk operating inefficiencies over time.

Bakken Calling?
Although not all of Brigham's assets are in the Bakken, there is no question that this is first and foremost a Bakken play. Along those lines, investors may see some movement in stocks like Whiting (NYSE:WLL), Credo (Nasdaq:CRED), Kodiak (NYSE:KOG), EOG (NYSE:EOG), and Continental (NYSE:CLR) as sympathetic "me-too" trades. Although energy prices (and smaller energy stocks) have softened a bit, the likelihood is that more deals are on the way.

The Bottom Line
I should have learned my lesson with Petrohawk; if you snooze too long, you lose the chance to buy good stocks at good prices. While there is plenty of hope and hype in the energy sector, it makes sense to acquire shares of up-and-comers like Brigham on those occasions when valuations pullback on economic fears. Looking ahead, Statoil still looks like a high-quality undervalued oil and gas major and it holds a lot of appeal for investors who want a somewhat more conservative play on energy. For Brigham shareholders, it's probably time to find another high-quality small energy company worth holding for its organic growth potential. (For additional reading, see Finding Solid Buy-And-Hold Stocks.)

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