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Oil Plunge, Winter Threaten North Dakota's Record Production

Nilanjan Choudhury
Alliance Resource (ARLP) to benefit from positive market fundamentals in Q1 earnings.

As per North Dakota’s oil regulator, the state’s daily crude output rose 2.4% in October after increasing 5.2% in the previous month. The North Dakota Department of Mineral Resources’ (‘DMR’) latest data said that oil production in October averaged a record 1,391,877 barrels a day, up 32,595 barrels a day from September.

Like crude, natural gas output also hit its highest level ever. The state churned out 2,562,465 thousand cubic feet per day in October, up from September’s 2,527,434 thousand cubic feet per day. Meanwhile, North Dakota’s total number of producing wells tallied 15,344 at the end of October, the highest on record.

The newest numbers, which showed that daily crude output remained above one million barrels for the 21st month, further confirms the status of North Dakota (centered on the Bakken formation) as one of the hottest shale plays in the United States.

Oil Price Plunge, Winter Might Slow 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 helped send the index into a tailspin, leading to a 40% drop from recent highs. Even the OPEC-led supply cuts look unlikely to end the market surplus.

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.

Dakota Access Pipeline: Stretched to the Brink

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 infrastructure that can allow for the movement of more oil. A potential 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 is likely to augment 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.

Two Stocks to Focus

While the crude price collapse and winter weather 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 Corporation WLL and Continental Resources, Inc. CLR that might warrant attention. Both carry Zacks Rank #3 (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 $3.10, representing some 336.6% earnings per share growth over 2017. Next year’s average forecast is $3.19, pointing to another 2.8% 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 $3.10, representing some 507.8% earnings per share growth over 2017. Next year’s average forecast is $3.27, pointing to another 5.8% growth.

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