Forward-Looking Investors

How do investors find success from the Bakken oil and gas play? This is the story of how an award-winning team and an expanding duo reveal their successful Bakken investment strategies.
By The Bakken magazine staff | May 16, 2014

The Bakken oil and gas play is a challenge to investors for all the right reasons. To investment bankers looking for buy and sell side opportunities, the entrepreneurial spirit of the businesses serving the play makes the Bakken impossible to ignore, but difficult to navigate. For investment portfolio managers choosing the best that the Bakken has to offer for its shareholders, the pool of worthy companies to add to a portfolio looks like a high-end grocery store to a chef planning dinner—the possibilities are endless, depending on preference.

We spoke with an investment group that helps in the buying  and selling process, and with an investment portfolio manager, who has helped build an award-winning fund. Both are bullish on the Bakken (but for different reasons); both are located in Northern Plains, but vastly different geographical locations (Calgary, Alberta, and Minot, N.D.), and each discussed how investors are looking to capitalize on the side effects of oil production in the Bakken. 

The Best Energy Fund In the Country.
In 2003, a Minot, N.D.-based investment fund purchased the Integrity Small-Cap Fund. Within five years of managing the fund, the portfolio management team of Mike Morey, Shannon Radke and Monte Avery renamed the fund to the Williston Basin/Mid-North America Stock Fund. “When we changed the name of the fund, we were trying to get it focused on the resource potential of the middle part of America. We saw that potential in the Bakken,” Morey says. “The thought process was to get the fund linked to the Bakken.”

By 2011, the portfolio management team received validation that the name change and tweaked fund philosophy was a success. The nationally recognized Lipper Fund Performance Awards ranked the fund the best in the nation over a three-year period. “It was an exciting time for us,” Morey says. “We are headquartered out of Minot and we were beating every single fund in the country in the energy category. If you were to ask someone on Wall Street or in New York, they probably wouldn’t know who we are, but we are beating them on a performance basis.”

The fund wasn’t a one-hit wonder. Since 2011, it has received the same award for three consecutive years. The fund is based on an approach that is different compared to other natural gas or energy investing strategies. “We look for a more thematic approach. We invest in a lot of companies that a lot of people don’t classify as energy but are tied to the energy and shale energy revolution,” Morey says.
When the fund first started under the new direction of the Minot team, they worked to find the best companies in the Bakken linked to exploration and production, oilfield services and equipment. Eventually, the team recognized a trend linked to energy production in the Bakken and other shale plays, and they began to focus on companies that benefited from lower energy-input costs, specifically natural gas. Firms that used natural gas for chemical production, or were in the business of building out natural gas infrastructure were also added to the fund.

In addition to the energy input costs, the team has also invested in companies impacted by the fluctuating price of oil. “They have been a roller coaster over the past several years. After seeking out the industries that benefit the most from the variance in price of WTI [West Texas Intermediate, or Texas light sweet, a grade of crude oil used as a benchmark in oil pricing]  has proven to be a great benefit to us,” Morey says. Refiners and exploration and production companies benefit from the price swings, he added, each at different times. The philosophy of the management team has also meant the fund’s focus has expanded beyond just the Bakken. “We look at our approach and try to keep a diversified value chain along the entire shale energy value chain—starting from when the drill bit hits the ground.”

To keep the fund in award-winning status, the team analyzes the portfolio on a daily basis, looking into companies the fund owns while seeking out new opportunities. Morey travels to Denver and Houston often, meeting with corporate management. But, Morey and the rest of the team frequently hit the gravel to meet up with companies working in the Bakken to better understand the changes or opportunities linked to the nearby shale play that initially generated their success.

The Entrepreneurial Spirit
Jason Orr and Paul Fejtek work for Hunter Wise Financial Group LLC, a national investment banking firm, focusing their efforts on oil and gas. Although the team has interests in every energy-related development in North American, the Bakken is the most important transaction area, says Orr. The team focuses on buying and selling companies. For clients looking to purchase a Bakken-based firm, they are looking to spend between $5 million and $50 million.  “The Bakken is a very interesting place,” Orr says. “You have a culture of entrepreneurship that seems to be very different from other areas. People who have the ability to see business opportunities are acting on them.”

The opportunities for Orr and Fejtek are directly linked to the entrepreneurial nature of the Bakken. “When we look at these entrepreneurs, some are looking for growth capital and others have taken their business to the limit. Some want to partner with a strategic investor, others want to sell,” he says. Orr and Fejtek believe that the Bakken has matured to a point that hundreds of these companies are ready to take the next step—for growth capital, or to sell. “It is almost an unprecedented opportunity for companies looking to cash out on their initial investment or for those who are ready to take the next step.”
After helping a Bakken client sell its business to a Calgary-based firm, the team has formed meaningful relationships in and around Williston, N.D., that have spurred on several other client requests.
According to Orr, a company’s request of Hunter Wise to form a potential buyer list reveals why large-scale investment banking team offers small- to medium-sized businesses an advantage over small and local dealmakers. When a company asked for a buyer’s list from Hunter Wise, Orr and Fejtek came up with a list of more than 100 potential buyers. From that list, the team was able to generate signed confidentiality agreements from over 28 interested firms. “That is an almost unprecedented response rate,” Orr says, noting that a typical response rate would be considered successful if it reached 10 percent. Orr credits the size of the Hunter Wise network, combined with the team’s local relationships for its ability to find buyers for others looking to sell.

The most attractive businesses for buyers are those in the oilfield services and transportation sectors, including those that work in rig moving, fly ash and frack sand. Other appealing companies are those that offer a specific technology or any equipment rental firm that has a proprietary technology, Orr says. In addition to the business offering, all buyers want a business that has been built for long-term sustainability, a company trait that can be linked to the happiness and well-being of the company’s workforce. For Orr and Fejtek, the workforce element of any company is key to investing, he says, particularly for those looking to enter the Bakken through acquisition or startup.

“Any company with a lot of capital could get into the Bakken. The problem is that they would have an incredibly difficult time finding qualified employees,” Orr says. “The best way to get into the Bakken is by acquiring a local business.” The Hunter Wise team is currently making a push to help clients buy their way into the Bakken. The pitch to investors is that a company can be built through capital, time and tremendous effort to find employees, but that time, money and effort won’t be guaranteed. “If you can acquire a business, your chances are much greater given the local dynamics there.”

Forward-Looking Statements
The U.S. and Canada represent the main regions for Bakken-interested investors, Orr says. If a company can offer an EBITDA (earnings before interest, taxes, depreciation and amortization) value over $100 million, international investors will certainly look. Calgary’s financial community is extremely active in the Bakken. Orr has opened a Hunter Wise branch there to help build the energy team’s portfolio of Bakken clients. “We are enlarging our footprint,” he says.

Morey and the team from Minot are also looking to expand the number and type of company they include in the Williston Basin Fund. The team looks to the Eagle Ford, Permian, Marcellus and Wattenberg shale formations. “They all have a unique upside,” Morey says. The operators with the best acreage are the main focus for Morey’s team, along with the those that can withstand a major oil price decline. “A valuation isn’t going to save a company. Being the low-cost producer will,” Morey says.

Much like Orr, Morey values the ability of any company to sustain and grow. Valuations that look good on paper don’t necessarily indicate that a company is growing or has room to grow, Morey says. “We talk to the local companies a lot to see what is really going on.”

The future for Orr and Fejtek appears strong because of the Bakken. The team’s local connections have brought on more work than the team had initially expected when it began focusing on the Bakken. The Minot team continues to draw the attention of financial advisors who are looking at the Williston Basin Fund with more conviction, Morey says.

Although the success of the Hunter Wise and the Integrity Viking teams is clear, and the trends each is following has proven to be financially lucrative, Morey and Orr both share a forward-looking statement that keeps them focused. “We are thrilled with the execution over the past several years, but one thing is clear: It doesn’t matter what you did in the past,” Morey says.