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North Dakota Oil Output Remain High, Zooms Past 1.1M Barrels

Nilanjan Choudhury
As daily output remained above 1 million barrels for the eighth month in a row, the state's total number of producing wells reached a new all-time high.

As per North Dakota’s oil regulator, the state’s daily crude output rose 2.1% in September after climbing 3.5% in the previous month. The North Dakota Department of Mineral Resources’ ("DMR") latest data said that oil production in September averaged 1,107,104 barrels a day, up 22,414 barrels a day from August.

Record Number of Producing Wells

Reflecting a healthy increase and trumping expectations, the newest numbers confirm the resurgence in volumes extracted from North Dakota, centered on the Bakken Shale formation. As daily output consolidated above 1 million barrels for the eighth month in a row, the state’s total number of producing wells numbered 14,190 at the end of September, a new all-time high.

Despite the Increase, Production is a Shadow of Earlier Highs

Churning out as high as 1,227,483 barrels/day in December 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 $55 now, in between falling to a 12-year low of $26.21 in February 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

Some 56 drilling rigs were active in the state in September, flat from the August count. The all-time low of 27 was set in May 2016, while a year ago, North Dakota had just 34 rigs operating. A closely watched yardstick of North Dakota 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.

Shale Industry Adjusting to $50 Oil

More rigs in operation and stable production not only confirms the positive developments for the state of North Dakota, but also points to 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 (in North Dakota and particularly the Permian Basin in Texas) 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.

What Lies Ahead?

The U.S. West Texas Intermediate (WTI) benchmark hit a more than two-year high of $57 recently. Also, we are confident that improving fundamentals have probably put a floor under crude prices for the time being. While we do not rule out chances for short-term pullbacks on oversupply concerns and a stronger U.S. dollar, we remain extremely confident of a bull run in the near future.

In this context, the improvement in North Dakota’s September 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 for the time being.

Dakota Access Pipeline: Can It Increase Production Further?

Apart from the strength in crude prices, there is another factor that might speed up Bakken output growth – 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 June.

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 Permian Basin.

This, industry observers hope, will support the increase in Bakken output and help producers like Continental Resources Inc. CLR, Whiting Petroleum Corp. WLL, EOG Resources Inc. EOG, Hess Corp. HES, Marathon Oil Corp. MRO.

Want to Own a North Dakota Play Now?

If you are looking for a near term North Dakota play, Northern Oil and Gas, Inc. NOG 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 stocks here.

Headquartered in Minnetonka, MN, Northern Oil and Gas is a non-operator explorer and producer with primary focus on the Williston Basin in North Dakota and Montana. The company has an excellent earnings surprise history. It surpassed estimates in three of the last four quarters at an average rate of 175%.

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