Banking on the Bakken
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Banking on the Bakken shale wealth in Montana and North Dakota isn't quite as easy as in the eastern cohort, the Marcellus in Pennsylvania, Ohio, New York and West Virginia. I wrote a few weeks ago about playing the Marcellus with some of the banks that are handling newfound high net worth customers.
Despite a boom in North Dakota, especially, where housing for the drilling workers is in scarce supply, and banks are overwhelmed with new deposits, some not even accepting new deposits, in twelve counties in western North Dakota; the problem is that there are few publicly traded banks that are a pure play. For a good infographic about North Dakota's Bakken shale, click here.
There are many community banks, but they are all privately held and also compete with the Bank of North Dakota, the only state-owned bank in the country. As for Montana, there are two banks that are public but the boom in Montana is still in nascent stages, although companies like Rosetta Resources own hundreds of thousands of Bakken acres.
Mark Twain's Adage
Mark Twain, humorist and chronicler of the Gold Rush, once wrote: "When everyone is looking for gold it's a good time to be in the pick and shovel business." Sounds like something Warren Buffett would say. And Warren's biggest bank holding in his portfolio Wells Fargo (NYSE: WFC) may be the best way to play Bakken wealth. It's by no means a pure play, but it is the largest big bank in the region that offers mortgages and lending, both of which are in high demand. Banks themselves are in the position of having to buy houses for employees that can't afford to live in the region.
Wells Fargo is trading at a 10.35 P/E with a 2.70% yield and a reasonable payout ratio of 25%. It operates in three segments: Community Banking, Wholesale Banking, and Wealth, Brokerage and Retirement. All three segments are in demand in the Bakken.
In total, Wells Fargo has 9,000 banks (although they call them stores) and are represented in 35 countries. So if the boom in the Bakken does go bust, which is unlikely as oil would have to drop below $50 a barrel, you still have a huge international banker that is also a play on any housing recovery. Not only that, they have $33.52 cash per share and the shares are trading at $32.88. Maybe Warren's onto something.
Not All Banks Are Created Equal
There is another bank in the North Dakota Bakken that is much riskier than Wells Fargo, just so you know, called BNCCORP, which trades on the OTC Markets and is the holding company for BNC National Bank, a community banking and wealth management company mostly located in North Dakota with some Arizona and Minnesota branches. Revenues from mortgage banking doubled over the last year, and it will probably continue to benefit from workers moving into the Bakken; but this is a very speculative name. It is very, very thinly traded, between 1,000-7,000 shares a day. It has a P/E of 1.36 but has been in the eye of a controversy over assets serviced by a fraudulent Arizona mortgage lender. A lawsuit with its insurer is ongoing to recover their loss of $26 million. This is a name only for high stakes gamblers.
Money in Montana
While North Dakota may be making all the news, Montana's Toole, Glacier, Pondera, Liberty, and Teton counties are Bakken shale rich. Drilling is not as gung-ho in this region, but future drilling is expected. There are two banks that may be a way to get in on the ground floor of the Montana Bakken. The first is First Interstate BancSystem (NASDAQ: FIBK), which only went public a few years ago. They own 72 branches in Montana, Wyoming and western South Dakota. The stock trades at a 12.72 P/E and has a yield of 3.50%. On Oct. 22 they reported a 111.6% rise in mortgage origination and sale income with a year over year improvement in EPS from $0.26 to $0.35, a 34.6% rise.
Return on equity has improved also from 8.44% in 2011 to 11.07% for the same quarter in 2012. While it is a fraction of the market cap of Wells Fargo, which stands at $173 billion to FIBK's $654.84 million, it does have a higher yield and slightly better quarterly revenue growth of 13% to Wells Fargo's 10%.
Possibly an even better name may be Glacier Bancorp (NASDAQ: GBCI), which has a little higher P/E at 15.08 (and a forward P/E of 12.81) but also has a 3.60% yield, which they just raised 8% on Nov. 29. It is a multi-bank holding corporation with 97 branches in Montana, Idaho, Colorado, Wyoming, Utah, and Washington. The company is headquarterd in Kalispell, MT. It's also larger with a $1.04 billion market cap.
Their profit margin is 24.22% and operating margin is 42.76% with a return on equity of 7.94%. The yield payout ratio is quite high at 54%. Another caveat is that the short float, while declining, is at 7.70% higher than most regional banks.
Drill Down Some More
The two most interesting names to me are Glacier and Wells Fargo, both of which are larger than the other names and both which have strong yields. Wells Fargo is a Buffett name and one which he has held for some time. It is a double play on housing in general as well as the Bakken. Glacier, while not as pure a play as BNCCCorp of North Dakota, is a much more stable bank and stock. Even without Bakken money, Glacier has been doing well. You may still prefer to invest in the Marcellus shale banks, which are purer plays as community banks in North Dakota and Montana are mostly averse to going public. This is just a starting point for your own due diligence in the world of shale wealth.
leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!