Two areas of the country best embody the challenges and opportunities created by the marriage of horizontal drilling and hydraulic fracturing (aka “fracking”). The Marcellus Shale beneath Pennsylvania, West Virginia, southern New York, eastern Ohio and far western Maryland holds primarily natural gas. The Marcellus has risen from obscurity to become the nation’s largest gas production basin.

The region that to me typifies the oil side of the shale boom is the Bakken formation. The Bakken is within the Williston Basin, which includes parts of North Dakota, Montana, southwestern Manitoba and southern Saskatchewan. The oil unlocked here by the shale boom turned North Dakota into the nation’s largest crude producer after Texas. Over the past decade oil production in North Dakota has grown by an order of magnitude to more than 1.2 million barrels per day (bpd).

The country’s seven most prolific shale resources. Source: U.S. Energy Information Administration

While there are a number of important shale oil and gas-producing regions in the country, the  Bakken and the Marcellus are pretty unique in owing almost everything to fracking — until the technology came along these were not major producers of oil or gas. So there were many challenges in ramping up production. One was resistance from some residents — and state and local governments — that didn’t appreciate some of the changes accompanying shale development. Another was the difficulty of delivering the oil and gas output to the shipping hubs and end markets before new pipelines got built.  

One of the consequences of the oil production boom is that associated natural gas production also increased. In many cases the gas volumes from these wells are too low to justify building pipelines to get it to market, so many producers opt to flare the gas — burn it off.

Satellite pictures show the effect of all this flaring. Despite the fact that there are no major cities in the area, flaring in the Bakken is significant enough that the area could be mistaken for a major city from space, as is also the case with the Eagle Ford in Texas:  

I recently made a trip to the Bakken in an effort to help solve this problem. In my day job, I am the director of alternative fuels for a company called Advanced Green Innovations. We have worked closely with the shale oil and gas producers to engineer a solution to gas flaring. One of our flare gas units is currently running in the Bakken, and I was sent to check on its operation. Here is a picture that I took from the top of the pumpjack at the oil production site of a major publicly-traded operator in the Bakken where our unit is located, showing the current flare onsite:


This is a relatively small flare, and it is further diminished because we are feeding a substantial fraction of the gas volume to our unit. While driving around the area, I took lots of pictures of flares, many of which looked like the one below near Williston, North Dakota. I won’t name the operator, but it is one of the major oil producers in the region:


It had been a few years since I was in North Dakota, but my company recently hired someone very familiar with the area. Jon Hesse has worked in the Bakken for several years, and really understands the region and the business. Football fans may recall him as a linebacker at the University of Nebraska, where he was part of two national championships. He went on to earn an NFL Super Bowl ring with the 1997 Denver Broncos. Jon and I spent five hours driving around the Bakken, discussing the opportunities in the region.


My Bakken guide: former Nebraska Cornhusker and NFL linebacker Jon Hesse

Activity in the Bakken has definitely slowed as a result of the oil price slump that began last year. The slowdown has hurt the oil producers and pipeline companies, but the hardest hit may be the businesses serving the oil industry. For instance, as shale boomed, there was a housing shortage in the area. A building frenzy ensued. Now there are many unfinished apartment buildings and man camps in the area, and numerous abandoned RVs throughout the region.

As market conditions deteriorated, many producers made the decision to drill wells and then cap them until conditions improve. We saw a number of these wells awaiting completion as we drove around. Nevertheless, there is still plenty of activity in the region. According to the EIA’s Drilling Productivity Report, production in the Bakken has declined only slightly thus far from the 1.2 million bpd record reached in December 2014.

Who are the major operators in the region producing this oil? As Jon and I drove around from site to site, ownership at different sites was always prominently displayed with signs such as this one at a Hess (NYSE: HES) site in Williston County:

There are dozens of oil companies — public and private — operating in the Bakken. Many of the names would be familiar to regular readers. EOG (NYSE: EOG), Continental Resources (NYSE: CLR), Whiting Petroleum (NYSE: WLL), Hess, and Statoil (NYSE: STO) are some of the major operators. As of June, these were the top 10 oil producers in the North Dakota Bakken, responsible for about 72% of the basin’s oil production that month:

• BOED = Barrels of oil equivalent per day
• Oil per well = average oil in barrels per day per well

Continental had long been the leading oil producer in the region, but was surpassed by Whiting following that company’s acquisition of Kodiak Oil & Gas, Whiting is now the Bakken’s top oil producer, top gas producer and the current operator of the largest number of active rigs in the region.

I will drill down a bit deeper on the important financial metrics for these and select other Bakken producers in the next issue of The Energy Strategist.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Buying Targa’s Rainy Forecast      

Targa Resource Partners (NYSE: NGLS) is a large and geographically diversified gas gatherer and processor, and one of the most transparent in its forecasting. Its initial outlook for 2016, released last week, provides valuable insights into the domestic midstream and upstream trends.

The good news is that its export logistics business keeps growing and that its gathering operations are expected to see no dropoff in inlet volumes at the minimum next year and possibly growth “in the low single digits.”

NGLS general partner Targa Resources (NYSE: TRGP) still plans on hiking its dividend 15% next year, though that’s down from this year’s 25% growth pace.

TRGP currently yields 5.7% vs. 10.5% for NGLS.

The downside of TRGP’s plans to keep raising its payout is that NGLS distributions are now to remain flat through the end of 2016, with distribution coverage of 90-95% at management’s projected energy prices modestly above today’s, and 85-90% at recent futures strip prices for 2016.

Capital spending plans have been trimmed modestly, though Targa is pushing ahead with a new joint venture to provide gas processing in the Eagle Ford for Sanchez Energy (NYSE:SN).  

Even if energy prices were to drop significantly from current levels, NGLS would likely earn enough to fully support a yield of at least 7% at the current price, so the downside seems relatively limited at this point. The fact that the price has held up as well as it has on news of no distribution growth for the next 15 months suggests as much.  

The upside is that the yield gets back to 8% and maybe lower by means of capital gains rather than distribution cuts. And that’s not so far-fetched a scenario given the competitiveness of U.S. shale drillers relative to global rivals, and the likelihood that the world can’t continue to affordably increase energy consumption without additional U.S. supply, even as domestic oil and gas production appears to have peaked.

With NGLS units down 58% since last year’s Labor Day and the supply glut that prompted that decline largely worked off, this seems like an opportune time to add NGLS to the medium-risk Growth Portfolio. Buy Buy NGLS below $40, a price the units fetched as recently as late July. TRGP remains a Buy below $75, and we’ve reduced the limit to acknowledge that it won’t be challenging the old highs any time soon rather than for want of near-term promise.

— Igor Greenwald