THE OPPORTUNITY THAT IS BAKKEN
The Bakken Formation is an oil reserve that occupies parts of North Dakota and Montana. It is one of those things that everybody knows about, yet nobody really knows about. It's very well known inside of the oil/gas community, yet for the most part undiscovered amongst your average investor class. I'm assuming this is because a majority of investors are more focused on risk/reward plays such as gold, silver, popular tech stocks etc. that tend to cater more to their masochistic, self-destructive side.
I'm a relative newbie when it comes to the Bakken Formation, but have been reading everything I can get my hands on regarding what has become one of the larger oil finds in recent decades. My thirst for knowledge about Bakken isn't because I want to be geophysicist or have an intense passion for the oil markets, but rather due to the fact that our largest and most profitable current holding is directly involved in Bakken. Therefore, I am eager to learn in order to grasp the full realm of possibilities with our current holding, as well as any potential future investments I will make involving Bakken exploration and drilling.
One could write a book about the history, revised estimates over time, technical difficulties in recovering oil and technological advancements that allow for recovery in Bakken. I don't have the time nor the patience to write a book, and am probably under-qualified to do so. That's why I am going to offer a cliff notes version of the reasons why I feel the opportunity in Bakken is so spectacularly profitable. Whether past, present or well into the future, there is no shortage of opportunity.
The possibilities that Bakken offers in terms of oil reserves have been known for decades. However, the technology has been absent to recover the oil from the rock formation. Advances in technology have been increasing at a fantastic pace due only to the fact that a surging price of oil has made the increased allocation into research and development by oil companies a top priority. It's a lot easier to justify hiring a bunch of expensive engineers to discover ways of getting oil out of an extremely difficult formation when the oil you are going after is priced at $100 as opposed to $30.
Now that technology exists to recover the oil from the reserve, the question becomes how much oil exists in the reserve for oil companies to profit from? The question of existence and recoverable are two different areas entirely. There have been estimates of 500 billion barrels of oil below the surface at Bakken. However, the recoverable percentage has been estimated at 1% or less. This means perhaps 5 billion barrels, maybe less. A couple years ago the USGS put the mean at 3.65 billion barrels of recoverable oil.
What is interesting about Bakken is that these estimates, especially recently, have been increasing exponentially. Perhaps a certain euphoria has hit the area that has allowed certain individuals within the industry to inflate estimates. Or perhaps as the oil companies have seen the advances in technology that have allowed them to drill increase drilling operations in the area, they have come to realize that the USGS estimate of 3.65 billion barrels was very conservative.
One of the wealthiest men in the country, Harold Hamm (CEO Continental Resources, symbol: CLR) recently was quoted as saying that 20 billion barrels of oil are recoverable in Bakken. Even if you implement the "rule of 100% exaggeration" by CEO's, you still get a recoverable estimate of 10 billion barrels of oil. Hamm was also quoted as saying that the revised estimate would make North Dakota "one of the 13 or 14 largest producing countries — not just state."
The market value for companies that drill or explore in Bakken has already seen a dramatic increase over the past 12 months. The micro-cap name that we own in the portfolios has seen a move of over 500% since it began trading last year. Names with larger market caps have also seen dramatic moves up:
- CLR +75%
- MRO +70%
- HES +45%
-CHK +40%
I am a big believer in the wisdom of the markets. If the names in the companies that dealt in all matters relating to Bakken had been flat, or moved minimally up or down, then I wouldn't be nearly as optimistic about the opportunity. In this case, however, it seems that the markets are wholeheartedly confirming that the estimates of reserves within Bakken may indeed be conservative. The truth lies somewhere between what now seems like the overly conservative 2008 USGS estimate of 3.65 billion barrels and the overly-optimistic estimate of CLR's CEO Harold Hamm.
Of course, as oil continues to climb, the story of Bakken will become more front and center, until it is possibly spoken about in the same light as gold or silver. The price of oil on the world markets will be the ultimate deliverer of the story that is Bakken to the investment public. At a minimum, it deserves some due diligence by investors. I've done mine and I'm sitting tight for awhile to come.
