Playing the Next Big Oil Rush: Part 1

Playing the Next Big Oil Rush: Part 1

Everyone knows about North Dakota, but what have you heard about the Niobrara? Whiting Petroleum posted great results from both plays, but investors should focus on Whiting Petroleum's plan for the Niobrara over the next few years.

Two simply isn't enough
At the beginning of October Whiting was running two rigs in the Redtail part of the Niobrara, but that simply isn't enough. Whiting recognizes that and plans on doing something about it. On November 4, Whiting is going to add an additional rig with plans to add two additional rigs in January and June of 2014, bringing the total to five.

Not only is Whiting going to complete more wells in the Redtail, but it plans on pumping out more per well. Whiting has pointed toward improved completion technology as to why the average production of its eight latest wells are producing ~20% more cumulative BOE per well at ~165 days of production versus a standard well.

Six out of eight of Whiting's newest wells are outperforming the traditional 400,000 boe total output with the average of those eight wells above the production curve. The new wells Whiting is bringing online are posting total cumulative levels of 450-500,000 boe, which is between 12.5% to 25% higher than the average. One thing to note going forward is that the Niobrara isn't the Bakken. In the Bakken peak production rates are hit within four to five days, while Niobrara wells don't peak until 30 days into production.

With Whiting's additional rigs it plans on bringing more and more wells online each year by completing its 1,650 net drillable locations in the area. By the middle of 2014, Whiting will have five rigs up and running, but that's just the beginning of the growth story. By 2016 Whiting plans on having 11 rigs up and running in the Redtail. In 2017 Whiting is planning on potentially adding another rig to keep up the growth.

Higher levels of output per well combined with many more wells coming online is going to produce some strong compounding growth. Whiting is focused on growth, no doubt about it. Whiting sold off $150.1 million in assets down in the Delaware Basin (the Permian Basin) to focus on the Redtail, and so far it looks like its paying off. The Niobrara growth story is just starting to unfold, and Whiting is one of many players capitalizing on America's next big shale play.

Whiting is a strong growth play worth looking into if you want limited risk with double digit output growth. Production growth is great, but remember that you need the infrastructure to get that output to buyers.

Nu pipeline
NuStar Energy L.P. has built the Niobrara Falls project, a pipeline that gathers crude oil from the Niobrara shale and transports it to Texas. Earlier this year the pipeline had the capacity to move 70,000-75,000 barrels of crude a day, but by the first quarter of 2014 NuStar wants to increase the pipeline to full capacity. Full capacity would be roughly 125,000-130,000 boe/d, which is an increase of 75%.

NuStar stands to benefit through higher levels of cash flow from the project, which can be used to build additional pipelines as market conditions dictate. NuStar isn't stupid, it sees potential in the Niobrara and plans to reward its unitholders through higher levels of cash flow from strategic investments.

It gets better, as NuStar's contracts extend from five to ten years. This is important to note because it provides at minimum five years of stable cash flow to invest back in the business. Companies in every sector have to be wary of fluctuating prices on a daily basis, but not NuStar. Stability is something that shouldn't be taken for granted. This is what enables the Niobrara to have an optimal risk-reward ratio, high levels of growth with limited risk.

Final thoughts
The Niobrara is a lesser known play when compared to the Bakken or Eagle Ford, but still offers plenty of growth. Whiting is a way to play the production growth while NuStar offers the necessary infrastructure to move crude oil (there is also plenty of NGL and natural gas in the area) out of Colorado to buyers.

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