The Rockin' Bakken Party is Just Startin'
Kirk is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Among those who follow the energy industry, the Bakken Oil Shale might seem like old news. But for everybody else, it is still only on the periphery of their investing consciousness. This is good for those who want to establish positions in some of the wonderful companies associated with the Williston Basin oil shale plays as many stocks are not pricing in relatively easy-to-predict future free cash flows.
In reality, the Williston Basin's Bakken, and now Three Forks, oil shales are relatively new as far as having the ability to recover copious amounts of black gold are concerned. Hydraulic fracturing (fracking), the relatively thick and continuous shales, and the high-quality light sweet crude have made the area a very manageable and lucrative oil play.
This summer I visited the Williston Basin twice and had a chance to see first hand the massive boom that was going on there. I fueled at the busiest gas station in the world. I ate at the busiest McDonald's in the world. I bought a T-shirt at the busiest Wal-mart in the world. All this in the town of Williston with a population of under 100,000 permanent residents.
The ebb and flow of people in the region is truly overwhelming. Traffic is heavy with trucks hauling frac-sand, waste water, oil, steel piping and other supplies the region needs, on top of the normal agricultural, tourism and other traffic. As far away as Devil's Lake, we watched heavy truck traffic on the newly repaired U.S. Highway 19 as we hooked Walleye over flooded railroad tracks.
In looking at Williston oil and gas E&Ps my favorites are four of the five companies I profiled earlier this year: pure plays Kodiak Oil and Gas (NYSE: KOG), Oasis Petroleum (NYSE: OAS) and Triangle Petroleum (NYSEMKT: TPLM) and the more diversified Magnum Hunter (NYSE: MHR).
Each company is exhibiting exciting growth, which is being disguised by the fact that they are pumping their cash flow into more drilling. Oasis and Triangle show up on this screen by a fellow Fool.
In essence, what analysts and investors are doing by being under-invested in these companies is relying on a pure free cash flow valuation model to find their stocks. The problem with that is it is rare to find growth at low prices (GALP) with a backward-looking model.
In trying to assign value to these companies it is imperative to make a fair estimate of the costs of their drilling expansions, the cost per barrel of oil longer term (hedging by the oil companies smooths things in the short-term) and the free cash flow that will become available once the number of producing wells creates excess above drilling activities. It is important to factor in the rapidly improving efficiencies of the region now that much of it is de-risked and infrastructure is being built with few stops.
In looking at some of the larger American oil companies that have much higher ratios of producing wells to new drilling, it is easy to see that free cash flow at these four companies stand to expand significantly in just a few years. With development progressing in the Williston, the wait for free cash flow could be very worth it to investors who buy soon and hold.
Kirk and clients of Bluemound Asset Management, LLC own common stock shares of Oasis Petroleum, Magnum Hunter, Triangle Petroleum and Kodiak Oil & Gas. Neither Kirk nor Bluemound clients plan any transactions in the next 3 trading days in the mentioned company's securities. Opinions subject to change at any time without notice. Follow Kirk on Twitter @GALPinvesting, GALP is Growth At Low Prices, for new columns, important financial news and weekly stock picks. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.