‘Cash Is King’: Bakken E&Ps Sustain Production To Get By

Despite abandoned drilling programs and slashed spending, operators in the Bakken Shale are hanging on the only way they know how—by pumping oil.

In the heart of the play, North Dakota is still producing more than 1 million barrels per day (bbl/d) of oil. As the downturn persists, many expected oil production to nose dive. However, the state barely took a hit in February, according to North Dakota’s Department of Mineral Resources (DMR).

Compared to January, the state’s production dropped by about 400,000 bbl/d of oil, or less than 0.5%, a report from the DMR said on April 15.

Lynn Helms, director of North Dakota’s DMR, said the reason for sustained production is simple—survival.

In order to keep afloat, companies have whittled their operations down to the basics while still pumping oil out of the core of the play.

“Cash is king—basically what we saw happening was the need for cash flow and production by some operators,” Helms said.

Harold Hamm, CEO and president of Continental Resources Inc. (NYSE: CLR), told Hart Energy that prices needed by producers vary and many have retreated back to surer footing after the market’s landslide.

“Most operators have cored up in certain areas that they can drill,” he said. “I think most of the time we’re back to where we’ve said all along that at $70 oil we can see very extensive development of oil in the Bakken.”

Long-term, less (oil) would be more (money). Instead, operators are propping up production to stay alive.

Limping along with 31 drilling rigs—down from 2012’s peak of 218 rigs—E&Ps are depleting the best geologic areas of the Bakken/Three Forks for pennies on the dollar.

"They’re using maximum management of their capital for the right amount of drilling, fracking and production and that maintains their cash flow as well as maintains state production,” Helms told Hart Energy.

Even North Dakota’s largest oil producer, Whiting Petroleum Corp. (NYSE: WLL), made a deal April 27 to boost Bakken production.

Whiting said April 27 it will forego plans to freeze drilling and fracking new wells after entering a participation agreement with an undisclosed investor. The move should add production and proved reserves with no increase to Whiting’s $500 million capex.

The Denver company entered into a wellbore participation agreement that will pay 65% of drilling and completion costs in exchange for a 50% working interest in 44 gross Williston Basin wells. The deal includes a $30.7 million cash payment for wells already in progress. Under the agreement, Whiting will continue to run two drilling rigs and will add a completion crew.

Whiting holds 756,225 gross (445,921 net) acres in the Williston Basin. In the first quarter, its production averaged 124,900 barrels of oil equivalent per day (boe/d). The Bakken/Three Forks represented about 85% of Whiting’s total first-quarter production.

In the first quarter, Whiting disclosed a net loss of $171.7 million, compared to a net loss of $106.1 million year-over-year.

Unlike Whiting, Hess Corp. (NYSE: HES) revealed April 27 it wouldn’t consider adding drilling rigs in the Bakken until oil prices reach a certain level.

“Our Bakken rig count will be reduced from three rigs currently to two rigs during the third quarter and is expected to remain at this level until the WTI price is closer to $60 per barrel,” said John B. Hess, the company’s CEO, according to a Seeking Alpha transcript of its earnings call.

Hess said the company’s focus is on “value not volume.”

During the first quarter, Hess brought 31 gross operated wells on production in the Bakken. Net production edged up nearly 2% to 111,000 boe/d from 108,000 boe/d year-over-year due to higher NGL and natural gas production.

Continental said it will wait for oil prices to pick up as well and plans to defer most Bakken completions in 2016.

For now, the company is among operators still able to economically drill wells with WTI at $40 per barrel, Hamm said.

“Sure, we’d like to be getting better rates of return from those wells, but we’ve moved on from about 650,000 barrels a day EURs to 850,000,” he said.

The Oklahoma City company currently has four operated drilling rigs in the Bakken and plans to maintain this level through year end. The company currently has no stimulation crews deployed in the Bakken.

In 2016, Continental’s Bakken drilling program will continue to focus on the core of the play in McKenzie and Mountrail counties, N.D. The company is targeting wells in the area with an average EUR of 900,000 boe per well.

Based on the higher EUR and a lower targeted completed well cost of $6.7 million per well, Continental expects capital efficiency to increase 17% and finding costs to fall 15% in 2016.

Given plans to defer most completions, Continental’s Bakken drilled but uncompleted (DUC) well inventory is expected to increase by 60 to about 195 gross operated DUCs at year-end 2016.

Helms estimated between 950 to 1,000 DUCs in North Dakota are waiting for WTI to return to $50 to $60 levels. “And that has to be sustained for 90 days or more in order to create the confidence that the price is here to stay,” he said.

In addition, the industry would need another 120-180 days for crews and equipment to mobilize before any significant impact on the DUC inventory, he added.

Hamm predicts the supply overhang will dissipate by mid-year, sending oil prices up to $60 by the close of 2016.

"At the time that I made that prediction everybody thought it was a little bit optimistic," he said.

However, he said several others in the industry, from Raymond James to IHS, are now echoing his forecast.

Charts and maps by Darren Barbee, dbarbee@hartenergy.com. Emily Moser can be reached at emoser@hartenergy.com.

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