According to Bloomberg News: "Bakken oil strengthened to a premium against West Texas Intermediate crude after Tesoro Corp. (NYSE:TSO) said it was ahead of schedule in construction of an offloading terminal for the grade at its Washington refinery.
The 60,000-barrel-a-day capacity rail terminal, which is permitted to receive 30,000 barrels of oil a day, will begin operation in September, Chief Financial Officer Scott Spendlove said on a conference call.
Bakken oil strengthened $3 to a $1 premium to WTI at 12:09 p.m. on March 3, 2012, in New York. That's the first time since December that the grade has traded at a premium.
In an earlier series of articles I looked at 20 Bakken/Eagle Ford companies to identify growth opportunities based on their capital expenditure budgets compared to their enterprise value. Four of those companies are best poised to benefit from the jump in Bakken crude spot prices to a premium to WTI spot prices. These companies have the vast majority of their production in the Bakken. The other 16 companies either have a significant amount of their production outside the Bakken or they are land rich and production poor. The sudden jump in Bakken crude prices will allow these companies to have better than expected cash flow as long as the gap remains tight.
The company with the most direct Bakken crude oil production exposure as a percentage of total company production and best positioned to benefit from a rise on Bakken crude spot prices is Northern Oil & Gas (NYSEMKT:NOG). Northern is a Williston Basin-focused operator with 62.1 million shares outstanding. Northern has 170,000 net non-operated Bakken acres and averaged about 8,500 Boepd in the first quarter. Northern has very good hedges in place. In 2012, the company had 1,072,000 barrels of oil hedged with a costless collar between $91-$107. This gives Northern downside protection at $91 against West Texas Intermediate and doesn't cost the company anything, unless WTI trades above $107. For 2013, the company has a costless collar for 2,033,000 barrels of oil hedged for $90-$105. As long as oil stays within its trading range so far this year, Northern is able to avoid any realized hedging losses and all of its oil and gas revenue can contribute to cash flow. Plus, it has downside protection at a relatively high $90-$91 per barrel.
Close to NOG is Oasis Petroleum (NYSE:OAS), which is also focused on the Bakken. Oasis has 92.8 million shares outstanding. The company has 307,400 net Bakken operated and non-operated acres and averaged 17,633 Boepd in the first quarter. In addition to two-way collars, Oasis is using a lot of three-way collars to hedge. For the rest of 2012, Oasis has a $65.31-$90.31-$109.35 three-way collar on 8,000 barrels of oil per day. This means Oasis doesn't benefit and could suffer realized losses if WTI trades above $109.35 or if it trades below $65.31. Oasis is protected between $90.31 down to $65.31. The company also has a 4,500 barrel of oil per day two-way collar at $85.56-$106.50. Additionally, Oasis has a three-way collar for July-December on 2,000 barrels of oil per day at $70-$90-$112.40 and two more three-way collars that expire at the end of June on 3,000 barrels per day. For 2013 the company has a three-way collar on 6,000 barrels of WTI per day at $70-$91.67-$113.58 and a two-way collar on 2,000 barrels per day for $90-$112.78 and another three-way collar for six months on 500 barrels per day. Oasis is being very aggressive in its hedging strategy for 2012. The company has between 15,500 to 14,500 barrels of oil per day hedged in 2012, which is not that far below its first quarter production. While Oasis' current growth trajectory can comfortably handle this, the company is exposed to a significant downturn in the economy, similar to the one in 2008 and 2009. Oil prices dropped down to $30 and capital was hard to come by. Additionally, anything that causes Oasis to stop drilling could cause it not to actually have enough oil in the second half of the year to meet its hedging obligations. While the risk of a collapse in oil prices or big reduction in drilling is low, Oasis is exposed in a way Northern is not.
The company with the third most exposure to Bakken crude oil as a percentage of overall production is Kodiak Oil & Gas (NYSE:KOG). Kodiak has 263.5 million shares outstanding. Almost all of the company's production is from the Bakken due to its recent rapid growth in production. The company does have some legacy oil and gas assets that are no longer the focus of the company. Kodiak has 157,000 net Bakken operated and non-operated acres and averaged 10,578 Boepd in the first quarter. Kodiak mainly uses swaps to hedge its exposure to wide swings in oil prices. A swap is an agreement to a fixed price without a floor or ceiling. At the time a swap is entered into, it offers the best downside protection with no cushion for a rise in prices. For 2012, Kodiak has 6,510 barrels of oil per day hedged at an average of $96.45. For 2013, Kodiak have 3,105 barrels of oil per day at an average price of $92.76. For 2014, Kodiak has 2,800 barrels per day hedged at $91.76. For 2015, it has 1,625 $87.13. Kodiak is solidly hedged for 2012 in case prices nosedive.
The last company with very significant direct exposure is U.S. Energy (NASDAQ:USEG). U.S. Energy does have some Eagle Ford and Gulf Coast assets, but over 85% of its production is currently from the Bakken. U.S. Energy has 27.5 million shares outstanding. The company has 21,700 net Bakken operated and non-operated acres and is on track to average over 1,200 Boepd in the first quarter. Through September 30, U.S. Energy has a two-way collar on 400 barrels of oil per day for $80-$99. It has another one for 200 barrels of oil per day for $90-$106.50 through year end 2012. From October 2012 through December 2013 U.S. Energy has a two-way collar on 200 barrels per day for $95-$116.60. Like Northern and Kodiak, U.S. Energy is well hedged for 2012 without exposure to a downside surprise.
This article is not intended to be a buy recommendation on any of the companies mentioned. It is just intended to narrow the companies to research if an investor is interested in taking advantage of the sudden closing of the gap between Bakken crude spot prices and West Texas Intermediate crude prices. The gap was a deficit of over $25 in February and is now a $1 premium. The spread has been volatile and the favorable pricing in the Bakken may or may not last. But takeaway capacity is finally running faster than production growth.
Disclosure: I am long USEG.