The Bakken Is Back

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Includes: AXAS, CLR, COP, CPG, EOG, EQNR, HES, MRO, NFX, OAS, PSHIF, WLL, WPX, XOM
by: Laurentian Research
Summary

The Bakken production reaches a new high, indicating the failure of earlier pronouncement of its demise.

The comeback of Bakken is supported by the superior subsurface geology of the Williston Basin and enabled by improved completion techniques.

The sufficiency in takeaway capacity helped lift spot price of Bakken oil and improve its economics.

A list of Bakken players is presented for interested investors.

“The Bakken is back stronger than ever.” - Harold Hamm

“The Bakken is back stronger than ever.” - Harold Hamm, CEO of Continental Resources

Please note: This is an abridged and updated version of an article that was posted on June 30, 2018, at The Natural Resources Hub, my exclusive investment community.

The comeback of Bakken

As of September 2018, the Bakken region produced at 1,491 Mbo/d and 1.87 MMcfg/d, surpassing the previous peak production volume reached back in 2015 (see here)(Fig. 1).

Fig. 1. Oil and gas production in the Bakken play. Source.

Considering just three years ago, the Bakken play was declared in an "early demise" by well-known geologist Art Berman (see here), the comeback of the Bakken is indeed amazing.

How did the Bakken operators manage to achieve this? Is the uptrend sustainable? Which are the major participants in the play? In this article, I intend to answer these questions for the investors who are interested in the U.S. unconventional plays.

The Bakken Play

The Bakken Formation is a rock unit of the Late Devonian to Early Mississippian ages (see here). It consists of the lower shale member, the middle member of sandstone, siltstone, shale, and dolomite, and the upper shale member (Fig. 2). The Three Fork Formation underlying Bakken is also a common objective in oil and gas exploitation in the Williston Basin.

Fig. 2. The Bakken Formation and its subdivision. Source.

The Bakken Formation exists in an area of around 200,000 square miles in the Williston Basin and can be found subsurface in western North Dakota, eastern Montana, and southern Saskatchewan and Manitoba in Canada (Fig. 3).

Fig. 3. Structural map of the Williston Basin. Source.

The resources

The thickest sections of the Bakken Formation occur in Mountrail, McKenzie, Williams, and Dunn counties in North Dakota (Fig. 4). This area is commonly called the core of the Bakken play.

Fig. 4. Isopach of the Bakken Formation in North Dakota, upper left, lower member; upper right, middle member; lower left, lower member; lower right, the entire formation. Source.

How much oil is there in the Bakken Formation? And how much is recoverable?

  • According to an earlier USGS study, the total amount of oil-in-place contained in the Bakken shale ranged from 271 to 503 billion barrels, with a mean of 413 billion barrels.
  • In April 2013, the USGS estimated that 7.4 billion barrels of undiscovered oil, 530 MMbbl of natural gas liquids (aka, NGLs) and 6.7 Tcf of gas are recoverable from the Bakken and the Three Fork formations using current technology (see here).
  • In the Canadian portion of the Bakken Formation, there may be 1.6 billion barrels and 2.2 Tcf of technically recoverable oil and natural gas (see here), which can be increased to 3.1 billion barrels of oil with waterflooding (see here).

From 2008 to 2013, approximately 450 MMbo have been produced from the Bakken and Three Forks formations in the U.S. (see here), which only represent some 6% of the USGS estimate. Therefore, there is still an enormous amount of oil can be produced from the Bakken and Three Fork formations. Since then, the advance of completion techniques has greatly improved the recovery factor, further adding to the recoverable reserve base, as shown below.

The surge in Bakken production is supported by the superior geology of the Williston Basin, especially the Bakken and Three Fork formations.

The Bakken infrastructure

Prior to the completion of the Dakota Acess pipeline on June 1, 2017 (see here)(Table 1), the Bakken producers had to resort to rail transportation to export oil production. As a matter of fact, the deadly 2013 Lac-Mégantic rail disaster in Quebec was caused by Bakken oil (see here).

Table 1. The exporting pipelines and local refineries. The author's compilation.

With the Dakota Acess, the infrastructure bottleneck in the Bakken Basin is temporarily relieved (Fig. 5). However, it can be expected a need for Enbridge Sandpiper pipeline will re-emerge in the near future.

Fig. 5. Map showing infrastructure in the Bakken region. Source.

Bakken-WTI differential

According to North Dakota Pipeline Authority forecast, there exist sufficient total takeaway capacity, between 1.4 MMbo/d-capable pipelines and 1.5 MMbo/d-capable railroads, for Bakken oil production, which was at 1.2 MMbo/d as of February 2018 and 1.46 MMbo/d as of June 2018, although natural gas takeaway can be challenging in 2H2018 and 2019 (Fig. 6).

Fig. 6. Oil takeaway capacity and production (left) and natural gas takeaway as compared with production in the Williston Basin. Source.

Due to the takeaway sufficiency in recent years, the Bakken Clearbrook spot price has been fluctuating around WTI within $3/bo on either direction, while WTI Midland differential blew out in recent months (Fig. 7).

Fig. 7. A comparison of the Bakken Clearbrook-WTI and WTI Midland-Cushing differentials. Source.

Since 2014-2015, the oil differential has improved substantially for Bakken operators. For example, the oil differential improved by 53% since 2015 for Continental Resources (CLR) and by 72% from 2014 to 1Q2018 for Whiting Petroleum (WLL)(Fig. 8).

Fig. 8. Differential of Bakken oil to WTI for Continental Resources (left) and Whiting Petroleum (right). Sources: here and here.

Advance in technology

The surge of Bakken production benefits not only from the superior geology of the Bakken play but also from recent improvements in well completion techniques.

Productivity improvements

Although a moderate recovery of rig count contributed to the production growth to some extent (see here and here), it is improved well completion and the ensuing productivity increase that did the heavy lifting.

  • From 2015 to 2018, new-well oil production per rig has tripled from 500 bo/d to 1,500 bo/d in the sweet spot of the Bakken play (Fig. 1).
  • In the three years between 2015 and 2017, operators in the Bakken region drilled more wells that produced more than 100,000 boe in the first 90 days than the previous 15 years combined (Fig. 9).

Fig. 9. Distribution of industry-wide Bakken wells or units that produced over 100,000 boe in 90 days. Source.

The Bakken play achieved better well productivity gains in 2017 than any other unconventional plays in the U.S., including the Delaware, Midland, DJ, SCOOP, and STACK plays (Fig. 10).

Fig. 10. Cumulative production by year for various unconventional plays in the U.S. Source.

However, please note, these amazing results were obtained in the heart of core Bakken play. The Bakken play in its totality does not fare as extraordinarily (Fig. 11).

Fig. 11. The Bakken play in comparison with the top 50 offshore and shale plays. Source.

Well economics

Optimized completion of wells led to a consistent substantial increase in type curve economics, unlocking the economic value of the Bakken play.

  • For example, Continental Resources was able to raise the ROR (aka, rate of return) of the type well to approximately 140% at $65/bo WTI and $3/Mcf natural gas, following consistent improvement since 2011. The payout period is down to 8 months (Fig. 12)(see here).

Fig. 12. Continuous improvement of completion technique in the Bakken play. Source.

Bakken: the competitive landscape

Besides two large private oil companies, i.e., Kansas-based Slawson Exploration (see here) and Dallas-based Petro-Hunt of the Hunt family (see here), the largest publicly-traded producers in the Williston Basin, in terms of producing wells or production volume, are (Fig. 13; Fig. 14):

  • Continental Resources (CLR),
  • Whiting Petroleum (WLL),
  • Hess Corp. (HES),
  • ConocoPhillips (COP),
  • EOG Resources (EOG),
  • Oasis Petroleum (OAS),
  • XTO Energy, a wholly-owned subsidiary of ExxonMobil (XOM),
  • WPX Energy (WPX),
  • Equinor ASA (EQNR), formerly Statoil ASA (STO), and
  • Marathon Oil (MRO).

Fig. 13. Percentage of net producing wells by the operator. Source.

Fig. 14. The Bakken producers. Source.

Among the top ten, Whiting is a Bakken pure play, Continental Resources, Oasis Petroleum, and WPX are duo-focused with operations both in the Williston and Anadarko/Permian basins, while the rest of cohort are diversified E&P companies with Bakken representing a minor portion of their assets.

Besides the top ten producers, there a slew of other publicly-traded companies that also operate in the Bakken play (Table 2):

  • Crescent Point Energy (CPG) operates in the Bakken play on both sides of 49oNorth, besides the Uinta Basin in Utah and the Shaunavon and Viking unconventional plays in Southwest Saskatchewan (see here).
  • Newfield Exploration Company (NFX) operates in the Williston Basin, besides the Anadarko and Arkoma basins of Oklahoma and the Uinta Basin of Utah (see here).
  • Abraxas Petroleum (AXAS) operates in the Williston Basin, besides the Permian Basin and the Eagle Ford shale (see here).
  • Petroshale (OTCQX:PSHIF) is a Canadian junior oil company that only operates in the Bakken play.

Table 2. A compilation of acreage and production data as for Bakken operators. The author's compilation.

A relative valuation with a focus on the E&P companies with a significant portion of their assets located in the Bakken play is beyond the scope of the present article; interested readers are referred to an article posted at The Natural Resources Hub, our exclusive investment community.

Investor takeaways

The Bakken's demise has been greatly exaggerated. The unconventional play is having a comeback, supported by the superior subsurface geology of the Williston Basin, led by substantial improvements in completion techniques, and aided by ample takeaway capacity, as I reviewed above.

I believe the under-followed Bakken play can provide investors with an exposure to considerable upside without the takeaway capacity constraints in the near-term as seen in the Permian Basin. Investors will still need to pick the best risk-reward profile from the Bakken operators. To that end, a list of major Bakken operators is presented.

Disclosure: I am/we are long WLL.

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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.