A Timely Bakken Play At A Discount

In the disaster that continues for independent shale oil producers, some brief moments of sunlight peek through. And right now, one of those moments is shining on Hess, one of the first and most committed to the Bakken shale play, a particular play gaining some interim relief from the oil bust.

It's been clear to me that the down cycle for independent E+P's here in the US was not going to be a short one - I outline all of the reasons for this and my projected timing in my new book "Shale Boom, Shale Bust", now available everywhere. But where rig counts have been decimated, there have been some small indications of production also leveling off a lot quicker than most analysts (and I) thought might happen - particularly in the Bakken.

I suppose that the Bakken is the most likely place to see a quick turnaround from rig numbers going down to a translation on supply numbers; after all, it is the most mature of the shale plays, even though it is only 7 years old. But the players there, or at least the strong ones, are far better established than in other shale plays around the country: Continental Resources (CLR), Conoco-Philips (COP), Whiting (WLL), Apache (APA), EOG Resources (EOG) and Hess, to name just a few of the big ones.

It is also where the most speculative players went first to drill the outer reaches of the core areas that the 'big boys' had already staked out and are clearly on their way to tossing in the towel during this oil downturn - American Eagle (AMZG), Triangle Petroleum (TPLM), Emerald Oil (EOX) and others I could name - but the point is that those rigs from those marginal companies are probably off line for good.

This has resulted in a major collapse of the basis price discount that many of the Bakken players have been laboring under even during good times - when oil was over $100 a barrel, they often saw $12-15 discounts to West Texas Intermediate crude (WTI) which was also laboring under a $5-10 discount to global grades. So, with oil rallying from $45 to $60 a barrel, WTI discounts to Brent moving under $5 a barrel and steadying and Bakken discounts dropping to near parity with WTI, Bakken independents have quietly broken out the party hats, at least for the time being. At $100 Brent oil, some Bakken producers would actually realize closer to $70 a barrel for crude; here at $60 a barrel for WTI, they're getting almost the full $60 - not so bad.

Now, the question of course is how long all of this is going to last, but for our purposes, that may not really matter. I have been of the opinion that easy capital has continued to buoy the shale players, slowing down the necessary consolidation needed in the sector. Yet the valuations on at least some of these Bakken players are getting relatively good in spite of this, at least compared to the Eagle Ford (EFS) and Permian specialists I tend to prefer.

Which circles me back to Hess. One of the few plusses for Hess, outside of this lucky break on the basis of market changes, has been their consolidation plan and the very deliberate way they've been putting that into motion. One outcome of this has been today's $2.6B drop-down/JV deal with Global Infrastructure Partners of Hess-owned Bakken pipelines. It's hard to minimize the value released every time Hess can manage one of these - it costs some debt, but will release 5 or 6 times the accretive value - and it's not the only one Hess can do.

It's been a tough year for Hess - they sold off their status as an 'integrated' oil company which would have saved them from the share price disaster they've endured - they were a $100 stock last year and hit their 52-week low last week at $65. But with the turnaround in Bakken oil discounts and the value release of more midstream assets today, I'm willing to believe Hess can find a better stock price going forward. This isn't a long-term play, but one that takes advantage of two positives at a great discounted stock price.

Recommend Hess at $69.