Investing in the Williston Basin

Money really isn’t that important. Is a guy with 50 million happier than a guy with 48 million dollars?” -Milton Berle.
Uncle Milty didn’t know it at the time, but he could have been talking about the wealth of leaseholders in the Williston Basin of North Dakota.

With the new estimate of technically recoverable oil in the Bakken Oil Formation, a $50 million dollar estate seems credible. Heck, 111 million barrels have already been pumped from the ground in the past 50 years in North Dakota and Montana. Even at a low average of $20 per barrel, that comes to a cool $2.2 trillion dollars.So, there’s gotta be a $50 million dollar estate in there somewhere.

Before the rest of us get all excited about “billions” of barrels of oil locked in Bakken shale,however, let’s temper our excitement with a dose of reality. If it’s true that excess supply causes prices to drop, then the Bakken announcement was a yawner in the oil markets. On April 8th, the day Bakken headlines appeared, oil closed at $108.78 per barrel. On April 22nd oil closed at $119.17.

Let’s put the announcement in perspective. At 3,649 million barrels of oil, if it is economically feasible and fully developed in the next 20 years, this entire field would provide the United States with the equivalent of about six months of oil consumption. EIA data shows the U.S. consumes 20.7 million barrels of oil per day.

While the United States Geological Survey (USGS)stepped up to announce the billions of barrels of oil technically available in the Bakken Formation, it has no idea how many barrels of oil will actually be economically recoverable. No one else does either.

But there are guesstimates out there from petroleum engineers. These assume modern practices of horizontal drilling and hydraulic fracturing technology. Without boring you to death, let me just say that we must include various geological variables such as permeabilities, porosities, natural fractures, etc. and how they release oil with the use of different pumping methods. Recovery studies predict a range of 4-5 times the current rate of production, or 500 million barrels.
Then there’s the matter of economics. Remote drilling isn’t cheap. Have you priced the cost of a 20-mile road lately? Oil is cyclical, therefore the industry is cautious with new investments.

After the ‘70s oil price peak, exploration companies were burned with too much capacity and too many expensive workers. Oil field labor is expensive. Specialists like geologists and petroleum engineers will be in short supply until high school grads see the high wages.

Certain areas of the Bakken field will yield only small quantities of daily production, making a $3-5 million dollar rig investment a poor risk.

Small players in the Bakken find: WLL, EOG, BEXP and CLR. Noble Energy (NBL) is a big player in oil field development in North Dakota. Noble’s dividends have increased every year since 2003 with a current dividend of 44 cents per share. NBL is a large-cap with a 28.8% profit margin. The company says 9% ofits investment for 2008 will be devoted to West Africa, the hot growth area for China’s resource demand.

Total oil volumes for the last quarter of 2007 averaged 200,000/bpd versus 185,000/bpd the last quarter of 2006. That’s an increase of $1,725,000 perday at $110 per barrel.

As British Petroleum (BP) left North Dakota,Tesoro Petroleum (TSO) picked up most BP assets. Refiners as a class have been in decline,because as the price of oil goes into the stratosphere, more investment money flows to exploration. Margins get tighter as the price of product increases. Investors expect consumption to drop as the price of gasoline goes up; therefore, refining capacity could grow, making refiners less efficient.

At a P/E of only 6.53, a risk taker could begin to fish for a bottom. There’s no doubt the CEO of Tesoro would like to find a bottom in TSO stock because he owns 1.77 million shares.

While we were traveling in China in 1999, we noticed that British Petroleum was building gas stations in areas that didn’t even have finished roads. BP pays a 4.7% dividend.

P.S. Has the parasite outgrown the host? Last week we learned that there are more U.S.government employees than there are employees in manufacturing.