North Dakota's oil producers are not getting rattled by the sudden drop in oil prices.
Top executives of publicly traded companies drilling in the Bakken remain mostly upbeat, reporting over the past week significant third-quarter production gains. Most expressed caution about the pace of 2015 drilling, but said oil prices remain well above break-even levels.
"It's too early to tell what everybody's plans are," Michael Reger, CEO of Northern Oil & Gas, a Wayzata company that invests in Bakken oil drilling but doesn't operate rigs, said Friday on a conference call with analysts. "But rest assured everybody's eyes are on the ball right now."
The U.S. benchmark price of crude oil has dropped more than 25 percent since June, as expanding North American production outstripped world demand. Stock prices of 12 oil companies with major footprints in the Bakken have dropped an average of 23 percent over the past three months.
Those declines come at a time when oil companies are looking at capital budgets for next year.
Oil industry analysts said drilling is sure to drop off somewhat in the Bakken. Jodi Quinnell, manager of crude oil analytics for the energy intelligence firm Genscape, said she expects a drop of about 30 drilling rigs over the next six months or so. That would represent a 16 percent decline from the 190 rigs reported operating in September by the North Dakota oil regulators.
She said drillers will focus on core areas in shale plays known for the highest returns. In North Dakota, nearly 90 percent of the drilling happens in four western counties where break-even points are lowest, according to state data.
"Those core areas will remain relatively economical, even if the prices continue to drop," Quinnell said.
Northern Oil & Gas reported strong growth in oil output and earnings for the three months ending in September, and said 2014's oil production should be up 25 percent over last year's, putting it at the top end of its guidance. The company didn't offer details on its 2015 drilling-investment plans, however.
Reger said in October his company opted not to invest, because of low projected returns, in 25 percent of planned drilling projects in areas where it holds oil leases. That compares with more typical 10 to 15 percent decline rates in the past, he said.
"We are being very selective," Reger added.
Betting against OPEC
Perhaps the most optimistic of the Bakken operators is its largest, Continental Resources, based in Oklahoma City. Founder and CEO Harold Hamm surprised Wall Street on Thursday by revealing the company cashed in $520 million of hedges designed to protect against oil price drops in 2015 and 2016.
Hamm said he believes that oil market fundamentals haven't changed. He's betting that Saudi Arabia will cut production and predicted that crude oil will return to $85 to $90 per barrel. West Texas Intermediate has traded below $80 in recent days.
"We feel like we're at the bottom rung here on the prices and we'll see them recover pretty drastically, pretty quick," Hamm told analysts Thursday.
But Continental also announced that it had cut its 2015 capital investment by 12 percent and expects the number of Bakken drilling rigs to drop to 19 next year, down from 22 now.
At SM Energy, a Denver-based oil company that recently hit 17,500 barrels of daily oil production in the Bakken, President Javan D. Ottoson told analysts the company is prepared to shut down drilling rigs "pretty fast" if oil prices tank.
"Clearly though, we're not in knee-jerk mode here," Ottoson said on an Oct. 29 conference call. "We're going to have to be convinced that you're going to have to see low prices for quite some time before we start really jerking our program around."
Whiting Oil and Gas Corp., whose pending merger with Kodiak Oil & Gas could make it North Dakota's leading oil producer, hit 87,000 barrels per day of production in the third quarter, a 9 percent increase over the second-quarter and a 33 percent increase over 2013.
Months to trickle down
In the face of low oil prices, Denver-based Whiting is projecting a 20 percent increase in production next year, similar to this year's growth rate.
"In terms of whether or not there'd be much of a change if oil prices fell to, say, $75 or so, no, I don't think so," CEO James J. Volker told analysts last week. Rates of return and other key measures "really don't change very much … all the way down to $70," he added.
Carlos Newall, an oil industry analyst with Raymond James, said he remains bearish on oil prices, but agrees with many in the industry that drilling in shale plays like the Bakken should remain robust. Even so, persistently lower oil prices likely will curb investment, though it may take months for that to trickle down to the oil fields, he said.
"You have seen several companies pull back from capital expenditure guidance from 2015, and you may see that trend continue if prices remain where they are right now," Newall said.
David Shaffer • 612-673-7090 Twitter: @ShafferStrib
