One of the most needed resources in the world, particularly in America, is oil. Oil is used for many more things than just cars, trucks, and airplanes. In order for crude oil to be used it must be processed so that it can be used in different types of engines. For instance, you can not put jet fuel into your standard combustion engine. Because America uses so much oil, it is imperative we become more energy self sufficient since paying high import fees is a drain on America's economy. The Bakken Shale has helped America become less dependent on foreign oil. The Bakken region covers parts of Montana, North Dakota, and Canada.
The Bakken oil reserve is estimated by the United States Geological Survey (USGS) to have about 24 billion barrels of oil that can be successfully extracted at this point. That oil is extremely difficult to harvest since the rock is very hard to manuever. Therefore, new drilling techniques such as horizontal drilling and fracture stimulation technology have had to be mastered by the companies drilling in the region.
One company that has become advanced in these new techniques is Continental Resources (CLR). There are 42 different companies drilling the Bakken including Hess (HES), Denbury (DNR), Whiting Petroleum (WLL), and EOG Resources (EOG). These companies are in prime position to capitalize on the vast amounts of oil that could come out of the ground.
Currently, Continental Resources has the most rigs in the Bakken region with 22. Having the lead in working rigs gives Continental the best position to make the most money. Continental is planning to expand as they recently increased the budget for the Bakken project by $400M. This should lead to more rigs in the area, which leads to more oil, and ends in more money for the company. More money for the company directly leads to greater investor success.
The cost of oil is important to Continental Resources since they have a mean cost per barrel of $60. Which means the price of oil needs to stay around $100 per barrel in order maximize profits without less demand by consumers. If the price of oil gets well over $100 per barrel people will drive less. On the contrary, if the price of crude stays in the high $90s, people will still drive the same and give Continental Resources great revenue.
The future of Continental looks promising since they are publicly predicting tremendous growth over the next five years. As you can see here, Continental Resources is predicting 30% growth through 2011 with a goal of 300% growth in five years. If they can successfully match or beat this goal then Continental is a great choice for the long term. Especially right now since the stock has pulled back about 7% from their 52 week high.
I recommend waiting a little longer as the stock should pull back another 5% or so before it heads up again. The 300% goal in 5 years may seem outlandish, but the company does own the most land in the region, and if you combine that with the sheer volume of available oil, then a 300% increase should be well surpassed. The amount of land Continental owns will grow over time as well since I see Continental Resources buying out other private oil companies. This will exponentially increase the amount of oil Continental Resources can produce.
The third largest oil company in the region is Hess. Hess currently has eight rigs in the Bakken region and they have a goal of 10 working rigs in the Bakken before 2012. They may surpass that goal since they have put up three rigs in the past few months, so I would not be surprised to see Hess build more than their goal. One factor that points to Hess being a better choice over Continental Resources is that Hess is only up about 2% so far in 2011 while Continental Resources is up 14% YTD.
However, it must be noted that Hess only has 8:22 working rigs compared to Continental Resources. Therefore, Hess is producing much less oil. My take on the two companies is to pick which one you think will expand more in the future, and of course, do extensive research to come to this decision.
According to the charts of Continental Resources and Hess, the former is the better company for your portfolio. According to the charts after the 2008 surge, due to the USGS report on the Bakken, both companies had a drop that was in line with most of the market. After that, Continental has steadily risen with what looks like no bound in site. On the other hand, Hess appears to be growing much more slowly.
This could be due to the fact that Hess has much less oil production coming out of the Bakken which means Hess has more room to expand. But, at the same time, since Continental Resources has publicly announced they will triple production by 2016, it will take an even greater effort by Hess to beat that. One way for Hess to get a head start on Continental Resources is to begin a process to buy out the smaller private energy companies that are dispersed throughout the Bakken region.
A much smaller company that is slowly building a strong stake in the region is Denbury. Currently, Denbury only has six rigs working in the Bakken region. However, they are planning to increase the activity in the region in a timely manner. One way they plan to do this is by recovering carbon dioxide in mass quantities so that they can pump it down into the wells and get more oil compared to standard techniques. By using carbon dioxide you leave behind much less environmental problems, which is terrific for the future of America.
It will take patience for investors because Denbury does not expect to receive their first carbon dioxide collection until about 2014. Denbury is methodically increasing their revenue which should be about 2.4% greater this year on revenue of about $1.2 billion; and they expect to increase that by 12.5% in 2012. I see Denbury reaching a very high level around 2016 since they have fundamental ideas and management is not trying to rush anything.
If you plan to invest in Denbury be sure to spend a great amount of your research time studying their claims in Louisiana, Alabama, and Texas to be sure they have a wider cash flow than just the Bakken region. Since the Bakken is not producing as much money for Denbury as other companies, Denbury needs outside regions of oil production.
Other major players drilling in the Bakken are Whiting and EOG Resources. These two companies are very similar because they are both expanding in the Bakken region with 15 and 10 rigs, respectively. Also, they are both currently in the process of attempting to expand their output by buying into other companies that can help them increase revenue and stay atop the oil producing market. For instance, EOG recently bought 30% of Apache, which will help these two companies expand and keep pace in the natural gas and crude oil market.
EOG has great potential for expanding in the Bakken since they have a tremendous amount of cash that they can use to purchase other companies, or build more rigs. Both will increase revenue, and therefore investor success. Whiting recently flexed its long term growth muscles by enacting a 2 for 1 split, as well as paying a $1.5 per share dividend in the first three months of 2011.
Despite the obvious need for the Bakken oil, it is causing quite the stir in the communities around the area. Since these companies are continuously building new machinery and bringing more employees to the area, the roads are becoming backed up and there is a crunch for living in the area. Currently, there is a bill on Capitol Hill that wants to increase tax cuts for oil produced in the Bakken. As you can imagine, this has caused a debate, but the positives far outweight the negatives.
Since the demand for oil will increase in this country, we need the Bakken shale in order to quench the thirst of demand. Also, this oil field will probably last about 15 years of constant drilling which means we can rely less on foreign oil during that time. With that said, I believe this site holds more oil than we have found. My proof for this is the fact that in 2008, the USGS said only about four billion barrels existed in the area, and now that number is 24 billion barrels.
I strongly believe as time goes by we will find this large expanse of oil covers much more than we can imagine. Not only will we discover this site holds more oil, we will also begin to realize the need for natural gas and begin to use that just as much as regular oil, which will in turn allow the Bakken to last even longer.
As usual, I preach that you do extra research on any company before you invest. However, I will preach that idea even more for all the Bakken companies because this region is very new to the market and most people do not even know what or where it is. Most of the companies working in the region are well established oil and natural gas producers. However, they have a lot to learn before unlocking the true potential of the Bakken shale.
Because of this, these stocks are all long term investments that will not see any large pops in share price any time soon. The only way there will be large pops in the share price is if they have an outstanding quarterly report and a large volume of shareholders decide to buy. Of course, after these pops there will be an inevitable drop in share price back to pre quarterly report levels. With that said, these companies operate pretty close to analyst predictions due to mathematical calculations of oil that is being extracted.
Therefore, surprises are very rare when dealing with these companies, but not impossible. I believe all of these companies will have year over year growth for a long time and they will be a good addition to any long term portfolio.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.