Back to top

Image: Bigstock

North Dakota Production Up in July: Will the Gain Last?

Read MoreHide Full Article

As per North Dakota’s oil regulator, the state’s daily crude output rose 1.4% in July after dropping 0.8% in the previous month. The North Dakota Department of Mineral Resources’ ("DMR") latest data said that oil production in July averaged 1,047,526 barrels a day, up 14,653 barrels a day from June.

Along With Oil, Gas Production Rises Too

Reflecting a healthy increase and trumping expectations, the newest numbers confirm the resurgence in volumes extracted from North Dakota, centered on the Bakken Shale formation. As daily output remained above 1 million barrels for the sixth month in a row, the state’s total number of producing wells numbered 13,981 at the end of July, a new all-time high.

Interestingly, natural gas output was up 1.3% in July to 1,876,460 thousand cubic feet per day – another record – as operators scrambled to the core areas of the Bakken where wells tend to produce more gas along with crude.

Despite the Increase, Production is a Shadow of Earlier Highs

Churning out as high as 1,227,483 barrels/day in December 2014, the current production statistics highlight oil’s horror show that has seen prices come down from $110 per barrel in mid-2014 to around $50 now, in between falling to a 12-year low of $26.21 in February 2016. The commodity’s collapse has fueled spending cuts and layoffs while threatening the industry’s creditworthiness by hurting cash flows, drying up liquidity and narrowing profit margins.

Rig Count Clawing Back Steadily

Some 58 drilling rigs were active in the state in July, up from 55 in June and 50 in May. The all-time low of 27 was set in May 2016, while a year ago, North Dakota had just 31 rigs operating. A closely watched yardstick of North Dakota oil industry's strength, the steady rise in the number of units searching for oil and gas in the region indicates increase in drilling activities and essentially steady production. Notwithstanding recent gains, the rig count is still down considerably from the peak of May 2012 when North Dakota had 218 units drilling.

Increase in Wells, Rig Count Supported by Enough Fracking Crews

Even as the rig count in North Dakota continues to rise and the number of producing wells in the state reach record highs, production was being stymied recently by the lack of hydraulic fracturing crews. However, the situation seems to have improved now.

At present, there are around 24 or 25 frack crews in the state, sufficient to complete wells and keep pace with the rig count.

Shale Industry Caught in a “Catch-22” Situation

While more rigs in operation and stable production could be construed as positive developments for the state of North Dakota, the current oil prices of around $50 will render a lot of drilling as unprofitable. And at the crux of the matter is the rising flood of U.S. shale-driven production.

Now at a financial equilibrium, the shale firms are putting more rigs and employees back to work. Throughout the downturn, producers worked tirelessly to cut costs down to a bare minimum and look for innovative ways to churn out more oil from rock. And they managed to do just that by improving drilling techniques.

With these efforts, many upstream companies have repositioned themselves to adapt to the new $50 oil reality and even thrive at those prices. In other words, while OPEC's moves to trim output and rebalance the demand-supply situation has stabilized the market to a large extent, in the process it has incentivized shale drillers to churn out more.

Therefore, the U.S. shale (including the likes of North Dakota and particularly the Permian Basin in Texas) is perhaps the biggest reason why crude prices are floundering again.

What Lies Ahead?

As one can conclude from the above discussion, the improvement in July production does not mean much with the oil bust now anticipated to last through this year and well into 2018. While the monthly output in the second-largest oil producing state after Texas is expected to stay above the psychologically important one million barrel a day mark for the time being, there are chances that volumes could fall below that figure if prices revisit the $45-a-barrel level.

Dakota Access Pipeline: Can It Revive Production?

While the oil weakness is expected to persist at least till the first half of 2018, there is one factor that might speed up the revival of Bakken output – the 1,100-mile-long Dakota Access Pipeline.

Making good on his campaign promises to rev up infrastructure spending, President Trump ignored bitter opposition from environmental activists and signed executive order to smooth the way for Energy Transfer Partners L.P.’s (ETP) $3.7 billion Dakota Access Pipeline just a few days into his new Administration. As a result, disregarding the censure from environmental groups and the Standing Rock Sioux Tribe, the sponsor brought the controversial conduit online in early June.

With the project’s arrival, operators have scrambled to use the Dakota Access Pipeline to send a major portion of their product to market. In fact, around 78% of oil shipments out of North Dakota are now being carried by pipelines, with the costly railroad share dropping from over 24% earlier in 2017 to less than 10%.

Market players believe that the pipeline has helped in bettering the region’s drilling economics by lowering transportation costs for operators. Set to carry about 500,000 barrels of oil daily, or more than 50% of North Dakota’s output, the commencement of the Dakota Access Pipeline has bridged the gap between Bakken players and producers in other U.S. oil producing areas like the Williston and Permian basins.

This, industry observers hope, will set the ball rolling for Bakken’s production revival and help producers like Continental Resources Inc. , Whiting Petroleum Corp. , EOG Resources Inc. (EOG - Free Report) , Hess Corp. (HES - Free Report) , Marathon Oil Corp. (MRO - Free Report) , QEP Resources Inc. , SM Energy Co. (SM - Free Report) .

Will You Make a Fortune on the Shift to Electric Cars?

Here's another stock idea to consider. Much like petroleum 150 years ago, lithium power may soon shake the world, creating millionaires and reshaping geo-politics. Soon electric vehicles (EVs) may be cheaper than gas guzzlers. Some are already reaching 265 miles on a single charge.

With battery prices plummeting and charging stations set to multiply, one company stands out as the #1 stock to buy according to Zacks research.

It's not the one you think.

See This Ticker Free >>

Published in