2 Reasons to Add This Bakken Producer to Your Portfolio

It's an investment bonanza in North Dakota! Just last week, the region's top oil regulator predicted that production in the state will double to 1.6 million barrels per day, or bpd, by 2017. That's probably something most investors didn't anticipate five years ago. 

But you can't talk about North Dakota without mentioning Continental Resources . This was one of the first companies to drill in the Bakken over 20 years ago and is the No. 1 leaseholder in the region. As the leading operator in the play, here are two reasons to consider adding Continental to your portfolio. 

1) They're rockin' the Bakken
Last quarter, Continental posted some truly incredible numbers. The company's average daily production jumped 12% over the previous quarter and 43% year-over-year. Since the start of the year, Continental has grown proven reserves 17%. Additionally, the company's production mix is skewed toward oil which now accounts for 71% of output. Exactly what you want to see from a company in a era of low natural gas prices. 

But while top-line growth steals the headlines, Continental is also the low-cost drilling leader. On average the company spends $8.3 million to complete each well and has recently hit its target for drilling wells for $8 million months earlier than it had expected. Yes, that figure is high compared to conventional wells and other shale plays like the Eagle Ford. But that metric compares favourably to other Bakken producers which spend upwards to $8.5 million and $9.5 million per well. 

More importantly those cost metrics are expected to decline futher. In the past year Continental has been able to save $1 million of average well completion costs. Management expects to shave another $300,000 off this figure by year-end driven by the falling cost of fracking services, the transition to pad-drilling, and other efficiencies.

All of this translate into big cost savings. When you multiply the 300 net wells the company is expected to complete in 2014 by $1.3 million in cost savings on each well, Continental will pocket an additional $390 million over the next year. That's a pretty substantial figure when you consider that the company generated $1.6 billion in cash flow from operations last year. It's still a long way from closing Continental's funding gap, but cost savings will have a big impact on the firm's cash flow. 

2) The best has yet to come
Yet in spite of these impressive statistics, the company's best days might still be ahead. Based on the latest figures from the United States Geological Survey, the Three Forks formation could hold more oil than the Bakken shale that lies above it. According to the report, the Bakken contains 3.65 billion barrels of undiscovered, technically recoverable oil. That's just short of the Three Fork's 3.73 billion barrels reserve figure. Those estimates are conservative and could be revised higher as technology improves.

Other Bakken producers are exploring the Three Forks, and initial results are exciting the industry. Last quarter, Kodiak Oil and Gas  completed six pilot wells with initial production rates between 1,204 barrels of oil equivalent per day, or boepd and 3,482 boepd. These figures definitely suggest that the play could be viable. But while early numbers are encouraging, management cautioned that more testing is needed.  

Oasis Petroleum  plans to drill 20 Three Forks wells outside of Indian Hill and South Cottonwood as it maps the play's viability. The company is currently evaluating core and sample logs from six pilot wells and results are expected to be published later this year.  

As Continental and other operators like Kodiak Oil & Gas and Oasis Petroleum explore and de-risk the Three Forks formation, it could boost the company's own recoverable reserves. That could be a hidden catalyst for the stock.

Foolish bottom line
Is this thesis bulletproof? Of course not. Continental Resources is the most expensive of its peers on most valuation metrics, and the market is expecting big growth numbers to continue. But I would argue that's it's worth paying up for a best of breed company like Continental, and the firm still has plenty of room for upside surprises. 

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The article 2 Reasons to Add This Bakken Producer to Your Portfolio originally appeared on Fool.com.

Robert Baillieul has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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