Author: Tyler Kocon, Split Rock Private Trading
Covestor models: Bakken Shale, Equity Rotation
In terms of unconventional domestic shale production, most common investors know only one name. It is the most prominent and recognizable domestic shale oil play across most of the country, and is one of the biggest words in terms of domestic oil production.
Investors have been plugging the Bakken oil field of Western North Dakota for years since the immense potential surrounding this newly discovered American resource was uncovered. Undoubtedly, the Bakken craze prompted hundreds of public and private oil companies to head to Williston and attempt to carve out some real estate in the basin in order to begin producing sweet crude oil from the shale formation below.
As the Bakken began to slowly fill up with operators, companies across the nation began seeking other areas in which to operate in a similar fashion. The discovery of the Bakken helped lead to the discovery of some of the other domestic shale plays harboring similarly immense potential.
More importantly, it is the incredible popularity of the Bakken shale that has led portfolio managers here at Split Rock Private Trading to believe that the attractiveness of the Bakken as an investment is beginning to wane.
Portfolio manager Tyler Kocon, who oversees operations on the Bakken and U.S. Energy Shale separately managed account has begun incorporating companies with significant exposure to other major U.S. shale formations; most notably the Eagle Ford shale in central Texas.
The Bakken will continue to be a formidable force in the world of American oil production for decades, however, we believe that the proverbial torch is ready to be passed in terms of short term growth potential to an alternative play like the Eagle Ford in the near future. This is why.
The overall population boom in the areas surrounding Bakken production in the Williston basin may be a limiting factor for companies looking to expand their production. We have overheard several company directors reference the congestion in surrounding areas negatively affecting their operations by slowing delivery times, and delaying resource transitions into or out of the Williston basin area. The Bakken craze has overwhelmed the infrastructure of the area and operators are feeling some of the hurt.
The influx of drilled wells into the Bakken is squeezing space and requiring oil producers to continue to push the needle towards higher production rates for every well they drill. This is forcing operators to drill longer laterals and institute more fracturing stages in order to raise production numbers.
This inevitably raises the costs of Bakken wells to new heights, in some instances as high as $12 million a well. We have heard several large exploration and production companies that are operating in both shale locations discuss the rising price of wells in these regions because of a shortage of guar gum and preferred silica sand.
On the other hand, Eagle Ford producers are able to do more with less expense. The Eagle Ford shale includes a much larger pay zone, and the greater porosity of the shale means that less fracking is ultimately necessary. These lower costs have reduced total well costs in the Eagle Ford to a range between $6 and $8 million per well.
One of the most concerning factors about the oil production in the Bakken is the infrastructure that has been established to transport the resource to areas that can put it to use. As recently as last month, the Governor of North Dakota was quoted essentially pleading with pipeline companies to build more pipelines to help transport these valuable resources to areas that can use them.
Areas like the Gulf Coast are where a large portion of the nation’s refineries are located. Truth be told, the oil in the Bakken is relatively landlocked in the center of the continent, and the only way to move the oil to the refineries that need it is by rail or pipeline, both of which are severely underdeveloped.
The Eagle Ford on the other hand is conveniently located in the wheelhouse of the refineries located across the Gulf. The lower the transport costs, the higher the profit margin that the operators are able to realize per barrel as they sell their oil stockpiles.
Regardless of what shale play may be the best producing, lowest cost, or easiest to transport oil from, there are several different ways that Split Rock Private Trading has decided to play the landscape.
In previous research articles, Split Rock detailed some positions established in derivative companies using the Bakken and Eagle Ford to their advantage. Recently, portfolio manager Tyler Kocon added the second largest silica sand producing company in the nation to the Bakken and U.S. Energy Shale separately managed account.
Silica sand is an extremely important ingredient in hydraulic fracturing, and this company’s mix of locations and resources allow them to provide their services to companies in both the Bakken and the Eagle Ford. This position sets the portfolio up well for whichever way the growing shale oil industry develops.
The Bakken will still remain a viable source of domestic oil production for many years to come, but the time may have come for the Bakken to take a step back and let the next generation of shale plays take the limelight.
