Bakken Boom Pumping Profits into “Pipelines on Wheels”

David Fessler
by David Fessler, Energy & Infrastructure Strategist, The Oxford Club

Bakken Boom Pumping Profits into “Pipelines on Wheels”

by David Fessler, Investment U Senior Analyst

Tuesday, December 13, 2011: Issue #1663

Around the end of the Civil War, many soldiers looked to return home by hitching a ride on a freight train. Others, looking for work, hid in freight cars headed westward in the late nineteenth century. They became known has "hobos."

But these days, hopping a freight train in North Dakota, especially in the dead of winter, would be a death knell for a hobo. That's because all the cars are tankers, loaded with crude. There's no place to hide from the cold. They're all headed south, delivering oil to refineries along the Gulf Coast.

Most investors in the energy sector are thoroughly familiar with the "Bakken Boom." The Bakken formation is a 25,000-square-mile chunk of oil- and gas-bearing rock that underlies part of North Dakota, Montana and Saskatchewan.

It's responsible for the revolution in shale oil and shale gas that's taken the area by storm over the last few years. It's the primary reason North Dakota's overall unemployment rate is a whopping two percent. That's less than a quarter of the national average.

Estimates for how much oil the Bakken contains vary. According to North Dakota's Geological Survey, up to 169 billion barrels of oil may lie trapped within Bakken shale. That would run the entire country for over a decade at present usage rates.

The oil- and natural gas-bearing rock is an average of 150 feet thick. However, it can be as thin as fifty feet in some places. Oil and natural gas were discovered here way back in the 1950s.

It proved impractical to extract either, mostly because they were tightly trapped in the thin layer of shale rock that makes up the Bakken formation.

But horizontal drilling and hydraulic fracturing changed all that. Drilling companies are able to drill down to the oil- or natural gas-bearing layer, turn the drill bit, and then follow it for miles.

Once the well is completed, the surrounding rock is hydraulically fractured, and the cracks are propped open. This allows oil and gas to flow out of the well to the surface.

These two processes have completely changed oil and gas drilling in the United States. Nowhere is that more apparent than in the Bakken.

The "Bakken Boom" is responsible for the quadrupling of North Dakota's oil production since 2005. Take a look at these charts from the EIA. The data is based on information from the North Dakota Department of Mineral Resources.

north dakota oil chart

This past September, the state's oil production averaged over 460,000 barrels per day (bbl/d). That's nearly five times September 2005 levels. Oil production has increased to the point where North Dakota oil production is only surpassed by Alaska, Texas and California.

But the Bakken is just beginning to be exploited. Just over 200 rigs are currently drilling there. Projections are for at least 10 more by the end of the year, according to a study undertaken by the Associated Press.

No Way Out

All that drilling has created a backlog on the back end of the process. North Dakota Department of Mineral Resources (DMR) data currently indicated there are over 350 drilled wells awaiting fracturing services.

As more and more wells are fractured, oil production will continue to increase. The DMR is forecasting an oil production jump of 100 percent to as much as 750,000 bbl/d by 2015. This is higher than the 700,000-bbl/d estimate it gave earlier this year.

There's just one problem: There isn't enough pipeline capacity to get all this oil out of North Dakota. The proposed BakkenLink Pipeline, which will connect up to nine terminals to the big TransCanada Pipeline, won't be completed for at least two years.

The Keystone Pipeline, designed to haul crude from the Alberta oil sands and transport it south, was also supposed to pick up crude from the Bakken.

It's also "under review" by the EPA, and won't be addressed until after the 2012 elections. This will eventually get approved, but right now it's a political football being used by the party in power to garner votes. Bad idea…

All this pipeline posturing presents a golden opportunity for the freight transportation method that's been a mainstay of the United states for well over 100 years: railroads.

Keystone Pipeline Delay Spells Opportunity for Railroads

Even when these pipelines get approved, it will take years to build them. The Keystone is 2,000 miles long. That means railroads will be the transportation method of choice for years to come.

Hess Corporation (NYSE: HES), one of the operators developing Bakken acreage, understands this all too well. This year, it's spending a big chunk of the $1.6 billion earmarked for its Bakken operations on a new railroad loading terminal and storage facility.

When completed, Hess will be able to ship 130,000 barrels a day via rail. The company has plans to triple its Bakken shipments in the next five years to over 80,000 barrels per day from its current level of 25,000.

With pipelines on hold and oil flows continuing to rise at record rates, railroads servicing the Bakken are sitting on a cash cow for the foreseeable future. Investors might want to consider using dips in the market to pickup shares of any of the three companies mentioned to our premium Investment U Plus subscribers.

Good Investing,

David Fessler

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Three Big Rail Operators Cleaning Up in the Bakken

In today's issue, David Fessler writes about how rails are profiting from the lack of oil and gas transportation in the Bakken region. In the spirit of the holiday season, David offers not one, but three companies that are capitalizing on this opportunity.

First, David likes the prospects of Canadian Pacific Railway (NYSE: CP). According to him, Canadian Pacific is "in the middle of a $100-million investment to expand its operations in the Bakken between 2010 and 2012. Track upgrades and increased capacity is top on its list of priorities. Like many railroads operating in the Bakken, it’s seeing inbound shipments of pipe, sand and fracking chemicals."

Second, David told us about Canadian National Railway (NYSE: CNI). CNI is another big operator in the Williston Basin. According to David, "it claims 60,000 barrels per day of crude carrying capacity out of the area on its rail network."

Finally, David told us about one of his biggest winners already - Union Pacific Corporation (NYSE: UNP). Dave first recommended Union Pacific to his readers in The Oxford Club’s monthly Communiqué in September of 2010. Since then, its stock has gained over 37 percent and its P/E is still well under 20. He doesn’t think the run is over for Union Pacific, either.

He told us that UNP recently reported "it expects to triple its 2011 Bakken crude shipments from last year to 16,000 carloads. It reported a 15-percent jump in revenue in its Industrial Products division in just the first quarter of 2011. Most of that growth was fracking sand (increased 25 percent) and drill pipe (up 15 percent)."



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