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North Dakota Oil Output Drops But Stays Above 1M Barrels

Nilanjan Choudhury
While daily output remained above 1 million barrels for the fifth month, the small decline confirms the slowdown in the amount of oil extracted from North Dakota.

As per North Dakota’s oil regulator, the state’s daily crude output fell 0.8% in Jun after dropping 0.9% in the previous month. The North Dakota Department of Mineral Resources’ (‘DMR’) latest data said that oil production in Jun averaged 1,032,495 barrels a day, down 8,500 barrels a day from May.

Along with Oil, Gas Production Falls Too

While daily output remained above 1 million barrels for the fifth month in a row, the small decline reflected in the newest numbers confirm the slowdown in the amount of oil extracted from North Dakota, centered on the Bakken Shale formation. Interestingly, it must be noted that at the end of June, the state’s total number of producing wells tallied 13,915, a new all-time high.

With crude, natural gas output came down too – from May’s record 1,853,528 thousand cubic feet per day to 1,849,807 thousand cubic feet per day. 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 12%).

Current Production a Shadow of Earlier Highs

Churning out as high as 1,227,483 barrels/day in Dec 2014, the current production statistics highlight oil’s horror show that has seen prices come down from $110 per barrel in mid-2014 to around $47 now, in between falling to a 12-year low of $26.21 in Feb 2016. The commodity’s collapse has fueled spending cuts and layoffs while threatening the industry’s creditworthiness by hurting cash flows, drying up liquidity and narrowing profit margins.

Rig Count Clawing Back Steadily but Unlikely to Rise Further

Some 55 drilling rigs were active in the state in Jun, up from 50 in May and Apr. The all-time low of 27 was set in May 2016, while a year ago, North Dakota had just 28 rigs operating. A closely watched yardstick of oil industry's strength, the steady rise in the number of units searching for oil and gas in the region indicates increase in drilling activities and essentially steady production.

Notwithstanding recent gains, the rig count is still down considerably from the peak of May 2012 when North Dakota had 218 units drilling. Moreover, with oil prices tumbling some 19% year-to-date, the number of rigs are unlikely to ramp up beyond 55 this year. It’s because the current crude levels just won’t support any more drilling rigs.

Increase in Wells, Rig Count Offset by Lack of Fracking Crews

Even as the rig count in North Dakota continues to rise and the number of producing wells in the state reach record highs, production is being stymied by the lack of hydraulic fracturing crews. At present, there are just around 22 frack crews in the state, not even half of the number of rigs. In particular, major oilfield service providers like Schlumberger Ltd. SLB, Baker Hughes, a GE company BHGE and Halliburton Co. HAL are struggling to get experienced, qualified workers following mass layoffs triggered by the three-year crude slump. The ongoing labor shortage is primarily responsible for the recent drops in North Dakota’s oil production numbers.

Shale Industry Caught in a “Catch-22” Situation

While more rigs in operation and stable production could be construed as positive developments for the state of North Dakota, the current sub-$50 oil prices will render a lot of drilling as unprofitable. And at the crux of the matter is the rising flood of U.S. shale-driven production.

Now at a financial equilibrium, the shale firms are putting more rigs and employees back to work. Throughout the downturn, producers worked tirelessly to cut costs down to a bare minimum and look for innovative ways to churn out more oil from rock. And they managed to do just that by improving drilling techniques.

With these efforts, many upstream companies have repositioned themselves to adapt to the new $50 oil reality and even thrive at those prices. In other words, while OPEC's moves to trim output and rebalance the demand-supply situation has stabilized the market to a large extent, in the process it has incentivized shale drillers to churn out more.

In other words, the U.S. shale (including the likes of North Dakota and particularly the Permian Basin in Texas) is perhaps the biggest reason why crude prices are floundering again.

What Lies Ahead?

The fall in Jun production assumes greater significance considering that the oil bust is now anticipated to last through this year and well into 2018. In fact, with Jun production levels barely above the psychologically important one million barrel a day mark, there are chances that output in the second-largest oil producing state after Texas could fall below that figure toward the end of 2017 if prices fall under $45 a barrel and stay there for an extended period. But as of now, output should remain steady for at least the next two months.

Dakota Access Pipeline: Can It Revive Production?

While the oil weakness is expected to persist at least till the first half of 2018, 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. As a result, disregarding the censure from environmental groups and the Standing Rock Sioux Tribe, the sponsor brought the controversial conduit online in early Jun.

With the project’s arrival, operators have scrambled to use the Dakota Access Pipeline to send a major portion of their product to market. In fact, around 78% of oil shipments out of North Dakota are now being carried by pipelines, with the costly railroad share dropping from over 24% earlier in 2017 to less than 10%.

Market players believe that the pipeline has helped 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 commencement of the Dakota Access Pipeline has bridged 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 and help producers like Continental Resources Inc. CLR and EOG Resources Inc. EOG.

Still Interested in Oil Stocks?

Given the bearish oil pricing scenario, it shouldn't come as a surprise that most of the companies from this space are set to underperform in the near term. Furthermore, the Oil-Energy sector has a Zacks Sector Rankin the bottom 6% (15 out of 16), so there is little hope for a turnaround soon. (To learn more visit: About Zacks Industry Rank.)

But if you are still looking to stay in this industry for a near term play, Range Resources Corp. RRC may be a good selection. This company actually has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Headquartered in Fort Worth, TX, Range Resources is an independent oil and gas company, engaged in the exploration, development and acquisition of oil and gas properties primarily in the southwestern, Appalachian and Gulf Coast regions of the U.S. The 2017 Zacks Consensus Estimate for this company is 45 cents, representing some 116.5% earnings per share growth over 2016. Next year’s average forecast is 77 cents, pointing to another 69.5% growth. Range Resources has a VGM Score of “B.”

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