The U.S. Geological Survey (USGS) recently released an updated oil and gas resource estimate on the Bakken formation, which covers parts of Montana, North Dakota and Saskatchewan.
Unlike the previous estimate, which was taken in 2008, this latest update also includes the Three Forks formation, in southern North Dakota.
A Twofold Increase in Reserves and Production
“The assessments found that the formations contain an estimated mean of 7.4 billion barrels (BBO) of undiscovered, technically recoverable oil,” said the press release announcing the new estimate. “The updated assessment for the Bakken and Three Forks represents a twofold increase over what has previously been thought.”
The USGS update consists of a mean oil resource of about 3.65 billion barrels for the Bakken and 3.73 billion barrels for Three Forks, for a total of 7.38 billion barrels. Along with the oil, the two formations are estimated to contain 6.7 trillion cubic feet of undiscovered, technically recoverable natural gas and 530 million barrels of natural gas liquids.
“While recognizing that ‘undiscovered resources’ do not represent money in the bank,” wrote Investing Daily editor Robert Rapier in a May article in our Energy Strategist newsletter, “this new assessment signals that the oil boom in the Williston Basin is likely to continue for some time. At the current price of oil, the value of what the USGS considers to be undiscovered oil is almost $700 billion. Thus, there are fortunes to be made by oil producers, oil service providers, pipeline companies and railroad operators.”
Moreover, according to North Dakota’s Department of Mineral Resources and the Energy Information Agency, Bakken oil output has more than doubled, to 673,000 barrels per day in January 2013 from 274,000 in January 2011. Rising production in the region has moved North Dakota up to the second spot on the list of oil-producing states, trailing only Texas.
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The boom is being fueled in part by modern drilling techniques, including horizontal drilling and hydraulic fracturing, which are letting producers access deposits that were previously off-limits. Add in today’s historically high oil price of around $94 a barrel, and you start to get a sense of why producers like Exxon Mobil have been aggressively expanding in the Bakken.
“Capital is coming from all around the world, even Europe and Asia,” Oppenheimer energy analyst Fadel Gheit told CNBC on March 24. “It has singlehandedly changed the outlook for oil production.”
The Race for the Bakken Is Heating Up
None of this has escaped the attention of oil giant Exxon Mobil.
The company entered the Williston Basin in 2010, when it acquired XTO Energy in a $41-billion deal. The move was actually poorly timed. “This made Exxon the largest natural gas producer in the country just before natural gas prices began a long decline,” wrote Rapier in an April 24 Energy Strategist article. Rapier points to this purchase as a main reason why the stock has made little progress in the past years, after a strong run in the previous five. However, he writes, “XOM stands to benefit from the recent recovery in natural gas prices.”
Last September, Exxon boosted its acreage in the Bakken by 50%, to 600,000 acres, after it agreed to pay Denbury Resources $1.6 billion for 100% of all its properties in the Bakken shale. Denbury also received Exxon’s stakes in properties in Wyoming and Texas. As Exxon Mobil pointed out in its press release announcing the move, the Denbury assets have production of around 15,000 oil-equivalent barrels per day.
According to an April 29 article on Bakkenshale.com, the company has now fully integrated the Denbury properties into its XTO subsidiary, which operates them. As a result, Exxon Mobil’s Bakken production has jumped 75% from a year ago.
A January 6, 2013, article in Petroleum News Bakken puts Exxon’s total post-acquisition Bakken production at about 32,100 barrels per day of oil, good for sixth spot, behind Continental Resources at 66,155, Whiting Petroleum at 63,126, Hess Corp. at 60,137, EOG Resources at 47,847, and Statoil ASA, a subsidiary Brigham Oil & Gas, at 45,597.
A Key Holding for Safety and Income
Exxon’s Bakken production is still small next to its total daily oil and gas output of 4.4 million barrels. However, the company has said that it plans to increase capital spending by $7 billion to $8 billion a year, with a significant amount of that increase going toward unconventional plays in the U.S., including the Bakken, according to a January 20, 2013, Petroleum News Bakken article.
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Meanwhile, Exxon Mobil reported earnings of $9.5 billion in the first quarter, up 0.53% from $9.45 billion a year ago. The company spent $5 billion on share repurchases during the quarter. Due to fewer shares outstanding, per-share profits rose 6.0%, to $2.12, topping the consensus forecast of $2.05.
Revenue declined 12.2%, to $108.8 billion. Exxon’s oil-equivalent production fell 3.5% from a year ago.
Even though the stock has made little progress over the past five years, Rapier pointed out in his April 24Energy Strategist article that it has gained nearly 150% when you extend that timeline out to a decade. Its legendary stability and 2.8% dividend yield are also pluses.
“While it is true that this falls short of the payouts from many of the royalty trusts, investors can sleep easier at night knowing that XOM’s beta rating is only 0.48, meaning its stock is only half as volatile as the market,” he writes.
By. Chad Fraser
