North Dakota Production Up In April: Will The Gain Last?

As per North Dakota’s oil regulator, the state’s daily crude output rose 2.4% in Apr after dropping 0.8% in the previous month. The North Dakota Department of Mineral Resources’ (‘DMR’) latest data said that oil production in Apr averaged 1,050,630 barrels a day, up 24,940 barrels a day from March.

Along with Oil, Gas Production Rises Too

Reflecting a healthy increase and trumping expectations, the newest numbers confirm the resurgence in volumes extracted from North Dakota, centered on the Bakken Shale formation. It must be noted that at the end of Apr, the state’s total number of producing wells numbered 13,717, a new all-time high.

Interestingly, natural gas output jumped 6% in April to around 1.8 billion cubic feet per day – another record – as operators scrambled to the core areas of the Bakken where wells extract more gas along with crude.

Despite the Increase, Production is a Shadow of Earlier Highs

Churning out as high as 1,227,483 barrels/day in Dec 2014, the current production statistics highlight oil’s horror show that has seen prices come down from $110 per barrel in mid-2014 to around $45 now, in between falling to a 12-year low of $26.21 in Feb 2016. The commodity’s collapse has fueled spending cuts and layoffs while threatening the industry’s creditworthiness by hurting cash flows, drying up liquidity and narrowing profit margins.

Rig Count Clawing Back Steadily but Unlikely to Rise Further

Some 50 drilling rigs were active in the state in April, up from 46 in Mar and 39 in February. The all-time low of 27 was set in May 2016, while a year ago, North Dakota had just 29 rigs operating. The steady rise in the number of units searching for oil and gas in the region indicates increase in drilling activities and production.

Notwithstanding recent gains, the rig count is still down considerably from the peak of May 2012 when North Dakota had 218 units drilling. Moreover, with oil prices resuming their downward trend and officially sinking into the bear-market territory with year-to-date losses of more than 20%, the number of rigs are unlikely to ramp up beyond 55 this year. It’s because the current crude levels just won’t support any more drilling rigs.

Shale Industry Caught in a “Catch-22” Situation

While more rigs in operation and increasing production could be construed as positive developments for the state of North Dakota, the current sub-$45 oil prices will render a lot of drilling as unprofitable. And at the crux of the matter is the rising flood of U.S. shale-driven production.

Now at a financial equilibrium, the shale firms are putting more rigs and employees back to work. Throughout the downturn, producers worked tirelessly to cut costs down to a bare minimum and look for innovative ways to churn out more oil from rock. And they managed to do just that by improving drilling techniques.

With these efforts, many upstream companies have repositioned themselves to adapt to the new $50 oil reality and even thrive at those prices. In other words, while OPEC's moves to trim output and rebalance the demand-supply situation has stabilized the market to a large extent, in the process it has incentivized shale drillers to churn out more.

To conclude, the U.S. shale (including the likes of North Dakota) is perhaps the biggest reason why crude prices are floundering again.

What Lies Ahead?

As one can conclude from the above discussion, the improvement in Apr production does not mean much with the oil bust now anticipated to last through this year and well into 2018. In fact, with April production levels barely above the psychologically important one million barrel a day mark, there are chances that output in the second-largest oil producing state after Texas could fall below that figure before the end of 2017 if prices remain under $45 a barrel.

What’s more, economic hardship forced producers like Continental Resources Inc. (NYSE:CLR) , EOG Resources Inc. (NYSE:EOG) , Hess Corp. (NYSE:HES) , Marathon Oil Corp. (NYSE:MRO) , QEP Resources Inc. (NYSE:QEP) , SM Energy Co. (NYSE:SM) to put 1,466 wells on inactive status in April.

In case you are looking for energy names for your portfolio, one could opt for Canadian Natural Resources Ltd. (TO:CNQ) . It has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Calgary, Alberta-based Canadian Natural Resources is engaged in the acquisition, development and exploitation of crude oil and natural gas properties. The 2017 Zacks Consensus Estimate for this company is $1.31, representing some 725% earnings per share growth over 2016. Next year’s average forecast is $2.52, pointing to another 92% growth.

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