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Will Dakota Access Pipeline Spur a Production Revival?

Nilanjan Choudhury

As per North Dakota’s oil regulator, the state’s crude output jumped 5.4% in Feb – topping the one million barrel a day mark for the first time since November. The North Dakota Department of Mineral Resources’ (‘DMR’) latest data said that oil production in Feb was 1,034,168 barrels a day, up 52,788 barrels a day from Jan.

Notwithstanding the increase, the newest numbers confirm the slowdown in volumes extracted from North Dakota, centered on the Bakken Shale formation. Churning out as high as 1,228,973 barrels/day in Dec 2014, the current production statistics highlight oil’s horror show that saw prices come down from $110 per barrel in mid-2014 to around $52 now, in between falling to a 12-year low of $26.21 in Feb last year. The commodity’s collapse fueled spending cuts and layoffs while threatening the industry’s creditworthiness by hurting cash flows, drying up liquidity and narrowing profit margins.

Bumpy Ride Awaits Despite the Rebound

The steep monthly uptick in Feb highlights milder temperature (compared with Dec and Jan) and oil prices breaching the $50-a-barrel mark that boosted confidence among operators.

But the state regulator expects the improvement in activity to be a temporary phenomenon with output set to be flat or fall slightly in Mar and Apr. That’s because of state-imposed road restrictions in force due to inclement weather, which limits the supply of water, sand and chemicals for fracking.

Output in the second-largest oil producing state is likely to return to Feb levels only sometime in the late third quarter or early fourth quarter. Before that, activity is expected to start recovering from May onward when road restrictions are lifted.   

Rig Count: Rising but Still a Shadow of the Oil Boom Times

In a positive sign, North Dakota has seen its rig count improve over the past few months, with the addition of a flood of new units into an improving commodity price environment. The current tally – at 51 – is up 11% from the Mar average of 49, which in itself spiked from the Feb rig count of 39.

The rig count leader is Marathon Oil Corp. MRO which has 10 rigs at work, with 9 added in 2017 itself. Next is Continental Resources Inc. CLR, accounting for 5 rigs in the play – 2 added this year.

Despite the rig count upswing, one should note that the numbers are a far cry from the peak of May 2012 when North Dakota had 218 rigs drilling. Even two years ago, there were 91 active rigs in the state’s oil patch.

Dakota Access Pipeline: Boon for Oil Producers?

While the oil weakness is expected to persist at least till the second half of 2017, there is one factor that might speed up the revival of Bakken output – the 1,100-mile-long Dakota Access Pipeline.

Making good on his campaign promises to rev up infrastructure spending, President Trump ignored bitter opposition from environmental activists and signed executive order to smooth the way for Energy Transfer Partners L.P.’s ETP $3.7 billion Dakota Access Pipeline just a few days into his new Administration. The sponsor has already confirmed that it has finished construction of the controversial conduit and is now filling the line with crude to facilitate a mid-Apr startup.  

Market players believe that once online, the pipeline will help in bettering the region’s drilling economics by lowering transportation costs for operators. Set to carry about 500,000 barrels of oil daily, or more than 50% of North Dakota’s output, the impending commencement of the Dakota Access Pipeline will help to bridge the gap between Bakken players and producers in other U.S. oil producing areas like the Williston and Permian basins.

This, industry observers hope, will set the ball rolling for Bakken’s production revival, which plunged with the sharp fall in crude prices.

Operators Optimistic

Large operators like Hess Corp. HES and Oasis Petroleum Inc. OAS are counting on the Dakota Access Pipeline to send a major portion of their product to market. With lower costs and more options at their disposal, the companies plan to increase their Bakken production.

Even producers such as Whiting Petroleum Corp. WLL and Continental Resources – that are not in the race to use the Dakota Access Pipeline – are betting on the facility to unclog the crowded existing pipelines out of Dakota and avoid using the costly railroads.

However, each of these firms has a Zacks Rank #3 (Hold), which does not make them screaming buys.

In case you are looking for a Bakken-focused name for your portfolio, one could opt for Enerplus Corp. ERF. The Calgary-based independent energy explorer has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here

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Enerplus Corporation (ERF): Free Stock Analysis Report
 
Oasis Petroleum Inc. (OAS): Free Stock Analysis Report
 
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Continental Resources, Inc. (CLR): Free Stock Analysis Report
 
Hess Corporation (HES): Free Stock Analysis Report
 
Marathon Oil Corporation (MRO): Free Stock Analysis Report
 
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