While first discovered in 1951, it wasn’t until recently that North Dakota’s massive 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. However, few predicted just how much oil and liquids the Bakken holds … and it’s a lot.
The latest numbers out of a U.S. Geological Survey survey of the region — along with the neighboring Three Forks Region — nearly double the amount of energy locked within the shale rock. Overall, it’s predicted that the Bakken contains an estimated 7.4 billion barrels of “undiscovered, technically recoverable oil,” about 6.7 trillion cubic feet of natural gas and 530 million barrels of natural gas liquids.
And according to some independent analyst assessments, even these substantial reserve estimates are still conservative measures .
The bottom line: That’s a ton of potential energy and profits for the various firms that operate in the region. More importantly, that could mean plenty of hefty profits for investors who take the Bakken plunge and bet on those firms. Here are some major winners:
Perhaps no exploration company has benefited more from the growth in the Bakken than Continental Resources (NYSE:CLR). Its Chairman Harold Hamm was one of the first pioneers of horizontal drilling. Since using the advanced technique, Continental has quickly become one of the largest producers as well as the largest leaseholder in the Bakken.
Those hefty land leases have translated into vast reserves and production potential. CLR recently updated its reserve estimates to include the lower Three Forks and boosted total estimated reserves by 57%. This upping of reserves will help translate in higher production over the next few years. Continental hopes to boost production from today’s 98,000 barrels of oil equivalent per day to 300,000 by 2017.
CLR isn’t the cheapest E&P firm on the planet — with a trailing P/E of 21 — but it’s one of the most profitable (and its forward ratio is under 13). Gross margins currently sit north of 89%.
That statistic — along with the fact that CLR is trading for about 11% below its 52-week high — could make shares a buy.
Kodiak Oil & Gas Corp.
First entering the Bakken in 2006, Kodiak Oil & Gas Corp. (NYSE:KOG) has nearly 228,200 acres in the region as well as operations in the Green River Basin near Wyoming. As such, KOG shows proven reserves of 80.9 million barrels of oil and 83.1 billion cubic feet of natural gas.
Like Continental, Kodiak has managed to grow its production. The firm has more than doubled production versus last year’s first quarter to roughly 21,700 barrels per day. However, with 75 new wells scheduled for drilling this year, Kodiak expects another 35% to 45% worth of production growth by the end of 2013.
Plus, aside from being an up-and-coming Bakken player, Kodiak does have something else up its sleeve: size. The company’s market cap is only about $2 billion, while debt is only $1.1 billion. That means KOG could be the perfect target for another producer – say a major faced with dwindling production – to boost its own needs.
KOG can be had for a forward P/E under 9.
With roughly 70% of its production coming from the Bakken, Whiting Petroleum (NYSE:WLL) is the second largest player in the region. At the end of December 2012, Whiting had proven reserves of around 378.8 million barrels of oil equivalent (BoE) and had interests in 10,218 wells over 1,277,400 acres.
Like the other players on this, WLL also managed to increase production and saw a 10% jump in the amount of energy it pulls from the ground.
However, unlike Kodiak and Continental, Whiting could be the biggest bargain. The producer has had some issues with regards to its hedging strategy throughout the latest quarter. A strong hedging strategy is important for any oil or gas producer to limit its exposure to oil and gas prices.
Those issues are keeping WLL shares around 17% below their 52-week highs … even though Whiting’s cost controls have helped it boost operating cash flows by over 40% in the last two quarters. Meanwhile, rival Kodiak has experienced lumpy and even negative net cash flows over the same time period.
Median price targets for WLL shares are nearly $15 — around 25% — higher than where it is trading for today.
One of the biggest issues facing producers in the Bakken is the lack of sufficient pipeline infrastructure to get their energy to end-users. That’s where pipeline firm ONEOK Partners (NYSE:OKS) comes in. The firm is undergoing a massive build-out in the region to increase capacity.
Recently, two of the OKS current projects opened. Its Bakken NGL Pipeline and the Stateline II natural gas processing plant are providing much-needed natural gas infrastructure to the generally oil-focused Bakken. Believe it or not, there is so little in the way of natural gas infrastructure in the region, that producers are actually wasting any natural gas they produce alongside oil in Bakken.
By providing the necessary pipelines and other systems required to gather and process this wasted fuel, ONEOK is setting itself up for future cash flows and its shareholders future dividends. Structured as a master limited partnership (MLP), OKS pays a juicy 5.5% yield.
Canadian National Railway
While ONEOK is taking care of natural gas, Canadian National Railway (NYSE:CNI) is taking care of the oil. Crude by rail shipments continue to surge as oil output has expanded more quickly than pipeline capacity.
Crude shipments are now the fastest-growing product for several big railroads and Canadian National saw its crude-by-rail revenue jump 300% during the first quarter. CNI has begun expanding through new terminals to deliver Bakken crude to refineries in Western Canada and the Gulf of Mexico.
Canadian National isn’t the cheapest railroad out there, trading at a forward P/E of 15, but its current price could seem like a bargain as crude-by-rail volumes continue to surge. CNI also yields a decent 1.7%.
Finally, no list of unconventional energy players can be complete without King Hal. It stands to reason that higher reserve estimates translate into more drilling. As the leading oil services provider in the Bakken, Halliburton (NYSE:HAL) will continue to be the go-to supplier of fracking pumps, fluids and other equipment to tap that energy.
HAL should also benefit from recently rising natural gas prices across the country as more firms return to drilling.
Halliburton isn’t necessarily cheap as shares continue to make new 52-week highs. However, it is the North American leader when it comes to fracking and drilling. As such, the expense is worth it.
HAL really is best of breed.
As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.