Betting on the Bakken, America’s newest oil craze

Author: Tyler Kocon, Split Rock Private Trading

Covestor model: Equity Rotation

Disclosure: Long EOG, KOG

Is there buried treasure in your back yard? There could be if you live in northern North Dakota or Montana. There could be a giant reserve of oil flowing right beneath your feet, and there are plenty of people who would love to pay to get their hands on it. So where in North Dakota and Montana are we talking about? The Bakken Shale formation: a subsurface rock formation that occupies around 200,000 square miles of the Williston Basin.

The Bakken is the largest domestic oil discovery since Alaska’s Prudhoe Bay and could have the potential to significantly lessen American dependence on foreign oil. How much oil are we talking about? No one really knows for sure, but the estimates keep growing. Initially experts thought that the Bakken could contain somewhere between 2-4 billion barrels of oil. That number has been ratcheted up many times, and in the last three years the estimates have grown as high as 24 billion barrels (according to Continental Resources (NYSE:CLR) President and COO Jeff Hume).

Today North Dakota produces over 350,000 barrels of oil per day. Some estimates have output reaching 600,000-800,000 barrels per day in the not so distant future.

What does all this mean for America? It is tough to say. At the very least, our dependence on foreign oil could start to decrease. Plus, new jobs in these areas are being created at a rapid rate as companies drill new wells and ramp up production. North Dakota State University estimates the oil workforce has gone from 5,000 employees in 2005 to over 18,000 in 2009. Some estimates state that North Dakota could employ over 100,000 people in the oil industry if production hits a million barrels per day.

So what’s stopping us from hitting a million barrels a day? One of the major obstacles in the Bakken oil arena is moving the oil. With the current infrastructure, it is difficult to move oil out and pipelines will need to be built in order to accommodate this. Pipelines take time and money to build, but that doesn’t mean that they won’t be built. Another possible obstacle in the region is related to the impact that some say extracting this oil will have on the environment. Oil companies have to convince the public that fracturing (“fracking” – the technology they use to get the oil out of the ground) is safe.

Even with these challenges in place, many companies are taking huge bets on Bakken oil and feel that we have barely seen what North Dakota and Montana have to offer.

Perhaps the most important question for us is, “how might investors benefit from Bakken oil?”

There are many ways to approach it. You could invest in a company drilling and extracting the oil from the ground. You could invest in companies that are exploring for more oil. You could invest in manufacturers of the equipment used to retrieve the oil. You could put money into the railroads being used to transport the oil out of there. You could even invest in the forward-looking companies that are building pipelines and preparing themselves to get into the Bakken game. Depending on how indirectly you are willing to gain exposure to the Bakken, there are probably many more ways to invest.

Currently we hold long positions in EOG Resources (NYSE:EOG), a large player in the Bakken shale and one of the largest land owners calculated by acreage owned, and Kodiak Oil & Gas Corp. (NYSE:KOG). We feel that KOG, a small company with a total market cap under $1.5B as of 10/1, has the potential to grow at an extremely rapid pace due to their heavy exposure to Bakken oil. We believe it is much more likely that a company as small as KOG could double or triple its production than a huge company like Exxon Mobil (NYSE: XOM) could.