Natural Gas Production In The Bakken Is Destined To Fall

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Includes: BOIL, DCNG, DGAZ, GAZ, KOLD, UGAZ, UNG, UNL
by: Daniel Jones

Summary

In this piece, I decided to dig into natural gas production for the Bakken, an area I've only really looked at from an oil perspective before.

While the region is small compared to others in the space, it's still relevant in the grand scheme of things and a major drop in output looks to be brewing.

Should current trends persist, investors should see this as a bullish sign for the space in the months to come.

In the past, I've written articles covering the Marcellus and Eagle Ford regions and how the natural gas picture in these regions should look throughout 2016 if rig counts continue to fall and if other fundamental data stays within a reasonable range. The conclusion I arrived at regarding natural gas production in these regions is that investors should expect production to drop, while data for other areas, such as the Permian, is less bullish. In what follows, I will dig more into the data associated with the Bakken and see whether investors should expect production to fall and, if so, by how much, throughout 2016.

A look at the Bakken

In the image below, you can see that the Bakken is located throughout North Dakota and part of Montana, making it the most northerly U.S. shale play of the seven major oil-producing regions covered by the EIA (Energy Information Administration). Like all of the seven regions, the Bakken is responsible for the production of both oil and natural gas, with oil production last December averaging 1.16 million barrels per day, representing around 12.5% of total U.S. production and making it the third-largest of the seven regions in this regard, second to the Permian and Eagle Ford.

Click to enlarge

However, the Bakken's natural gas production is quite impressive as well. In the table below, you can see how its share of the natural gas market is relative to the Permian, Eagle Ford, Marcellus, Haynesville, Utica, and Niobrara. It is currently the smallest of the seven regions covered by the EIA but still accounted for the equivalent of about 271 thousand boe (barrels of oil equivalent) per day of natural gas.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report

Looking at some core assumptions

In order to get a firm grasp of the situation facing the Bakken, it's first imperative to understand the three components that determine how much natural gas is actually produced over time. These are rig count, rig productivity improvements, and decline rates. In my recent oil piece on the matter, I made a case for assuming that rig counts fall by 5 units each month, starting at 45 units for January (which is what the EIA has estimated). However, I've had to do the research from scratch to figure out what the other two components should look like.

In the graph below, you can see the historical month-over-month productivity rates of rigs in the Bakken when it comes to natural gas production. This graph covers monthly data starting in January of 2007 and goes through what the EIA has forecasted for the month of March this year. What we can see is a great deal of volatility over time, but the general trend recently has been toward declining productivity improvements. If the EIA is accurate, the improvement rate in April of this year compared to March will be just 1.01% but, to be on the safe side, I'm making the assumption that the rate after March will be 1.5% each month.

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*Source: Created by author with data from the EIA's Drilling Productivity Report

In addition to this, I had to look at the decline rates in the region. These, too, have changed a great deal over time but the picture over the past several months has been fairly consistent between 3.5% and nearly 4.5%. To account for the variability that can take place and to account for the fact that decline rates have been trending down just a bit in recent months, I'm assuming three different scenarios moving forward; a conservative one, where the rate is 3.5% each month, a moderate one (the most probable outcome in my opinion), where the rate is 4%, and the liberal one, where the rate is 4.5% each month.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report

Production should fall no matter what

Based on these core assumptions, I've been able to determine that it's highly likely that natural gas production will fall this year relative to last year. In the table below, you can see the results of my analysis. Under even the most conservative scenario that I outlined, we should see output fall to 1,352,407 Mcf per day by year-end. The moderate scenario calls for a drop to 1,298,952 Mcf per day, while the liberal scenario should result in production declining to just 1,247,378 Mcf per day.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report

To better illustrate what this looks like year-over-year, I made the table below, which shows production in December of 2015 and compares it to the three scenarios I outlined. Year-over-year, we should see output fall by at least 20.5% in the Bakken if my assumptions turn out to be accurate. Meanwhile, the moderate scenario calls for a reduction in output equal to 23.7%, while the liberal (and least likely) scenario should result in production dropping by 26.7% year-over-year. All of these are, in my opinion, material.

Click to enlarge

*Source: Created by author with data from the EIA's Drilling Productivity Report

Takeaway

Using my findings, it appears as though the production outlook in the Bakken for natural gas is anything but great, with output almost certain to decline unless rig counts start rising again. For producers who have a heavy presence there, this could prove very problematic but for long-oriented investors waiting for a chance for natural gas prices to go back up, this is certainly bullish. Of course, many things can change this picture but the bottom line is that investors have something positive to look forward to, as opposed to a growing glut that Mr. Market seems to fear

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.