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Can North Dakota's Production Boom Survive Low Oil Prices?

Nilanjan Choudhury

As per North Dakota’s oil regulator, the state’s daily crude output remained essentially flat in April after increasing 4.2% in the previous month. The North Dakota Department of Mineral Resources’ (‘DMR’) latest data said that oil production in April averaged 1,391,188 barrels a day, down by a marginal 572 barrels a day from March.

Drilling Activity Holds Steady

Despite this slight drop, the newest numbers showed that daily crude output remained above one million barrels for the 27th month, further confirming the status of North Dakota (centered on the Bakken formation) as one of the hottest shale plays in the United States. For the record, oil volumes reached an all-time high of 1,403,808 barrels a day in January.

As a proof of the region’s stable drilling activity, rig count has been hovering in the low- to mid-60s over the past few months. Some 63 rigs were exploring in the state in April, compared with the March count of 66. The all-time low of 27 was set in May 2016, while a year ago (i.e. in April 2018), North Dakota had 60 rigs operating.

Natural Gas Output, Producing Wells Hit Record High

Meanwhile, natural gas output hit its highest level ever. The state churned out 2,862,893 thousand cubic feet per day in April, up from March’s 2,837,170 thousand cubic feet per day. North Dakota’s total number of producing wells tallied 15,490 at the end of April, the highest on record.

Concerns Over Drop in Oil Prices

After a strong rally in the earlier part of the year that saw prices jump more than 50% to a nearly six-month high, oil has encountered a speed breaker. The commodity recently hit the lowest settlement level since January. The Jun 5 closing of $51.68 put WTI down 22% from its Apr 23 high of $66.30, officially meeting the definition of a bear market. While 'black gold' has come out of the bear market, prices continued to be threatened by economic concerns and inventory overhang.

As crude prices plunged in recent weeks, outlook for the drillers in North Dakota have darkened. Per Lynn Helms, Director of Mineral Resources, crude is trading at just over $40 a barrel in North Dakota, close to the break-even level of new wells. There are concerns that a further deterioration in prices or lower prices for an extended period might render well economics unsupportive for most producers in the state.

Another Challenge: Pipeline Constraints

One of the major factors for the revival of Bakken activity is the construction of 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 pipeline, with investments from energy majors like Phillips 66 PSX, Enbridge Inc. ENB and Marathon Petroleum MPC, has helped to improve the region’s drilling economics by lowering transportation costs for operators. In fact, large operators like Oasis Petroleum Inc. OAS utilize 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 $1.6 billion 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?

While the crude price collapse could stall North Dakota oil growth engine for the time being, production is nevertheless expected to remain robust. Among the number of companies who have built sizeable acreage positions in the second-largest oil producing state after Texas, we believe Hess Corporation HES 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 #2 (Buy) upstream energy firm expects its daily production from Bakken will likely increase to 200 thousand barrels of oil equivalent (BOE) by 2021 from the current 130,000 BOE. The 2019 Zacks Consensus Estimate for this New York-based company is 21 cents, representing some 128.4% earnings per share growth over 2018. Next year’s average forecast is $1.86 pointing to another 787.5% growth.

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

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