In last week’s MLP Investing Insider, I discussed my recent trip to the Bakken formation. The Bakken is part of the Williston Basin, which lies under parts of North and South Dakota, Montana, southwestern Manitoba and southern Saskatchewan — and it is the region I consider to be the epicenter of the shale oil boom in the U.S. The shale revolution that unlocked huge new supplies of oil and gas in the region created a number of challenges and opportunities for companies doing business in the area.

Early on, there wasn’t enough housing to accommodate the oil workers migrating to the Bakken. This sparked a construction boom, but just about anyone with a spare room to rent was able to make a few dollars off this temporary opportunity.

The same was true for many other service industries. A lot of money flowed through the economy, and after workers finished paying the steep costs for limited housing, they spent much of what was left in the many new restaurants and stores that sprang up to serve the growing population.

The railroad industry was also one of the early beneficiaries. The Bakken wasn’t historically a major oil or gas-producing region, so there wasn’t a lot of infrastructure for moving these commodities to market. This resulted in a lot of flaring of natural gas that was a byproduct of oil production — which I discussed in last week’s issue. Flaring has diminished as natural gas pipelines have been built, but there are still numerous flares like this one dotting the Bakken:


The rapid expansion of crude oil production also allowed the railroads to become the transport option of choice for moving oil to distant markets. In less than three years railroads including Berkshire Hathaway’s (NYSE: BRK-A) BNSF Railway increased crude shipments by over 700,000 bpd.

This year, however, the volume of oil being moved by rail has fallen by about 200,000 bpd. Some of this can be explained by flattening oil production as a result of the price crash, but the other major factor is that pipeline infrastructure is finally beginning to catch up.  

Rail loading facilities and pipeline capacity in the Bakken have both experienced explosive growth in recent years. In just the past two years, rail loading facilities have added 625,000 bpd of capacity, bringing the total to nearly 1.5 million bpd. Over that same time frame, pipeline capacity increased by nearly 250,000 bpd to reach 827,000 bpd. The North Dakota Pipeline Authority projects that over the next two years pipeline capacity will balloon to 1.53 million bpd with major projects from Enbridge (NYSE, TSE: ENB) and Energy Transfer Partners (NYSE: ETP).

Of the current pipeline capacity, 68,000 bpd feeds Tesoro’s refinery in Mandan, North Dakota. The Butte Pipeline, operated by Bridger Pipeline LLC, is a 260,000 bpd crude oil pipeline system from Baker, Montana to Ft. Laramie and Guernsey, Wyoming.

Enbridge’s North Dakota mainline moves 210,000 bpd from the Williston Basin to a terminal in Clearbrook, Minnesota.  Enbridge’s Bakken Pipeline Expansion added another 145,000 bpd of pipeline capacity out of the Bakken. Thus Enbridge now owns 43% of the crude oil pipeline export capacity out of North Dakota, but this is down from the 61% share it held just two years ago.

Plains All American Pipeline’s (NYSE: PAA) Bakken North pipeline project came online in 2014 with a capacity of 40,000 bpd. Kinder Morgan’s (NYSE: KMI) 84,000 bpd Double H pipeline rounds out the Bakken’s crude oil pipeline capacity. The Double H interconnects with Pony Express Pipeline for transportation to the Phillips 66 (NYSE: PSX) refinery in Ponca City, Oklahoma, or the Deeprock Terminal in Cushing, Oklahoma.    

In this month’s MLP Profits, I will focus on the companies processing natural gas and transporting natural gas, natural gas liquids and finished products in the Bakken. I will also provide updates on the pending crude oil pipeline and rail loading projects.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Buying Targa’s Rainy Forecast      

Targa Resource Partners (NYSE: NGLS) is a large and geographically diversified gas gatherer and processor, and one of the most transparent in its forecasting. Its initial outlook for 2016, released last week, provides valuable insights into the domestic midstream and upstream trends.

The good news is that its export logistics business keeps growing and that its gathering operations are expected to see no dropoff in inlet volumes at the minimum next year and possibly growth “in the low single digits.”

NGLS general partner Targa Resources (NYSE: TRGP) still plans on hiking its dividend 15% next year, though that’s down from this year’s 25% growth pace.

TRGP currently yields 5.7% vs. 10.5% for NGLS.

The downside of TRGP’s plans to keep raising its payout is that NGLS distributions are now to remain flat through the end of 2016, with distribution coverage of 90-95% at management’s projected energy prices modestly above today’s, and 85-90% at recent futures strip prices for 2016.

Capital spending plans have been trimmed modestly, though Targa is pushing ahead with a new joint venture to provide gas processing in the Eagle Ford for Sanchez Energy (NYSE:SN).  

Even if energy prices were to drop significantly from current levels, NGLS would likely earn enough to fully support a yield of at least 7% at the current price, so the downside seems relatively limited at this point. The fact that the price has held up as well as it has on news of no distribution growth for the next 15 months suggests as much.  

The upside is that the yield gets back to 8% and maybe lower by means of capital gains rather than distribution cuts. And that’s not so far-fetched a scenario given the competitiveness of U.S. shale drillers relative to global rivals, and the likelihood that the world can’t continue to affordably increase energy consumption without additional U.S. supply, even as domestic oil and gas production appears to have peaked.

With NGLS units down 58% since last year’s Labor Day and the supply glut that prompted that decline largely worked off, this seems like an opportune time to upgrade NGLS to a Buy below $40, a price the units fetched as recently as late July. TRGP remains a Buy below $75, and we’ve reduced the limit to acknowledge that it won’t be challenging the old highs any time soon rather than for want of near-term promise. Both NGLS and TRGP are part of the medium-risk Growth Portfolio.         

— Igor Greenwald