Best Bets in the Bakken

Last week the U.S. Geological Survey (USGS) provided an update of oil and gas resources in the Bakken region. This was the first update since a 2008 USGS report that estimated mean undiscovered volumes of 3.65 billion barrels of oil and 1.85 trillion cubic feet of natural gas. The new estimate includes the Three Forks formation which largely lies below the Bakken in the Williston Basin that sprawls underneath North Dakota, South Dakota, Montana, and southern Saskatchewan.

Bakken map

Figure 1. Location of the Three Forks Formation Assessment Units (AUs) in the Williston

Basin. Inset map shows location of the Bakken Total Petroleum System (TPS). (Source: USGS)

The new USGS assessment noted that Three Forks had not been previously assessed, but that an assessment was warranted based on a rise in drilling and production in the formation. Inclusion of the Three Forks formation added an estimated mean resource of 3.73 billion barrels of oil to the estimated 3.65 billion barrels of oil in the Bakken formation for a total estimated resource of 7.4 billion barrels of undiscovered, technically recoverable oil in the two formations. The two formations were also estimated to contain a mean of 6.7 trillion cubic feet (tcf) of undiscovered, technically recoverable natural gas and 0.53 billion barrels of undiscovered, technically recoverable natural gas liquids (NGLs).

The new assessment represents a doubling of estimated undiscovered, technically recoverable oil and a nearly threefold estimated increase in mean natural gas and mean NGL resources from the 2008 assessment. The increase in estimated resources is primarily due to the inclusion of the Three Forks Formation.  However, Rigzone reported that a USGS spokesperson explained that the size of the Bakken estimate also increased:

“It’s deceptive, because although our current estimate of 3.65 billion barrels of oil for the Bakken is numerically the same as the 2008 assessment for the Bakken, you have to remember that oil companies have been producing millions of barrels of oil since the 2008 assessment, gradually transforming the undiscovered resources to the proven reserves then production barrels,” the spokesperson commented. “Because our assessments do not include proven reserves or produced barrels of oil, the 3.65 billion does represent an increase.”

While recognizing that “undiscovered resources” are not quite money in the bank, this new assessment signals that the oil boom in the Williston Basin is likely to continue for some time. At the current price of oil, the value of what the USGS considers to be undiscovered oil is almost $700 billion. Thus, there are fortunes to be made by oil producers, oil service providers, pipeline companies, and railroad operators.

This week let’s take a look at which companies are most likely to benefit from a continued oil boom in the Bakken. Note that these are growth companies that typically do not pay dividends, and are therefore unsuitable for income investors. Also note that some of these companies have significant assets outside of the Bakken, but this article is focused on their Bakken assets.   

Continental Resources

Continental Resources (NYSE: CLR) was one of the pioneers in the Bakken formation. CLR entered the Bakken in 2003 with a purchase of 300,000 acres. In 2004 it completed the first commercially successful well in the North Dakota Bakken that was both horizontally drilled and fractured. In 2008 Continental under hard-charging founder Harold Hamm was the first to complete a horizontal well in the Three Forks formation, and to date the company has drilled about 20 percent of all Three Forks wells. Today, Continental is the largest leaseholder and oil producer in the Bakken with more than 1.1 million acres leased.

Continental chart

Figure 2. CLR has shown strong growth in production, reserves, and stock price. (Source: CLR Investor Presentation)

In 2012 CLR increased total proved reserves to 785 million barrels of oil equivalent (BOE), which represented a 54 percent increase over 2011. Proved reserves in just the Bakken were up 92 percent over 2011. Overall production in 2012 was 58 percent higher than in 2011, and CLR’s earnings (on an EBITDAX basis) were up 51 percent.

CLR has also been a pioneer in pad drilling, which allows the drilling of multiple wells from a single pad. This approach results in an estimated 10 percent cost savings on the drilling and completion of each well.

Continental’s market cap is $15.6 billion, and its Enterprise Value/EBITDA ratio is 9.3. (EV/EBITDA is a rough measure of the cash flow multiple implied by the company’s market cap, adjusted for cash and debt.) The share price has been volatile (as is the case with most Bakken producers), as indicated by the stock’s 1.6 Beta. In 2012 the company had a return on average equity of 27 percent, a profit margin of 31 percent and a total debt to equity ratio of 112 percent.

CLR is a Best Buy in our Aggressive Portfolio. Buy CLR up to $110.

Whiting Petroleum

One of Continental’s biggest competitors in the Bakken is Whiting Petroleum (NYSE: WLL). Whiting is the second largest oil producer in North Dakota, averaging 82,500 BOE of production in 2012 across more than 700,000 acres of leased land.

In the first quarter of this year, 87 percent of Whiting’s 89,000 BOE of production was liquids. This was better than the 80 percent liquids production Continental reported for 2012. Like Continental, Whiting has been actively engaged in pad drilling, citing a cost savings of more than $500,000 over single wells drilled in its Pronghorn field. At the end of 2012, Whiting had 10 rigs capable of pad drilling in North Dakota.

Whiting has increased oil production and oil reserves in each of the last four years. Oil reserves at the end of 2012 were 88 percent higher than at the end of 2008, and oil production was 104 percent higher.

Whiting’s market cap is $5.7 billion. The company’s share price has underperformed in recent years, declining 24 percent over the past two years. Over that same time period, Continental’s share price increased by 37 percent. As a result, Whiting is cheaper than Continental with an Enterprise Value/EBITDA of 4.8. However, Whiting is also slightly more volatile than Continental with a Beta of 2.0.

Whiting was added to our Growth Portfolio in March 2013, and is currently a Best Buy. Buy Whiting up to $57.

EOG Resources

In 1999, Enron Oil & Gas Company was spun off from Enron as EOG Resources (NYSE: EOG). Today, EOG is the 5th largest non-integrated oil and natural gas company in the United States, and one of the top five oil and gas producers in the Bakken. However, EOG is also the largest oil producer in the Eagle Ford formation in Texas, and as such the company is usually primarily associated with the Eagle Ford.

EOG is by far the largest horizontal crude oil producer in the US, with nearly 200,000 bpd of crude oil produced by horizontal drilling at the end of 2012. EOG increased its crude and condensate output by 39 percent in 2012.

EOG has been in the Bakken for seven years, and plans to drill 57 wells in the Bakken and Three Forks this year. The estimated ultimate recovery (EUR) of EOG’s Bakken wells is 544,000 BOE, placing the company well ahead of Bakken peers. At the end of 2012, EOG had 167 million BOE of proved reserves in the Bakken and Three Forks formations.

EOG has been a pioneer in shipping oil by rail with 800 shipments to datel. The company owns a loading facility in the Bakken that ships to both Cushing, OK and St. James, LA, where their crude fetches much higher prices than those available at the North Dakota well head.

EOG’s market cap is $37 billion. The company’s stock has been a solid performer over the past 12 months, rising 30 percent. EOG has an Enterprise Value/EBITDA of 8.8 and a Beta of 1.3. Unlike Continental and Whiting, EOG pays a modest dividend, currently yielding 0.6 percent on an annual basis. Over the past 14 years, EOG has increased its dividend 14 times.

EOG is a long-time member of the Growth Portfolio, where it is currently a Best Buy. Buy EOG up to $145.  

Oasis Petroleum

Whereas a minority of EOG’s interest is in the Bakken, Oasis Petroleum (NYSE: OAS) is a pure Bakken/Three Forks play, with 335,000 leased acres in the Williston Basin. Oasis has only been a public company since 2010, and in addition to the $400 million raised in its IPO, the company has funded operations with $1.2 billion in debt.  

In 2012 Oasis produced 22,500 BOE per day, more than doubling its 2011 output and quadrupling  production since 2010. Eighty-nine percent of the production was oil, and management expects 2013 production to be 30,000 to 34,000 BOE per day. The company’s proved reserves at the end of 2012 were 143 million BOE, up from 79 million BOE at the end of 2011. Oasis has announced plans to boost pad drilling to 60 to 70 percent of its drilling program in 2013, citing cost savings of 5 to 10 percent.

Oasis chart

Figure 3. Production has risen rapidly at OAS (Source: OAS Investor Presentation)

Oasis’s market cap is $3.4 billion, and the share price has risen 19 percent over the past 12 months. The Enterprise Value/EBITDA is 8 and the Beta is 2.0. The aggressive borrowing by Oasis to fund operations has left it with a long-term debt to equity ratio of 151 percent, which means it’s significantly more leveraged than Whiting, EOG or even Continental.

OAS is a Buy in our Aggressive Portfolio up to $38.

Key Peformance Indicators for the Profiled Bakken Operators

Bakken operators table

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