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North Dakota Oil Production Falls, Growth Likely to Moderate

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As per North Dakota’s oil regulator, the state’s daily crude output fell 1.2% in November after hitting the highest level on record in the previous month. The North Dakota Department of Mineral Resources’ (‘DMR’) latest data said that oil production in November averaged 1,375,803 barrels a day, down 16,566 barrels a day from October. The drop was due to the onset of winter, lower oil prices and voluntary reduction to control flaring.

Like crude, natural gas output went down too – from October’s all-time high of 2,561,988 thousand cubic feet per day to 2,522,875 thousand cubic feet per day. Meanwhile, North Dakota’s total number of producing wells tallied 15,237 at the end of November, down from its October record of 15,352.

Drilling Activity Remains Strong

Despite the monthly drop, the newest numbers showed that daily crude output remained above one million barrels for the 22nd month, further confirming the status of North Dakota (centered on the Bakken formation) as one of the hottest shale plays in the United States.

As a proof of the region’s healthy drilling activity, some 67 rigs were exploring in the state in December, up three from the November average. The drilling rig count increased further to 68 in January. The all-time low of 27 was set in May 2016, while a year ago, North Dakota had 56 rigs operating.

Dakota Access Pipeline: Capacity Almost Full

Apart from the robustness in oil prices, there is another factor that helped to speed up Bakken output growth – the 1,170-mile-long Dakota Access Pipeline. Energy Transfer L.P.’s (ET - Free Report) mega project has a capacity to carry about 520,000 barrels of oil per day (or more than 50% of North Dakota’s output). The conduit has successfully bridged the gap between Bakken players and producers in other U.S. oil-producing areas like the Williston and Permian basins.

The geographically constrained Bakken Shale's crude has now better access to Gulf and East Coast refineries and also reaches international markets. The pipeline, where energy majors like Phillips 66 (PSX - Free Report) , Enbridge Inc. (ENB - Free Report) and Marathon Petroleum (MPC - Free Report) have invested, has helped to improve the region’s drilling economics by lowering transportation costs for operators.

Moreover, the pipeline’s service has bolstered the revival of Bakken output, with large operators like Oasis Petroleum Inc. (OAS - Free Report) counting on the Dakota Access Pipeline to send a major portion of their products to market.

But with the pipeline’s spare capacity vanishing rapidly amid high demand, there is a need for infrastructure that can allow for the movement of more oil. A potential expansion of the Dakota Access Pipeline and the proposed Liberty Pipeline, which will provide opportunity to shippers to secure transportation service from the Bakken production areas to Corpus Christi, TX, are touted as solutions.

While the Dakota Access expansion is likely to augment the pipeline’s capacity by 50,000 barrels per day, the Liberty pipeline will have an initial throughput capacity of 350,000 barrels per day and is expected to start operations in another two years.

What Lies Ahead?

Oil prices have recovered some ground after plunging to a 17-month low of $42.53 a barrel on Christmas Eve but the commodity is still down more than 30% from four-year peak in October. At the same time, worries about weakening demand for crude points to soft fundamentals. Even the OPEC-led supply cuts look unlikely to end the market surplus soon.

With oil prices unlikely to move much beyond $50 per barrel in the near term, oil volume in North Dakota is expected to experience muted growth as producer profits remain under pressure. Winter weather and road restrictions in the coming months will also put brakes on the region’s breakneck activity.

While the North Dakota oil growth engine could stall for the time being, production is nevertheless expected to remain robust.

Though a number of companies have built sizeable acreage positions in North Dakota, we have shortlisted two of them – Hess Corp. (HES - Free Report) and Marathon Oil Corp. (MRO - Free Report) – that might warrant attention. Both carry Zacks Rank #3 (Hold) and own sizeable positions at the core of the Bakken shale play of North Dakota.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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