Initial Thoughts on the NDIC November Dockets

This photo is part of the series of photos sent from a reader taken in the Williston area. Note the little figures with two legs which will give you an idea of how big these rigs are. Note two cranes on site. My understanding is that the largest crane operator west of the Mississippi is in the Bakken. I could be wrong on that.

Initial Thoughts on the November Dockets

A reader asked about my thoughts on the November dockets. This was my reply, unedited (for the most part) and off-the-cuff, in line with how I've described this blog in the "welcome" and "disclaimer."

I've posted my usual summary (I post it to ensure that I actually read every entry; otherwise, if rushed, I might just skim through it.)

http://www.milliondollarwayblog.com/2012/11/ndic-hearing-dockets-november-2012.html

My initial thoughts, regarding the November dockets:

• fairly "empty" of the type of cases we used to see when the Bakken exploded (figuratively speaking, of course): not so many entries on permitting, expanding fields, etc.
• BR is taking the lead in 2560-acre spacing; I don't know if this is peculiar to BR's thinking regarding the economics of a Bakken well, or if it's related to the location of their properties
• it was notable to see no mention of OXY USA or Newfield; of course, many others were also missing
• CLR's 14 wells in one 1280-acre spacing unit in Divide County was very, very interesting
• it was exciting to see Oasis look to add 23 1280-acre spacing units to the Cottonwood, and anticipating 8 wells on each unit
• but this case was even more interesting: Slawson's 5 wells on a 640-acre unit; and then this: EOG's 6 wells on a 320-acre unit in McKenzie County

If we really start seeing 6 wells on 320-acre units in the sweetest spot(s) of the Bakken, that will be a game changer, and should merit a fair amount of press. [See update: it is likely that 6 wells on 320-acre units will be rare; there are very few existing 320-acre spacing units.]

A lot of the cases were continued cases regarding redefining stratigraphic limits. I have talked about this subject and probably won't talk about it here in reference to the dockets, except to note it. Mineral owners and oil companies obviously see this issue very differently.

A lot of cases on pooling which never interest me because I am not a mineral owner. I'm more interested in the potential of the Bakken and how the Bakken is developed.

So, the big story is really about stratigraphic limits, and continued move to more wells/spacing unit, with 1280-acre units being the norm, and BR taking the lead on 2560-acre units.

But really not much else to say.

Commentary

For the record (I have posted this before): the MDW blog has fulfilled its goals (there were two).

I will continue to post active rig counts, IPs, daily statewide production, etc., but none of this really matters to me any more. From my perspective, the Bakken is now in the hands of the politicians and the bean-counters back at oil company headquarters. I have a good feeling for what the Bakken potential is, and I have a good feeling for how it is being developed. Politicians will be influenced by their constituents and money; the bean-counters will develop the Bakken based on the economics of "a Bakken well." Just 'cause a well can produce 1,000,000 bbls EUR, the boss isn't going to do it if it doesn't make money.

I suppose if anything interests me now is how much more money will be poured into the Bakken on an annual basis in terms of new oil services coming in to the area and existing oil services expanding.

These are the new metrics: a) permitting; b) takeaway capacity; c) infrastructure dollars (all dollars minus direct costs associated with drilling/completing wells). (I may add others.)

In the short term (three days, unless we have weeks, months of recounts, chads, court battles), we have the "Romney cliff" to navigate. Big changes in the Bakken hang on who "wins" the presidency. ("Winning" seems to be the wrong verb.)

In the near term, but not the 3-day short term, we have the "fiscal cliff" to navigate. That could result in some year-end deals, but it almost seems we are near that deadline. Perhaps there are "tons" of year-end deals ready to go/not go depending on the election outcome. It's possible, with one election outcome, we will never learn of those potential deals.

By the way, for investors, and this is not an investment site, there is a very interesting article on page B1 of the weekend edition of the WSJ: how practical is 'tactical'? I never thought I would see this:

The classic "balanced" portfolio favored by prudent investors—60% in stocks, 40% in bonds—is up 11.2% over the past 12 months and 10.4% annually for the past three years.

Over the past decade, this no-brainer portfolio earned 6.3% annually. Even over the past five years, as stocks barely got back to where they stood before the financial crisis, a buy-and-do-nothing investor gained an average of 2.8% a year—thanks to the strong returns on bonds.

Even so, investors have flung money at tactical funds. These portfolios don't place bets on stocks, bonds or other assets and let them ride. They trade in and out, seeking to earn positive returns as markets go up and to limit losses when markets go down. If buy-and-hold investors are tortoises, tactical funds are hares.

And that's why I've never wavered in building part of my portfolio by dollar-cost averaging the majors (for example, XOM, COP, CVX). Locally, MDU is very, very interesting. I don't hold any shares and won't be buying any shares in MDU in the near future -- I always love those disclaimers -- as if one person buying shares in a company is going to make a difference -- unless that person is a "Warren Buffett" or an "icon." (As in Carl "Icon.") But I digress. For conservative investors interested in the Bakken, MDU may be exciting company to watch, even if not investing in it. One will learn a lot about the Bakken (and perhaps the national economy) based on what MDU does the next couple of years.

[This is a hoot: in preparation for the next segment, I googled XOM and this popped up: http://seekingalpha.com/instablog/783565-turnkeyoil/1188681-warren-buffett-and-carl-ichan-are-investing-in-fuel-refiners-vlo-xom-cvx-mpc-mur-hes-mro-cop-oxy -- how coincidental, with an October 18, 2012, byline.]

Which reminds me: it's not getting any easier to find and produce oil:

ExxonMobil’s strength is in its balanced operations, strong financial flexibility and continuous improvement on efficiency and cost control. The company’s efforts to build an unconventional resource portfolio both in North America and overseas aims at increasing production through increased exposure to large energy resources with long reserve life and low field declines. Despite the collapse in natural gas prices, ExxonMobil expects unconventional gas to play a dominant role in future supplies owing to the rapid decline in conventional production.

Recently, its Canadian unit − ExxonMobil Canada − agreed to acquire Calgary-based oil and gas driller Celtic Exploration Ltd., in a move towards expanding its footprint in the unconventional energy plays in North America.

Again, in September, the company and its subsidiary, XTO Energy Inc, entered into an agreement with Denbury Onshore, LLC, a subsidiary of oil and natural gas company Denbury Resources Inc., to acquire all of Denbury’s Bakken shale assets. The deal will increase its production in the Bakken oil shale region.

However, we remain skeptical due to the company’s continued disappointing production trend, which decreased for five quarters in a row. We see ExxonMobil struggling to grow production volumes over time.

By the way, I don't think the XOM-DNR deal was as much about XOM looking for more unconventional production as it was about DNR looking to get back to its core competency.

And, as abruptly as going over a fiscal cliff, this post comes to an abrupt end. Again, remember, this is not an investment site. The writer has no background in the oil and gas industry.