Bakken Producers Like Continental And Whiting Are Finding Profits By Going 'Green'

Mar.20.14 | About: Whiting Petroleum (WLL)


Bakken producers have been flaring natural gas for many years. Many are now moving to be "greener".

Whiting and Continental both say they are committed to zero flaring.

Both Continental and Whiting are seeing increased profits from the now captured natural gas; and this trend should continue.

The Bakken shale is one of the biggest oil fields in the US. Continental Resources (NYSE:CLR) last estimated that there were 903B Boe in-place. At a 3.5% recovery rate, this would yield 32 billion boe. At a 5% recovery rate, it would yield 45 billion boe. Some of this is natural gas.

Unfortunately, developers have often been so anxious to get at the more profitable oil that they have just flared the natural gas rather than try to capture it. In September 2011, 36% of produced gas in the Bakken was flared. As of March 2013, that figure was down to 29%. Environmentalists have been very unhappy about this.

Under current regulations, drillers can flare for up to a year without penalty. After that they have to control the gas somehow such as burning it for power or connecting it to a pipe. Operators can apply for an exemption if such options are impractical. North Dakota's long-term goal is flaring of 5% to 10%. Companies such as Whiting Petroleum (NYSE:WLL) and Continental Resources have discussed zero flaring. Not coincidentally, these are two of the most profitable companies in the Bakken.

Midstream companies as of March 2013 had committed about $4B in pipeline and processing projects to collect, modify, and move gas. This should help immensely. It is already helping CLR and WLL flare less.

In the case of Continental Resources , it reported net income of $739 million for 2012, which was a 72% gain versus 2011. Responsible for part of this gain was that it halved its 2011 rate of flaring. The increased production of natural gas is having a very positive effect on CLR's EBITDAX (see table below).

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CLR's natural gas production has gone up from 65,598 Mcf/d in 2010 to 240,355 Mcf/d in 2013. That's almost a quadruple in four years. At an average realized price of $5.25/Mcf for FY2013, natural gas represented approximately $460.6 million in revenues for CLR. By comparison, oil production represented approximately $3.147B. The natural gas represented almost 13% of total production revenues. That is not something a profit conscious company wants to throw away. It shows that CLR is going "green" in more ways than just one. It shows good management; and it bodes extremely well for CLR's future. Natural gas prices are likely to rise relative to oil long term.

CLR has 1,140,000 net acres in the Bakken as of December 31, 2012. Its next biggest play is the SCOOP (South Central Oklahoma Oil Province) with approximately 400,000 net acres of leasehold in the play. These two plays accounted for 117,089 Boe/d of CLR's total Q4 2013 production of 144,254 Boe/d. As of December 31, 2013, CLR had record proved reserves of 1.08 billion barrels of oil equivalent. This was a 38% increase over 2012E; and this number is still barely tapping the surface of CLR's likely overall reserves. About 30% of total production was natural gas. The value of that production should increase over time as US natural gas prices rise back to their norm with respect to oil. Typically 1 mmbtu of natural gas trades at a 6 to 12 multiple to 1 barrel of oil. In energy terms, 5.8 mmbtu of natural gas is equal to 1 barrel of oil equivalent. Currently, natural gas is trading at roughly $4.5/mmbtu. WTI oil is trading at approximately $100. This puts oil at a factor of approximately 22x; and it means that long-term natural gas prices will likely roughly double with respect to oil prices. That will mean CLR's attention to being "green" will pay off in much bigger profits in the future.

As an investment, CLR also looks good. It has a next five years average analysts' EPS growth estimate per annum of 26.86%. With a P/E of 29.11 and an FPE of 14.79, it is reasonably priced for a great grower with great assets. It has an average analysts' recommendation of 2.1 (a buy); and buyers can feel good that they are investing in one of the "greener" and best managed oil and gas companies in the Bakken.

The two year chart below of CLR provides some technical direction for this trade.

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The slow stochastic shows that it is neither overbought nor oversold. The main chart shows that it is in a strong uptrend. However, it is likely overextended to the high side. A value investor will want to wait for it to fall back to its 100-day or its 200-day SMA before buying. It appears to have fallen to its 100-day SMA with some regularity, so this should not be a problem. It usually pays to wait for cyclical stocks to cycle.

Whiting Petroleum Corp. is another company aiming at zero flaring in the Bakken. It is again one of the biggest acreage holders in the Bakken (Williston Basin) with 715,035 net acres as of December 31, 2013. It also has 120,000 net acres in the DJ Basin in the oil window of the Niobrara trend. It had average production of 100,965 Boe/d in Q4 2013 (87% oil and NGLs) and proved reserves of 438.5 MMBoe in Q4 2013. 79% of its production was oil. Excluding production associated with the Postle/Northeast Hardesty sale, WLL's production in 2013 was up 21% over 2012. Excluding the same, again proved reserves were up 31% year over year. Its table of 3P reserves is below.

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The natural gas reserves will again go up in value over time for the same reasons that CLR's will. It has also implemented a new well completion design. This is showing 50% to 75% increases in 30, 60, and 90 day IP rates; and it should increase profits.

WLL's attention to gathering and processing natural gas will pay off. It has a 50% interest in the Robinson Lake Gas Plant. This has an inlet capacity of 90 MMcf/s; and WLL has the ability to increase that to 110 MMcf/d. WLL owns a 50% interest in the Belfield Gas Processing Plant. This has the ability to process 35 MMcf/d. WLL has the Redtail Gas Processing Plant. This is expected to have an initial capacity of 15 MMcf/d of gas in early 2014. WLL expects to expand this capacity to 60 MMcf/d by Q1 of 2015. Gathering and processing WLL's natural gas and NGLs itself should glean WLL some extra money. Selling the natural gas instead of flaring it will make WLL not only greener, but more profitable. Kudos to its management team.

WLL has a P/E of 22.38 and an FPE of 14.64. WLL will only grow EPS -0.70% in FY2014; but this is mostly due to the Postle sale. In 2015, it is expected to grow EPS by +14.70%. Given its lower growth than CLR, it is more expensive. However, it has a slightly higher analysts' average recommendation of 1.9 (a buy). With its great assets, it should still be a good long-term stock to own, although I would probably wait for it to come back to its 100-day or 200-day SMA before buying it. It looks a bit overextended as readers can see from the two year chart of WLL below.

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Both CLR and WLL should pique investors' interests. Some may wish to average in over 2014. Some may wish to wait for a better entry point. One will probably occur in the next 3 to 6 months. Both are stocks investors might want to own over the long term. I do like CLR better. It is hard to argue with its growth rate. Plus, it does seem to be a leader in delineating the Three Forks (below the Bakken), which should be very productive. Both should benefit as they flare less and as natural gas prices rise over time.

NOTE 1: For readers who want a more thorough justification for a likely rise in US natural gas prices in the near future, please read the following article, "US Natural Gas Stores Are Dangerously Low, That's Good For Pipeline And Storage Companies."

NOTE 2: Some of the fundamental fiscal information above is from Yahoo Finance.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CLR over the next 72 hours. 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.