4 Strong Companies In The Bakken Oil Play

 |  Includes: CLR, KOG, MRO, XOM
by: Tom Dorsey

Exxon-Mobile Corporation (XOM), Marathon Oil (MRO), Kodiak Oil and Gas (KOG) and Conoco-Philips (COP) will all be profitable from the Bakken Oil Fields. All of these companies have excellent locations in productive oil fields and will produce oil profits for years.

U.S. Geological Survey estimated mean undiscovered volumes of 7.4 billion barrels of oil, 6.7 trillion cubic feet of associated/dissolved natural gas, and 0.53 billion barrels of natural gas liquids in the Bakken and Three Forks Formations in the Williston Basin Province of Montana, North Dakota, and South Dakota.

The United States Geological Survey (USGC), had estimated the Bakken oil reserves near 3.65 billion barrels of oil in 2008. New data from the U.S. Geological Survey from July 2013, estimate 7.4 billion barrels of (technically) recoverable oil. The USGS has a current estimate of 24 billion barrels of oil, and left room for huge increases of undiscovered oil in the 25,000 square miles covering multiple states and into Canada.

The Bakken Shale website estimates as much as 400 billion barrels of oil equivalent, (other estimates up to 900 billion barrels) in the Bakken play and four billion barrels of recoverable oil at this time only represents 1% of the oil estimated to be in place. General consensus is that 3-10% of the oil is recoverable. Regardless of the numbers, the oil play will continue for nearly 50 years and possibly extend with more finds and improved drilling and extraction developments. If we use the 24 billion barrels of recoverable oil and extract into the future 2 million barrels of oil a month average, we could expect to have oil for 1000 years. That is not including the increased technology to extract the other 90% of oil still there.

Continental Resources, (CLR) the Williston Basin's largest producer and one of the region's most active and experienced explorers, has all but officially declared a significant increase in the amount of oil it believes can be recovered from the massive Bakken petroleum system. Continental's recoverable calculation for the U.S. portion of the Bakken is based on a dated oil in-place estimate of 577 billion barrels of oil. Last year the company raised that in-place estimate to 903 billion barrels of oil without increasing the recovery estimate, leaving others to speculate based on whatever recovery rate they chose to apply. Continental has indicated that any change it makes to the current 24-billion barrels of oil recovery estimate likely would not come until at least the end of 2013, after it completes extensive productivity testing of the lower benches of the Three Forks formation. But the more successful these test results become, the bolder the company seems to get with its observations.

Production over the last two years has increased dramatically with:

  • 379,371 barrels of oil per month in August 11,
  • 662,890 barrels of oil per month in August 12,
  • 847,149 barrels of oil per month in August 13.

The first oil well went in production in 1953 and the website with oil production per month from first well in 1953 to present is found here.

The top 10 companies in the Bakken play include:

1. Whiting Petroleum (NYSE:WLL) - 66,155 barrels of oil

2. Continental Resources - 65,141 barrels of oil

3. Hess (NYSE:HES) - 64,656 barrels of oil

4. Statoil (NYSE:STO) - 50,324 barrels of oil

5. EOG Resources (NYSE:EOG) - 46,09 barrels of oil

6. Exxon-Mobil - 33,148 barrels of oil

7. Marathon Oil - 31,194 barrels of oil

8. Petro-Hunt (OTCPK:AAPH) - 25,743 barrels of oil

9. Slawson Exploration - 21,058 barrels of oil

10.Kodiak Oil & Gas - 20,423 barrels of oil

Over 70 other companies participate in the oil and gas operations in exploration, drilling, transport, storage, or construction of infrastructure in some capacity. The billions of dollars spent are rewarded with strong profits from the production of all the oil. List of all companies in the Bakken play are listed here.

Some of the early wells have completed their life cycle as high producers, then tapered off as pressure decreased, then pumping of the well until it became less profitable. The amount of fracking in shale to recover much of the oil is more challenging because the limited space the fracking occurs, many additional wells must be drilled to get at the shale. This is not a threat to the current amount of recoverable oil, but in the future the fracking expense will increase costs in the drilling. Fracked wells age very fast. The initial production is very high, but so is the rate of depletion. The point is, a newly fracked well may produce 1,000 barrels a day, but this falls by sixty percent the next year, thirty five by the third and fifteen percent by the fourth. Oil companies should replace forty to forty five percent of the current production each year to maintain/increase production. For now at least, the number of wells and cost of production can keep pace with profits because of the current oil prices. The depletion rates will make the wells unproductive and less profitable. The US will need more than 9,000 wells at more than $50 billion to counterbalance the declines.

The number of operating wells in the U.S. has been increasing rapidly while the corresponding productivity (considering all the wells in the U.S.) has declined. There are about 9,000 wells in North Dakota (analysts expect the number to go up to 50,000 by 2030). This averages to 89 b/d from each well in North Dakota, hence the need to constantly add new wells in order to maintain a sustainable level of output.

Also, wells in the Bakken oil fields are cheaper compared to the deepwater offshore wells but cost three times those of the conventional onshore wells. This is because the wells must be drilled vertically to nearly two miles, then the angled to horizontal like branches of a tree to more than three miles.

Fracking wells can extend to two miles or three miles to the maximum and Bakken is already saturated with wells. Counting those 50,000 future wells, most of them would be located outside the prime spots. Production from these wells would not have the comfort of those higher first year productivity as those wells located in the prime areas. But with further research, more sweet spots and productive areas are likely to be found.

If not for the shale boom, the oil prices would have climbed through the roof with similar results for unemployment figures. As per existing U.S. laws, the oil produced domestically cannot be exported, thus the possibility of even lower oil prices. In terms of energy security, from a futuristic point of view, shale will reduce the U.S. dependence on oil from the Middle-East, Nigeria and Venezuela.

No new refineries have been built in the U.S. in the last 30 years. The last refinery constructed in the U.S. at Garyville, Louisiana in 1976. North Dakota produces more than 800,000 barrel/month but has only one refinery in Mandan. All of the refineries across the U.S. are churning at full capacity which makes them profitable, but on the downside there is no room for mistake. They have to deal with variable demand on one hand and higher costs of inputs on the other. Recently, Sunoco Inc. (NYSE:SUN) announced closure of its largest refinery leading to fears of fuel shortage and higher oil prices in the U.S. Fortunately, a deal with the Carlyle Group saved the day for Sunoco Inc. and the oil industry. But, the problems in the refining sector are far from over. Two refineries owned by Sunoco Inc. did close in the last eight months, which means a loss of nearly half the gasoline and other refined products in the East coast. These challenges will continue in the future with no plan to increase production, or replace older, less efficient ones.

Transportation of crude to refinery has been a challenge to the infrastructure with new pipelines, heavy duty roads for trucks and equipment and the rail. Rail loadings in the Bakken Shale area on average was near 470,794 b/d in June, 2013, down from near 497,733 b/d on average during May. Rail carriers have been steadily employed with the increases in production and limited accesses to carry long distances to refineries. The two largest carriers of oil are the Canadian Pacific Railway and Burlington Northern Santa Fe, which is owned by Warren Buffett's Berkshire Hathaway. Both of these companies have been profitable and worthy an investment look.

Our recommendations for four solid companies that will make excellent profits from the Bakken oil play include Exxon-Mobile Corporation, Marathon Oil, Kodiak Oil and Gas and Conoco-Philips. Kodiak Oil and Gas is my favorite MLP that pays a double-digit distribution that we recommend. I will also research the two rail companies in a future report.

Disclosure: I am long XOM, KOG. 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.