Bakken Resources: A Net-Net That Doesn’t Net Out

I was excited to recently stumble across a company selling for less than net current asset value that’s based in my home state of Montana (because geographical proximity is a good reason to invest in a company, right?). Since there are only about a dozen publicly traded companies in all of “Big Sky” country, it was intriguing that one might be trading so cheaply as to be priced at less than liquidation value. With a name like “Bakken Resources Inc.”, however, I had a feeling I knew why it might be so cheap.

Bakken Resources (BKKN) is a $5 million market cap pink sheet company which describes itself as a “non-operating participant in the Bakken play in western North Dakota. The Company plans to focus on evolving into a growth-orientated independent energy company engaged in the acquisition, exploration, exploitation, and development of oil and natural gas properties.”

While the name “Bakken Resources” brings to mind a clear picture of where the company has acreage, BKKN has recently been selling some of its North Dakota assets and entering into leases in Idaho.

It was the sale of mineral rights in North Dakota, and the corresponding cash inflow, that put the company firmly in the net-net category. As of September 30, 2014 (the most recent financials), BKKN had:

Cash	$7,396,974
Accounts Receivable	1,037,186
Other Receivable	198,509
Prepaids	37,897
Total Current Assets*	8,670,548
Total Liabilities	2,187,417
Net Current Assets (NCAV)	6,483,131
Shares Outstanding	56,735,350
NCAV/Share	$0.1143
Current Share Price	$0.089
Discount:	22%

*Note: Current Assets do not sum correctly; an $18 discrepancy is not explained in the 9/30/14 10Q.

This kind of valuation might spur me to dig a little deeper on their leases, acreage, mineral rights, and royalties had it not been for three quick concerns that made this a firm PASS.

1. $6,000,000 of the cash on hand is “reserved for a future acquisition of oil and gas properties.” There goes our net-net status. Now maybe the company is still cheap if we believe management can go out and find some phenomenal acreage with these funds (especially since they should be buying on the cheap with the recent drop in oil prices), but now you’re investing in management, not the company. And to that thought . . .
2. There seems to be a spider web of related party transactions, payments to management, and general overlap in the business. These relationships are so convoluted that the company itself has become confused - having to disclose a restatement with the September 30th 10Q where revenue paid to BKKN should have gone to Holms Energy Development, a related party controlled by the CEO of BKKN. While these types of relationships may be common in the oil and gas industry (see: McClendon, Aubrey), its not my game.
3. For a company with a $5 million market cap, BKKN is battling a whole host of lawsuits. While a number of these cases seem to be in the process of being settled (and to be fair, most seem to have gone BKKN’s way), a number are still on appeal and there is a shareholder class action suit still pending that alleges managerial breach of duty and other malfeasances. 

Bottomline, BKKN may be cheap, but there are enough question marks surrounding management and the operating structure of the company that I’ll devote my time and energy elsewhere.

Disclosure: No Position

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