Opportunity Knocks a Third Time in the Bakken

Idle rambling on a Friday night. Perhaps the video at the bottom of this posting is more accurate than all I write.

For newbies:

• I'm irrationally exuberant about oil.
• I often extrapolate from a few data points seen through rose-colored glasses.

The first data point from which I will extrapolate:

the fact that a pure-play Bakken company can announce that it is going to dilute its outstanding shares by issuing another twenty percent (20%) of common shares AND then see the share price rise. Generally, when new shares are issued, the price of existing shares goes down.

Earlier this week NOG announced that it was going to issue about ten million new shares, equivalent to about twenty percent of their outstanding shares. The price of oil also dropped from $88 to $81 fairly quickly over this same time period (one week).

One would have predicted that the price of a share of NOG would have dropped significantly. In fact, NOG was near its 52-week high by the end of the week, and the new shares will be priced at the high end. And not only that, it appears that the offering will be oversubscribed, and NOG will end up issuing additional shares.

A second data point: Whiting has been granted about twenty new permits in the past month in Stark County, a county that has previously seen very little activity. We learn this past week about a "new" formation that extends into Stark County. I'm sure the oil companies knew about this a year ago.  (There have been 38 permits issued for Stark County in 2010; all but 17 are Whiting permits. Almost all of the ones issued this autumn have been for Whiting.) Whiting's "Lewis and Clark" prospect in southwestern North Dakota is likely to have two times as much oil as all the rest of Whiting's holdings in North Dakota, and Whiting has some excellent acreage.

A third data point: despite all common sense dictating it was not possible due to lack of infrastructure and personnel, the number of active rigs hit a new record this week, 160. North Dakota entered 2010 with 95 rigs; it will exit 2010 with 160.

So, where am I going with all this?

The North Dakota Bakken saw some initial activity in 2006. There was a spurt of activity from 2006 to 2008. Then a plateau. Another spurt of activity began in 2009 and went into 2010. Now, it appears we are in the midst of another spurt which will carry into 2011. I don't know how accurate those time periods are. To me, they are not important. What is important is the sense that the Bakken offers investors multiple and repeating opportunities. I missed the first opportunity but I was lucky enough to start investing during the second opportunity. Barring some major geopolitical event (EPA regulating fracking; oil plummeting to $40/bbl; a second, more severe recession), it's hard to see that we aren't at the beginning of another spurt of activity.

• 160 rigs. 
• Companies doubling their drilling programs. 
• Price of oil trending up. 
• Fifteen new permits in North Dakota on a daily basis this past month, doubling the norm. 
• Pipeline companies doubling down. 
• Fortune 500 companies moving in (XOM buys XTO; WMB buys seven percent of the reservation; Hess buys American). 
• A "new" formation announced.
• ERF and WMB paying up to $10,000/acre in the Bakken in the past month or so.
• $10,000/acre. In 2006, some of these acres were being picked up for less than $500/acre.

Investors who got in in 2006 were very lucky. But those who did not, got a second chance in 2009, maybe early 2010.

Right now, I think investors are being given another chance before another spurt. Every company in the Bakken Market Basket was up today (except two) and they were all up yesterday and this was after oil had fallen to near $80 before holding and turning back up.

Almost every Bakken operator has talked about increasing their 2011 capital expenditure (CAPEX) program (more drilling). And it's not just talk. Ninety-five (95) rigs ten months ago; now 160 rigs. Top line revenues are going to be setting records in 2011 (assuming the price of oil stays above $70); bottom line earnings per share may in fact be lower; it costs a lot of money to drill these wells, but long term investors know this will eventually take care of itself. Farmers are in arrears in the spring when they plant their seed corn; but they make it up in the autumn. Likewise, I assume it's going to be a very expensive year for drillers in 2011; it's their spring. But by 2012, investors will look back and realize they had three opportunities to invest in the Bakken since this boom began.


A Fool Such As I, Hank Snow
Perhaps, I, too, am a fool over the Bakken. Christopher Hitchens tells us we have to choose our future regrets. I would rather regret I was a fool over the Bakken and took advantage of the opportunity than to regret that I missed an opportunity of a lifetime.

Opportunity, they say, knocks once. Opportunity is knocking yet a third time for Bakken investors.