by Aaron Levitt | December 20, 2011 7:30 am
For many domestic energy investors, the Marcellus shale formation in the eastern U.S. has been the premier play on the future of America’s energy independence. After all, the rock formation has some of the country’s richest deposits of natural gas and will represent a major source of supply for years to come.
However, the new drilling techniques known as hydraulic fracturing, or “fracking,” are also breathing life into another shale formation, the Bakken oil shale of North Dakota and Montana. It could be the biggest domestic oil discovery in the last 40 years. For investors, betting on this new source of supply could be a portfolio-changing event.
While first discovered in 1951, it wasn’t until recently that the Bakken shale formation really got cooking. As with many other shale rock formations in the U.S. and Canada, the increased adoption of advanced drilling techniques and fracking has allowed energy and production (E&P) firms to finally tap the rich energy resources locked in those rocks. According to the U.S. Energy Information Administration, production in the Bakken shale formation went from a mere 3,000 barrels a day in 2005 to more than 225,000 in 2010. In September, the region produced a record 464,129 barrels a day, putting it on a path to surpass OPEC member Ecuador in terms of production. Overall, analysts estimate that region could be producing a million barrels a day by 2020.
Despite the jumps in production, the Bakken could be providing energy for long time to come. In 2008, The U.S. Geological Survey (USGS) published a report on the Bakken shale that shows the region holding around 4.3 billion barrels of oil that is recoverable with current technology. However, the report also said the region has total reserves in the range of 200 billion to 400 billion barrels. As drilling technology continues to advance, the Bakken could hold the key to America’s energy independence, job growth and economic resurgence.
And now, the Bakken is getting another boost in the way of a pipeline reversal. Enbridge (NYSE:ENB) and Enterprise Products Partners (NYSE:EPD) recently decided to reverse the flow of the critical Seaway pipeline to move more of the Bakken’s oil out of Cushing, Okla., to refiners on the Gulf of Mexico coast. Billed as the “pipeline crossroads of the world,” Cushing holds around 10% of the total U.S. crude inventory and is the major hub connecting Gulf Coast suppliers with consumers in the North. However, increased production in Bakken has caused a huge glut of oil at the storage deport. The pipeline reversal will enable this oil to finally be used.
Given the Bakken’s outsize potential, investors should take notice. While major oil firms have recently taken a shine to the field — Exxon’s (NYSE:XOM) purchase of XTO gave it some acreage in the region — the majority of players are smaller firms. Of them, Continental Resources (NYSE:CLR) could be the king. The firm currently has 901,000 net acres in the Bakken and is expanding production from its wells. However, the E&P firm has tapped only about 15% of this acreage.
This leaves plenty of room for future growth. Shares of Continental can now be had for about $62.80, some $10 below their 52-week highs and with forward P/E of about 20. Similarly, Whiting Petroleum (NYSE:WLL) holds about 532,266 net acres in Bakken and has seen its share price sink over the last few months. Now around $44, Whiting can be had for a P/E of 11.
Some of the biggest gainers in the Bakken could be the smaller firms as the major oil producers look for takeover targets. Statoil’s (NYSE:STO) recent $4.4 billion buyout of Brigham Exploration is the most recent example. Kodiak Oil & Gas’s (NYSE:KOG) 155,000 acres in the region, along with Samson Oil & Gas’s (NYSE:SSN) Bakken exposure could become the top picks in a major firm’s acquisition strategy. Investors may want to consider the pair along with the broad Jefferies TR/J CRB Wildcatters E&P Equities ETF (NYSE:WCAT).
While the Marcellus shale reigns supreme in many investors’ minds, the Bakken oil shale region has the potential to recast America’s energy fortunes. As drilling technology continues to improve, more oil will be recovered from the region, benefiting the firms that do business there — and the investors who make smart bets sooner rather than later.
Disclosure: Author does not hold any securities listed in this article.
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