Another Catalyst for Bakken Stocks
Kirk is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In my recent article titled "Run is Done for Tesoro" I pointed out that the increase in price on Williston oil versus WTI was a downer for Tesoro (NYSE: TSO). That same circumstance is a boon for the Williston E&P plays, however.
The main driver to the increased Williston oil price has been the development of three types of infrastructure in the Williston region. First off, more rail lines and hubs have become active this summer, vastly increasing the number of barrels that can be hauled out of the region to refiners. Secondly, Tesoro, added 10,000 barrels of capacity at its Mandan facility. Finally, some small connector pipelines have come on line as well.
In looking at production and production rates from several companies in the Williston Basin, if Williston oil stays about the same price as WTI, those companies will see significant earnings beats as most forward earnings estimates are based upon a discount of Williston oil v WTI. Currently, Williston oil is priced at a premium to WTI as transportation expansion has opened up new rails of delivery. As not all production is hedged, if both prices drift upward, this is also good for the E&Ps up to the point where demand falls.
| Company |
Avg. Daily BOE Production |
Growth Rate | EPS Growth Rate |
| Continental Resources (NYSE: CLR) | 100,000 | 76% | 69% |
| Whiting Petroleum (NYSE: WLL) | 80,700 | 26% | -25% |
| Oasis Petroleum (NYSE: OAS) | 20,353 | 60% | 128% |
| Kodiak Oil & Gas (NYSE: KOG) | 12,696 | 385% | 563% |
Each dollar that Williston oil increases improves the margins and falls to the bottom line almost completely intact. Looking at the company growth rates, obviously those will not be sustained long-term, however, they do point to much higher production in the immediate future.
If you have been waiting for infrastructure to catch up to production in the Williston, it appears that is happening rapidly. There is no going back, as even more infrastructure is scheduled to come on line in coming years. In the next few years we expect to see the completion of four to six new pipelines, added rail capacity and several Native American Tribes adding about 65,000 barrels of refining capacity.
Going forward, as new refining capacity, rail and pipelines enter the market, any significant discount of Williston oil to WTI is unlikely. A combination of slow rising oil prices, which many of us expect, and a smart hedging approach will add to the attractiveness of well run Williston Basin companies. As a group, there is generational growth potential in Williston E&Ps.
My favorites on the chart above are Kodiak, which I covered here, and Oasis, which I covered here. Continental also seems like a developing profit monster that could turn into a dividend play by the end of the decade as its production tops and drilling expenses fall. Fools, if you haven't gotten oily yet, it's time to oil up.
Kirk and clients of Bluemound Asset Management, LLC own common stock shares of Kodiak Oil and Gas and Oasis Petroleum. 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.
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