Is It Time to Short the Bakken?


Questions about the Bakken's longevity are not hard to find. Shale oil wells usually decline 10% faster than shale gas wells, making a shale oil driller's income relatively volatile. There is a great deal of opportunity to be found by riding a boom on the way up and selling on the way down. The Bakken is still in boom mode, but by 2017 the amount of acreage available for new wells will have fallen substantially.

The boom-bust cycle
The oil market has always been prone to boom-bust cycles, and the Bakken is no different. A reservoir has a finite amount of resources. As time goes by there is simply less oil available for extraction.

US Crude Oil Production Chart
US Crude Oil Production Chart

US Crude Oil Production data by YCharts

Conservative investments in the Bakken
When investing in the Bakken you must ask yourself what sort of investment strategies you are willing to take. If you want a simple strategy where you collect a consistent dividend, then a large and diversified producer like Statoil is a good fit.

Statoil has been expanding its U.S. operations. In the second quarter it produced an average of 42 thousand barrels of oil equivalent per day (mboed) of liquids in the Bakken region along with 3.1 mboed of natural gas. The advantage of investing in the Bakken through Statoil is it gives you access to other growth plays like the Marcellus and Eagle Ford. Also, it recently discovered a field holding 300 million to 600 million barrels of oil off the coast of Canada.

Volatile Bakken plays
If you are looking to buy the boom, sell the bust, and follow quarterly production data very closely, then small producers would be a better fit.

Kodiak Oil & Gas is a small player with strong growth and substantial debt. While it produced an average of 1.3 mboed in 2010, it expects to produce an average of 30 mboed to 34 mboed in 2013. In order to help fuel this growth the company has brought its current total debt-to-equity ratio up to 1.31 and increased its diluted weighted share count from 104 million in 2009 to 268 million in 2012. Kodiak is a great way to play the Bakken boom given its focus on the formation, and its balance sheet makes it a good way to play the bust.

Continental Resources is another Bakken player with a high total debt-to-equity ratio of 1.12, but it is already starting to develop alternative plays. In Oklahoma it recently increased its net acreage to 277,000 acres in the SCOOP formation. While the formation's production of 17.6 net mboed is significantly less than the 88 mboed it produced in the Bakken in Q2 2013, it bodes well for the company that management is already moving capex outside the Bakken.

Continental's high debt load makes Continental more risky than Statoil, but Continental is a safer option than Kodiak. Continental's operations outside the Bakken are growing, and its diluted weighted share count has only increased from 170 million in 2009 to 182 million in 2012.

Whiting Petroleum is similar to Continental, but it sports a better total debt-to-equity of 0.61. Whiting's production is heavily oriented toward the Bakken. Its Rocky Mountain division contributed 75.6 mboed in Q3 2013, and its next biggest division with the Permian basin contributed 12 mboed.

Its reserve base is relativity diversified. At the end of 2012, only 51% of its proved reserves were in its Rocky Mountain region. Overall, Whiting is more like Statoil than Kodiak.

Bottom line
Is it time to short the Bakken? The industry estimates that there will be enough acreage to maintain production for another couple years, but by 2020 there is a good chance the situation will have changed.

Now is the time to read up on production decline rates and set yourself up to play the bust. If you want to play the boom and the bust, then Kodiak with its high debt load is a good company to watch. If you want a stable investment, then Statoil is a better option thanks to its diversified North American operations.

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Joshua Bondy has no position in any stocks mentioned. The Motley Fool recommends Statoil (ADR). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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