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North Dakota Bakken Oil Play: Buy the Record Production

Nilanjan Choudhury
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As per North Dakota’s oil regulator, the state’s daily crude output rose 5.4% in April after edging down 1.1% in the previous month. The North Dakota Department of Mineral Resources’ (‘DMR’) latest data said that oil production in April averaged 1,224,948 barrels a day, up 62,814 barrels a day from March.

Like crude, natural gas output went up too – from March’s 2,119,751 thousand cubic feet per day to 2,241,623 thousand cubic feet per day - a new all-time high. As operators scramble to the core areas of the Bakken, wells here tend to produce more gas along with crude (present gas flare rate of around 15%).

Record Number of Producing Wells

Meanwhile, North Dakota’s total number of producing wells numbered 14,571 at the end of April, the highest on record.

The healthy (and somewhat unexpected) improvement in oil activity – primarily attributed to high number of well completions – follows four monthly production decreases in a row. Importantly, daily output remained above 1 million barrels for the 15th month.

Therefore, the newest numbers confirm the resurgence in volumes extracted from North Dakota, centered on the Bakken Shale formation. In fact, April production came in just short of a record high of 1,227,483 barrels per day recorded in December 2014.

Rig Count Improves

Some 60 drilling rigs were active in the state in April, up one from the March average. The drilling rig count increased further to 62 in May. The all-time low of 27 was set in May 2016, while a year ago, North Dakota had just 50 rigs operating.

A closely watched yardstick of North Dakota oil industry's strength, the improvement in the number of units searching for oil and gas in the region indicates rebounding drilling activities and production. Going by the outlook of crude producers, seven to ten more rigs are likely to join the fleet by the end of this year.

Though the current rig count is still down considerably from the peak of May 2012 when North Dakota had 218 units drilling, one must note that sophisticated drilling rigs have enabled producers to get more oil out of each well. In other words, modern rigs have helped boost the per-unit output.

More rigs in operation and higher production not only confirms the positive developments for the state of North Dakota.

Crude Prices, Production Should Remain Strong

Last month, the U.S. West Texas Intermediate benchmark topped $70 per barrel – a three-and-half-year high. The surge could primarily be attributed to robust global economic growth that led to healthy oil demand. With stronger oil prices increasing producer profits, crude output in the United States is expected to keep climbing. As it is, the current domestic production of 10.9 million barrels per day is the most since the EIA started maintaining weekly data in 1983.

While commodity prices have retreated over the past few weeks on reports that top suppliers Saudi Arabia and Russia are likely to step up output amid reduced supply from Iran and Venezuela, oil market fundamentals remain largely tight with strong demand amid stuttering supply. Industry watchers are confident that improving fundamentals have probably put a floor under crude prices for the time being.

In this context, the steady recovery in North Dakota’s production bode well for the region. With oil prices likely to head higher, the monthly output in the second-largest oil producing state after Texas is expected to stay above the psychologically important one million barrel a day mark in the short-to-medium term.

Dakota Access Pipeline: A Trump Card for North Dakota

While Bakken in North Dakota has significant accumulations of profitable oil reserves, production in the area fell sharply during the oil slump. However, with rebounding crude prices, Bakken has been regaining strength, with output gradually approaching the peak levels that was achieved in 2014.

Apart from the strength in oil prices, there is another factor that is set speed up Bakken output growth – the 1,100-mile-long Dakota Access Pipeline. Energy Transfer Partners L.P.’s ETP mega project recently marked its one-year anniversary. The conduit has carried around 182.5 million barrels of oil since inception, proving to be quite a game changer for the producers in the Bakken shale play.

The pipeline, with a capacity to carry about 520,000 barrels of oil per day (or more than 50% of North Dakota’s output) has successfully bridged the gap between Bakken players and producers in other U.S. oil-producing areas like the Williston and Permian basins.

The geographically constrained Bakken Shale's crude has now better access to Gulf and East Coast refineries and also reaches international markets. As expected, the pipeline, where energy majors like Phillips 66 PSX, Enbridge Inc. ENB and Marathon Petroleum Corporation MPC have invested, has helped to improve the region’s drilling economics by lowering transportation costs for operators and benefit the state financially. Moreover, the pipeline’s service has bolstered the revival of Bakken output, with large operators like Oasis Petroleum Inc. OAS counting on the Dakota Access Pipeline to send a major portion of their products to market.

While there are apprehensions that growing North Dakota production could outpace the pipeline capacity again sometime next year leading to widening discount for the regional crude, current prices continue to exceed breakeven costs comfortably.

Oil Production Expected to Hit Record Shortly    

Overall, rebounding oil prices, together with the start of the Dakota Access Pipeline, are expected to support further increase in Bakken output by providing the companies a chance to push their produce outward at a lower cost.

In fact, Lynn Helms – the director of DMR – feels that a conducive oil pricing environment is likely push the state’s output beyond the all-time high of 1,227,483 barrels per day before mid-2018.

Two Top-Ranked Stocks to Buy

Though a number of companies have built sizeable acreage positions in North Dakota, we have shortlisted two of them that might fetch you outstanding returns. Both our picks boast of a Zacks Rank #1 (Strong Buy), which justifies a company’s strong fundamentals. You can see the complete list of today’s Zacks #1 Rank stocks here.

Whiting Petroleum Corporation WLL is a top-tier operator in North Dakota's Williston Basin. The company has 410,000 net acres in the region, giving it drilling inventory of more than 20 years. In the last 60 days, 16 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 127.3% in the same period.

Continental Resources, Inc. CLR also holds a premium position in the prolific Bakken Shale formation. The company has a working interest in 1,576 net oil producing wells in the region, which comprises almost 48% of the energy explorer’s proved reserves. In the last 60 days, 17 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings has risen 28.6% in the same period.

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