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North Dakota Oil Output Expected to Hit Record This Summer

Nilanjan Choudhury

Per North Dakota’s oil regulator, the state’s daily crude output rose 4.1% in March after decreasing 4.9% in the previous month on harsh winter weather. The North Dakota Department of Mineral Resources’ (‘DMR’) latest data stated that oil production in March averaged 1,390,138 barrels a day, up 54,547 barrels a day from February.

Meanwhile, natural gas output hit its highest level ever. The state churned out 2,801,434 thousand cubic feet per day in March, up from February’s 2,631,118 thousand cubic feet per day. North Dakota’s total number of producing wells tallied 15,353 at the end of March for a monthly gain of 199.

Drilling Activity Remains Robust

While the oil output is still below January’s all-time high of 1,403,808 barrels a day, the newest numbers showed that daily crude output remained above one million barrels for the 26th month, further confirming the status of North Dakota (centered on the Bakken formation) as one of the hottest shale plays in the United States.

As a proof of the region’s healthy drilling activity, some 66 rigs were explored in the state in March, compared with the February count of 64. The all-time low of 27 was set in May 2016, while a year ago (i.e. in March 2018), North Dakota had 59 rigs operating.

Dakota Access Pipeline Capacity Expansion Bode Well

Apart from the robustness in oil prices, there is another factor that helped to speed up Bakken output growth – the 1,170-mile-long Dakota Access Pipeline. Energy Transfer L.P.’s ET mega project came online in June 2017 with a capacity to carry about 520,000 barrels of oil per day (or nearly 40% of North Dakota’s output). The conduit 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. The pipeline, where energy majors like Phillips 66 PSX, Enbridge Inc. ENB and Marathon Petroleum MPC have invested, has helped to improve the region’s drilling economics by lowering transportation costs for operators.

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.

But with the pipeline’s spare capacity vanishing rapidly amid high demand, there is a need for infrastructure that can allow for the movement of more oil. A recent expansion of the Dakota Access Pipeline and the proposed Liberty Pipeline, which will provide opportunity to shippers to secure transportation service from the Bakken production areas to Corpus Christi, TX, are touted as solutions. While the Dakota Access expansion has augmented the pipeline’s capacity by 50,000 barrels per day, the Liberty pipeline will have an initial throughput capacity of 350,000 barrels per day and is expected to start operations in another two years.

What Lies Ahead?

Bullish supply and demand fundamentals recently pushed WTI oil prices above $65 a barrel. The U.S. crude benchmark rallied to the highest in almost six months, underpinned mainly by production cuts from the OPEC-led group of exporters, and drop in supply from Venezuela and Iran. The so-called OPEC+ deal (an alliance of OPEC, Russia and other non-member countries) is withholding output by around 1.2 million barrels per day until the end of June. U.S. sanctions against Venezuela and Iran also continue to tighten the commodity’s fundamentals.

Signs of stable demand (contrary to previous expectations of slowing consumption), optimism over U.S.-China trade talks and the expiry of waivers granted to eight Iranian crude importers are other positives in the oil story. These themes not only put a floor beneath prices for the time being, but also are likely to aid the continuation of commodity’s recent gains.

Agreed, soaring oil production in the United States is putting some downward pressure on black gold but prices should generally trend higher during 2019 – something also corroborated by Director of Mineral Resources Lynn Helms. Moreover, with winter weather and road restrictions now out of the way, the monthly output in the second-largest oil producing state after Texas is expected to return to its record-setting ways from April.

Two Buy-Rated Stocks to Buy

Though a number of companies have built sizable acreage positions in North Dakota, we have shortlisted two of them – Hess Corporation HES and Continental Resources, Inc. CLR – that might fetch you outstanding returns.

Hess is among the leading producers of crude in the Bakken oil shale play in North Dakota. With interests in the best areas of the play, the Zacks Rank #1 (Strong Buy) upstream energy firm expects its daily production from Bakken will likely increase to 200 thousand barrels of oil equivalent by 2021. The 2019 Zacks Consensus Estimate for this New York-based company is 23 cents, representing some 131.1% earnings per share growth over 2018. Next year’s average forecast is $2.03 pointing to another 784.2% growth.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Continental Resources also has a premier position in the Bakken area. The Zacks Rank #2 (Buy) company produced 199,423 barrels of oil equivalent per day from the region in first-quarter 2019, representing a year-over-year rise of 23.6%. Over 30 days, the Oklahoma City-based company has seen the Zacks Consensus Estimate for 2019 and 2020 earnings per share increase 14.9% and 3% to $2.85 and $3.46, respectively.

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Phillips 66 (PSX) : Free Stock Analysis Report
 
Marathon Petroleum Corporation (MPC) : Free Stock Analysis Report
 
Enbridge Inc (ENB) : Free Stock Analysis Report
 
Continental Resources, Inc. (CLR) : Free Stock Analysis Report
 
Oasis Petroleum Inc. (OAS) : Free Stock Analysis Report
 
Hess Corporation (HES) : Free Stock Analysis Report
 
Energy Transfer LP (ET) : Free Stock Analysis Report
 
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