Setting the 2017 Bakken Stage

The summer of 2016 has revealed many things about the players connected to the Bakken. In contrast to previous summers, during the past three months there were few overarching themes, messages, strategies or common actions shared by the majority.
By Luke Geiver | September 10, 2016

The summer of 2016 has revealed many things about the players connected to the Bakken. In contrast to previous summers, during the past three months there were few overarching themes, messages, strategies or common actions shared by the majority of the main Bakken operators, service providers, midstream entities or industry experts. With oil prices slumping—then showing slight signs of recovering before slumping again—there was no one-size-fits-all approach to fulfilling contracts, paying shareholders, completing wells, maintaining operations or employees, or predicting the best course of action heading into the future. The strategies described to shareholders varied from one operator to the next. Some service providers said they would focus on a small number of clients while others made a point to continue their lower price maneuvers to reach and work with a wider group of clientele. Many entities looked to sell, while others focused on acquiring. Despite the variance in activity and strategy, a handful of themes or memorable moments created by some of the Bakken’s biggest, as well as lesser-known entities offered insight into the Bakken and how the play could be described by year’s end.

Servicers Make Bold Statements
When exploration and production firms began touting their well cost reductions at the onset of the low oil price environment, many investor analysts began questioning the long-term viability of the price reductions. In most cases, a portion of the root of the price reductions were linked to the service providers and their willingness to take less for their services. In July when oil prices were rising, analysts brought up the question with both operators and service providers: Will service cost reductions continue when oil prices and activity levels recover?

For the world’s largest service provider, the answer was an emphatic, “No.” The market, said Paal Kibsgaard, CEO of Schlumberger, was underestimating the role of the supplier industry to continue accepting fee reductions. According to Kibsgaard, during the past seven quarters, fees have been tied to a time schedule or some kind of oil price trigger. When prices recover, he said at the time, service companies will not continue to offer the same level of flexibility, but will instead look to recover contract pricing concessions while also high-grading its contract portfolio.

Dave Lesar, CEO of Halliburton, had a different perspective to share during summer. “I can summarize this market in one sentence,” he said. “Today, our customers are focused on growing their businesses again rather than being focused on survival.” While Kibsgaard briefly touched on the fact that activity was picking up and clients were looking to invest in the future, Lesar made it a major point when updating analysts and investors. “There is a growing survivor mentality out there and you can’t estimate the positive change that we are seeing in our North American customers that we didn’t see earlier this year,” he said. According to Lesar, Halliburton intends to ramp up its own investment when its clients do the same at the end of Q3 or Q4.

Investor Groups Pursue Bakken, Other Plays
Tailwater Capital LLC offered a reminder of why the current oil pricing environment should not be a hindrance to investing in the Bakken or other plays. The Dallas-based private equity firm infused $80 million into a Bakken-based fluid management firm called Goodnight Midstream (formerly 1804 Operating). Goodnight Midstream will use the money to expand its Bakken operations while it also looks to serve other shale plays. Joel Fry, principal at Tailwater, cited the ability of Goodnight Midstream to serve the Bakken successfully as a reason for its firm’s investment into the company. “Producers, particularly in the current environment, are focused on reducing capex and lease operating costs without impacting production flow assurance,” Fry said, adding that he was excited at the opportunity for Tailwater to expand into other shale plays.

Another Dallas-based investment firm turned to the Bakken to make a move into other shale plays. The Mitchell Group along with Redhawk Investment Group formed Redhawk Minerals Fund, a $58 million mineral rights acquisition fund. The money will be used to acquire mineral assets in Oklahoma’s STACK play. “The STACK play, now in its infancy, is being compared to the early days of the Bakken shale in North Dakota,” the company said. According to the company, the timing is perfect for mineral acquisitions as many mineral owners or sellers price-related expectations typically decline in proportion with the price of oil. “This can translate into the ability to acquire acreage at very competitive prices,” the company said, adding that mineral ownership in the STACK is highly fragmented.

IOG Capital LP, an upstream oil and gas investment firm that has previously invested in and been focused on the Bakken, also showed interest in the STACK this summer. The company said that since May, it had funded more than $260 million for the acquisition and development of assets in partnership with operators in drilling programs located in the Permian, STACK, Austin Chalk and Eagle Ford plays.

Operators Eye Active Bakken Future
Although investment headlines were mainly linked to the STACK or Permian, input from operators in the Bakken revealed that activity will remain strong throughout the year before picking up in 2017.

By the end of the year, Enerplus Corp. will spend roughly $15 million more than it had planned at the beginning of the year. After spending $30 million in Q2, the company will end 2017 by spending $215 million total. The additional spending will be put to use on downspacing testing, well completions and to buy facilities equipment that will be used in 2017. After focusing on its balance sheet this year like most operators did, Ian Dundas, Enerplus CEO, said the company intends to go back to pursuing growth in 2017.

Whiting Petroleum decided this summer it wouldn’t wait until 2017 to pursue Bakken growth plans. The Denver-based operator is adding a drilling rig in October and will also complete 16 drilled but uncompleted wells. Due to steadying commodity prices, the company intends to increase activity in the Williston Basin by an additional $50 million. The new operational activity plans will stabilize its production in the last quarter and give the company positive momentum heading into 2017.

Marathon Petroleum Corp. may have entered into an agreement to become a mainstay shipper on a new Bakken pipeline, but it isn’t extremely focused on the Bakken just yet. At $40 oil, the company will work to protect its balance sheet, said Lee Tillman, president and CEO of Marathon. At $60 oil, the company will work on its STACK acreage. The Bakken will be second in line for activity. “A $10 move in pricing has a big impact on our operating cash flows,” Tillman said. “We’d be looking to redeploy in our U.S. resource base.”

The company’s ramp-up plan would be made quickly, he added, due to the company’s commitment to retain its early-career employees.

Continental Resources believes it is set-up for high-value future growth despite the summer sale of $222 million worth of Williston Basin acreage located in North Dakota and Montana. The company sold 68,000 net acres in North Dakota and another 12,000 net acres in Montana to a non-disclosed buyer. While the company will use the proceeds of the sale to reduce debt, it will not change its operational plans for the year.

Halcon Resources will still spud 10 to 15 gross operated wells and continue operating one drilling rig on the Fort Berthold Indian Reservation, despite its announcement that it will undergo a balance sheet restructuring effort through Chapter 11 bankruptcy. The company will also continue paying royalty owners, suppliers and vendors while it emerges from bankruptcy proceedings expected to be complete after summer.

Chuck Stanley, president of QEP Resources, helped to highlight what may have been one of the major trends regarding Bakken operators. Although capital reductions were widespread during the summer of 2016, production remained relatively flat, as Stanley highlighted. “Despite an almost 50 percent year-over-year reduction in capital expenditures, we expect to maintain a relatively flat production profile in 2016,” Stanley said.

Author: Luke Geiver
Editor, The Bakken magazine
701-738-4944
lgeiver@bbiinternational.com