Bakken Flooding Update - Not The Big One, But Bakken Activity Was Disrupted By Weather

 |  Includes: GST, HK, KOG, NESC
by: Josh Young

In an article published in March of this year, I highlighted warnings from the National Weather Service that the "big one" could be coming this year. The warning was addressed to residents of Fargo in particular, but there was the potential for weather to negatively impact the oil-rich Williston Basin.

While there was no big one in 2013, there was substantial weather-related activity and production impact. The most recent company citing weather related issues in Bakken activity is Nuverra (NES). In its recent Q2 preliminary results announcement, Nuverra said that "Unusually harsh weather conditions in the Bakken Shale area, the company's largest region of operations, adversely impacted customer completion activity, as high levels of snow and rain hampered vehicle access to roads." This is precisely the type impact that the article I wrote in March warned of. It appears weather may have also negatively impacted GreenHunter (NYSEMKT:GRH), as drilling of saltwater disposal wells was planned for Q2 2013 according to a March 2013 presentation, while a June 2013 operations update made no mention of any Bakken area activity.

On the producer side, it appears the producers most affected were Kodiak (NYSE:KOG) and Halcon (NYSE:HK). Kodiak's acquisition juiced Q2 production, which might have otherwise missed projections due to a weather impact. And it put Kodiak back on track to exceed 30,000 boepd by the end of the year. Halcon cited weather issues in its Q1 production miss in the Bakken. And in analyst commentary it sounds like those issues are expected to extend into the second quarter. The pre-eminent Bakken company Continental (NYSE:CLR), however, seemed to shrug off weather issues and continue to grow production at a remarkable pace.

The previous article suggested a very small E&P company as an alternative to Bakken-focused companies. Another larger alternative has emerged that I have written about recently. The company is Gastar Exploration (NYSEMKT:GST). Gastar has assets in the liquids rich Marcellus and in the emerging Hunton Lime oil play. These are geographically diverse, limiting Gastar's exposure to local risk factors such as weather. Recent analyst reports peg Gastar's value at $4.50-$4.70 vs. the current ~$3.30 per share. And there is a reasonably good chance Gastar's earnings beat expectations and the stock outperforms on the back of that, based on the benefit of several accretive transactions and better than expected Marcellus results.

In short, the "big one" did not come in 2013 for the Bakken producers. However, activity and production was generally impacted, albeit with some notable exceptions like Continental. Services/water companies in particular seemed to be impacted. And an excellent alternative to Bakken E&Ps has emerged, which could do very well in the near term.

Disclosure: I am long GST. I am also short KOG and GRH. I may buy or sell any security mentioned without further notice. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.