Bakken-play developer Brigham Exploration Co. used stock issuances, debt paydowns, improving oil prices and technological expertise to hold and advance its leadership in the play.

In 2008, Austin, Texas-based, small-cap independent Brigham Exploration Co. spent $185 million prospecting in its nascent unconventional-oil acreage in the Williston Basin, while continuing its conventional exploration work elsewhere onshore the U.S.

Oil prices were gaining on $150 per barrel and natural gas prices were some $9 per thousand cubic feet (Mcf).

“At the time, we were bullish on oil prices and, though we recognized there was some risk with the broader economy, we certainly did not anticipate what occurred in late 2008 and early 2009,” says Bud Brigham, chairman, president and chief executive. “It was surprising to us, how rapidly the economy turned south—and oil prices along with it.”

Brigham had three rigs running in the Bakken and Three Forks play in the Williston Basin in North Dakota in 2008. By early 2009, it had released them all; oil prices had plummeted to $30 a barrel and gas was testing $4.

“When we saw those really low oil prices—and still-high service costs—we quickly laid down our rigs,” Brigham says. “We believed that, ultimately, prices would recover, along with the economy. We were determined to be in position, once service costs corrected, to drill in the best part of the cycle: when costs are low and oil prices are improving. We still believe that, once the economy gets back to normal, over the longer term, oil prices will once again be strong and, likely, north of $100 per barrel.”

In early 2009, however, Wall Street wasn’t buying “likely.” Knowing the answer and not wanting to sell shares in an anomalous oil-price market, producers weren’t using equity offerings to fund capex programs and right their debt profiles. Meanwhile, Brigham knew lease terms in the company’s roughly 300,000 net acres in the Williston Basin didn’t require a great rush on drilling; the company was already ahead of schedule when it laid down its rigs in early 2009.

Natural gas prices continued sideways, but Wall Street was becoming piqued by oil-prone stories again, and word of the Williston potential was spreading. Brigham Exploration was one of the leading drillers in what was proving to be one of the world’s most interesting oil plays and, while service costs were dropping, oil prices were ticking back up to the $50 threshold for economic oil-shale drilling.

In May 2009, the company noted the growing margin and capitalized on the opportunity, selling 36 million shares at $2.75 each to raise some $100 million to fund a renewed drilling program and pay off $35 million of debt drawn on its bank facility.

“It was very painful at the time, suffering that kind of dilution,” Brigham says, “particularly given that we recognized we had the premier acreage in what we view as the most promising oil play in the U.S.

“However, we also recognized the world had changed in terms of risk and our capital structure. We couldn’t be as dependent on bank debt, so we wanted to have a strong balance sheet, given the way risk fundamentals had evolved.”

The offering, which was oversubscribed, happened to come to market on the cusp of renewed oil-stock interest. “Prior to that, the equity markets were not open at all. Everything was frozen or locked up. But there were a lot of visionary fund managers who, upon hearing our story, got excited. They saw it as an opportunity to step in, particularly given that we had a trump card with our acreage position in the play. So the offering added a lot of quality, longer-term, value- and growth-oriented investors into our stock.”

Brigham rehired rigs and resumed drilling. Oilfield-service costs had fallen as much as 40% in the region.

In August, it brought in a drilling partner, U.S. Energy Corp., to pay 65% of the costs of drilling some of Brigham’s western North Dakota acreage. In September, Jefferies & Co. senior E&P analyst Subash Chandra said in an Oil and Gas Investor webinar that the Bakken play “will be one of the largest oil discoveries in North America.”

In October, Brigham sold 16 million shares at $10.50 each to fund further acceleration of oil-shale drilling and retire the $110 million outstanding under its bank facility, which had been renewed in July. In April 2010, it sold more stock, this time at $18 per share, in an offering that was also oversubscribed to further fund an accelerated drilling program.

Its debt in May totaled $159 million and cash on hand was some $378 million. Its renewed bank facility was undrawn with a $110-million borrowing base.

The stock that was $16.54 in June 2008 had fallen to $1.15 in March of 2009. At press time, it had recovered to $16, with 68 million more shares in circulation.

Issuing stock privately was one option Brigham had considered in the spring of 2009. “Capital was not moving. It was really an amazing time. The public-equity markets were a little bit in front, even relative to a lot of the private equity, and they moved prior to the private-equity players. In our case, some of the private-equity players that could have come in and benefited from our assets missed out.”

A New Profile

From beginning to amass acreage in the basin in late 2005, Brigham’s proved reserves from the northern Rockies play have grown to 56% of its total holdings at year-end 2009, from 18% at year-end 2008. And, Brigham notes, “the value of those Rockies reserves is oil. Oil is trading at 18:1 relative to natural gas, so they’re much more valuable reserves.”

The company has been transformed from a short-reserve-life, gas-focused producer to a long-reserve-life, high-margin, oil-resource leader—all in a three-year period.

2010 could be the most active drilling year in the 20-year-old company’s history, and may produce its greatest increase in production and reserves ever. It forecasts its 2010 oil production will grow 125% and then double again in 2011 to more than 10,400 barrels per day. It has five operated rigs at work in the basin now and expects to have eight drilling by mid-year 2011. With eight rigs running, Brigham expects its core 164,000 net acres will be held by production in three years.

How is it that one of the most interesting oil plays in the world is dominated by a small-cap E&P company whose exploration, land and engineering staff totals 22 members? “I am very proud of our engineers and our entire staff,” Brigham says. “They have demonstrated leadership in the play in the past two years with how they have successfully innovated to enhance the play’s drilling economics.

“We were the first operator to step out with two-section, roughly 10,000-foot laterals while running 20-plus frac stages in the wells. As a result, initial rates in our wells in recent quarters have averaged more than 2,600 barrels of oil equivalent (BOE) per day, roughly double that of our average public-company peer.”

Brigham’s latest achievement in the basin was set by its 27-frac-stage Sorenson 29-32 #1H, which now holds the record for highest early 24-hour peak flow-back rate (5,133 BOE) in the basin. Meanwhile, its Wright 4-33 #1H may set the record for most frac stages: It was being completed at press time with plans for 38 stages.

Brigham says the play is still nascent, though, and best drilling and completion practices, along with the boundaries of the sweetest spots, are still being defined. “There is so much option value in this play. We are very early in figuring out how to optimally stimulate and produce the very substantial amount of oil that is in the ground.”

The company believes it has substantially de-risked its core 164,000 net acres. Its 26 consecutive, high-rate, long-lateral, high-frac-stage wells have come online with an average peak rate of 2,648 BOE per day. It has roughly 470 net locations to drill in the core of the de-risked areas. At current prices and costs, the wells are expected to pay out in less than 18 months, make an average of 600,000 BOE each with a 36-year economic life, and generate an average 69% rate of return.

Going Forward

Jack Aydin, E&P analyst for KeyBanc Capital Markets, says, “These wells have great economics.” Average seven-day production for 20 wells online is 1,645 BOE per day; for 13 wells online for 60 days, the average is 777 BOE per day. “These are strong results.”

Tudor, Pickering, Holt & Co. analysts report that Brigham Exploration is their top E&P pick. Its Bakken weighting, upside potential and 26 straight, high-rate lateral wells “says this is the name to own.”

Analysts are eager to receive results from Rogney 17-8 #1H, Brigham’s first Bakken well in Roosevelt County, Montana, that will begin to define production potential from that acreage. The TPH analysts say good news there may add more than $2 to Brigham share value.

Aydin says, “A good well here would go a long way in adding value longer term, as the company has 83,600 net acres in the area.”

More potential may be defined by the possibility of down-spacing to four Bakken and four Three Forks wells per section from three in each target. Brigham plans to use microseismic monitoring of frac performance in the coming months, and will consider the four-from-three expansion then.

It projects company-wide 2011 capex of $360.4 million and drilling of 45 net Bakken and Three Forks wells in the Williston Basin. This spring, it sold $14 million of West Texas assets to Legacy Reserves LP that were contributing approximately 213 barrels of oil per day. In May, it added 10,000 net acres to its Rough Rider project area in western North Dakota, bringing its position there to approximately 123,000 net acres.

Analysts expect Brigham will sell more, or the balance, of its conventional oil and gas assets, which are onshore the Gulf Coast and in the Anadarko Basin, to further fund its work in the Williston Basin.

And, investors and industry remain curious as to what will be enough frac stages in the play. Brigham says, “I think what we’re going to see is that it varies by area. There are going to be some areas where we are going to utilize even more frac stages (than 38). In some areas, I think we’re going to find that 24 or 28 stages might be enough.”

It helps that additional stages are fairly inexpensive, he adds: $20,000 to $30,000 per additional. “Increasing the number of stages has provided strong returns as it improves the efficiency of stimulation along the length of the lateral.”

What is the exit strategy? Has Brigham received calls to sell?

“There is, as you can expect, a lot of interest, given that the Bakken/Three Forks play is the No. 1 large, high-quality oil-resource play domestically, the economics are so attractive and well performance continues to improve. Interest in the play is likely to persist for at least the next two to five years.”