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Will Oil Plunge Disrupt North Dakota's Production Juggernaut?

North Dakota's daily crude production in September broke the previous all-time high set in August, while natural gas output and producing wells also hit records.

As per North Dakota’s oil regulator, the state’s daily crude output rose 5.2% in September after increasing 1.8% in the previous month. The North Dakota Department of Mineral Resources’ (‘DMR’) latest data said that oil production in September averaged a record 1,359,256 barrels a day, up 66,751 barrels a day from August.

Like crude, natural gas output also hit its highest level ever. The state churned out 2,532,018 thousand cubic feet per day in September, up from August’s 2,443,010 thousand cubic feet per day. Meanwhile, North Dakota’s total number of producing wells tallied 15,287 at the end of September, the highest on record.

The newest numbers, which showed that daily crude output remained above one million barrels for the 20th month, further confirms the status of North Dakota (centered on the Bakken formation) as one of the hottest shale plays in the United States.

Rig Count Inches Down

Some 62 drilling rigs are active in the state now, down five from the October average and three less than September. A closely watched yardstick of North Dakota oil industry's strength, the decrease in the number of units searching for oil and gas in the region indicates uncertainty regarding future drilling activities amid the sharp drop in crude prices.

Oil Price Plunge to Put Brakes on Production Growth?

There is increasing evidence that a fundamental change is occurring in the oil market. WTI crude, the American benchmark, popped above $76 a barrel and was trading at multiyear highs in early October. A looming shortage of the commodity on Iran sanctions helped in driving oil prices higher.

Now, in a reversal, oil is facing a two-pronged attack: rising supply from major producers and fear that an economic slowdown will dampen the outlook for demand. Oil’s troubles pushed the index into a bear market, leading to a more than 30% drop from recent highs.

With weaker oil prices denting producer profits, oil volume in North Dakota is expected to experience muted growth. Winter weather and road restrictions in the coming months will also put brakes on the region’s breakneck activity. This has prompted operators to drill fewer new oil wells, reflected by the declining rig count.

Dakota Access Pipeline: Is it Facing a Crunch?

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 has a capacity to carry about 520,000 barrels of oil per day (or more than 50% 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 another conduit that can allow for the movement of more oil. The proposed Liberty Pipeline, which will provide opportunity to shippers to secure transportation service from the Bakken production areas to Corpus Christi, TX, is touted as a solution. With an initial throughput capacity of 350,000 barrels per day, the pipeline is expected to start operations in another two years.

Two Stocks to Focus

While the crude price collapse could stall North Dakota oil growth engine for the time being, production is nevertheless expected to remain robust.

Though a number of companies have built sizeable acreage positions in North Dakota, we have shortlisted two of them, Whiting Petroleum Corp. WLL and Continental Resources, Inc. CLR that might warrant attention. Both carry Zacks Rank #3s (Hold).

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

Whiting Petroleum 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. The 2018 Zacks Consensus Estimate for this Denver, CO-based company is $3.12, representing some 338.2% earnings per share growth over 2017. Next year’s average forecast is $4.05, pointing to another 29.9% growth.

Continental Resources 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. The 2018 Zacks Consensus Estimate for this Oklahoma City, OK-based company is $3.17, representing some 521.6% earnings per share growth over 2017. Next year’s average forecast is $3.82, pointing to another 20.6% growth.

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Phillips 66 (PSX) : Free Stock Analysis Report
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Enbridge Inc (ENB) : Free Stock Analysis Report
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