Crude oil production coming out of the Bakken has been one of the great growth stories of the past few years. However, there are signs that the story might be slowing down just a bit. Let's drill down into this topic to consider if this great growth story is really slowing down or if it's just gearing up for another run.
In the peak of its growth, the Bakken's production was growing at an average monthly rate of 20,000 barrels per day. However, that growth rate has been cut in half in the past six months, as overall production has only grown by 53,000 barrels per day over that time frame. Last November, production actually dropped by 2% over the prior month.
There are a variety of factors which contributed to this production slowdown. The question is if its temporary or a sign of things to come. For example, just as retailers are known to blame the weather for a drop in same-store sales, the weather is being blamed for the Bakken's production drop last November when heavy snow hit the region. While weather likely played a role in keeping production at bay, there are other factors at play, and topping the list is the industry's uphill battle with decline rates.
Bakken oil wells, according to Core Laboratories (NYSE:CLB), which helps oil companies optimize oil and gas reservoirs, can see production declines of about 40% in their first year. According to the company, further production declines of 25% can happen in the second year, which means oil companies need to keep drilling just to keep production flat. That's why on Core Lab's last quarterly conference call, CEO David Demshur noted that exploration and production companies "have a large hurdle to make up outside of the sweet spot if we're going to continue to get significant production growth in the Bakken." The company has also gone on record saying that it doesn't believe that the Bakken will hit the production growth target of 1.5 million barrels of oil per day by 2014. Given its deep knowledge of oil reservoirs, it's a comment not to be taken lightly.
A more recent consideration which could keep production growth at bay is that the price of U.S. benchmark WTI crude oil has been drifting below $90 a barrel. If oil falls a lot more then it would prove to be a disincentive for companies to drill in the Bakken. Investors are keenly aware of the massive fall-off in the number of dry gas drilling rigs over the past few years as natural gas prices plunged. Given the expense of drilling a Bakken well, it's important that the price of oil stays high enough to incentivize companies to continue to grow production.
The price of oil varies between drillers, as well costs and capital structures also vary in the industry, which can make drilling more profitable for some and a struggle for others. Top Bakken producer Continental Resources (NYSE:CLR) is one of the play's lowest-cost producers. The company's operated wells cost about $9.2 million to complete last year whereas its non-operated wells cost more than $11.3 million to complete. Looking ahead, the company is hoping to knock another million dollars of its completion costs at operated wells this year. The story is similar with smaller Bakken driller, Kodiak Oil and Gas (NYSE:KOG); however, its overall numbers are much higher. Last year the company spent around $11 million to drill a well, and it expects to get that number down below $10 million per well this year. This is a case were Continental can afford to keep growing even if oil prices dip, while Kodiak might need to put the brakes on its production growth plans.
In order to justify the investment in new wells, which will increase production, these companies obviously are better off if the price of oil stays high. That being said, the fact that well costs are going down due to drilling and completion efficiencies, as well as the increased usage of multi-pad drilling, bodes well for continued drilling even if oil prices do continue to slip. This is contributing to a long-term story that appears to still be intact.
If you listen to a company like Heckmann (NYSE:NES), which is an environmental service company with a substantial Bakken presence, it doesn't see the current slowdown as any indication of a future trend. When the company reported its fourth-quarter earnings last month it noted that the current rig count in the Bakken was 193. However, it noted that forecasts from the North Dakota Mineral Resource Department sees rig counts up over 200 by this coming June.
The rig count only tells part of the story. Because of multi-pad drilling, not only are more wells being drilled with fewer rigs, but also production isn't coming on line one well at a time. Instead, its coming on line in spurts of two to eight wells at a time. While the weather might have slowed production, drilling efficiencies also play a role in how the rate of production comes on line. Overall, though, this appears to be temporary in nature.
The Bakken is still really in its infancy – the industry has only drilled around 5,000 wells at this time. This is a far cry from the potential of 40,000-50,000 Bakken wells once the play is fully developed. While the price of oil will play a role in how many wells are drilled in the near term, its hard to imagine the price of oil dropping low enough over the long term to make the Bakken an unprofitable place to drill. So, while the Bakken might experience an occasional slowdown, the boom is nowhere near its end.
Motley Fool contributor Matt DiLallo owns shares of Heckmann and has the following options: Short Jun 2013 $4 Puts on Heckmann. The Motley Fool owns shares of Heckmann and has the following options: Long Jan 2014 $4 Calls on Heckmann and Short Jan 2014 $3 Puts on Heckmann. 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.