Williston ND: An American Adventure Story

I recently took the opportunity to visit and spend time in and around Williston, ND, to see the future being made. While my original intent was simply to visit, what I saw going on there and the impressions it made upon me has led me to writing this piece.

If Williston hasn’t yet made it to the top of your “must visit” list, let me tell you something about what I saw and determined as a result of that trip.

For those for whom Williston doesn’t ring any particular memory bells, it has gained prominence as one of the main US hubs (the other main fields are the Eagle Ford in South Central Texas and the Permian in West Texas) for something that was hardly a factor in the economy five years ago – the fracking revolution in the energy business.

Fracking – short for hydraulic fracturing – is a process developed for drilling wells for crude oil and natural gas. It’s used in areas where the hydrocarbons are, effectively locked into tight shale rock formations and had, prior to the development of this technology, had been pretty much unrecoverable. In order to get the product to flow, a mixture of water and sand is forced into the individual well. A small explosive charge then causes the rock to fracture, allowing for the free flow up the pipe.

To put the speed of the local growth in some perspective, the 2010 US Census said 14,716 people called Williston home. By 2014, the population had boomed up to over 21,000, making it the sixth largest city in North Dakota (ND) – and that’s not counting all the growth in the outlying areas.

Ever since we lived in Alaska, I’ve had a significant interest in the energy business. A large number of the working population in Anchorage had – and still has – some connection with the oil business. While there, I had the opportunity to spend time at Prudhoe Bay on the North Slope, which is where the oil begins its 800 mile trip through the 48 inch pipeline to Valdez. In a word, I’m sure the moon has more attractive terrain than the Slope does…

I’ve followed the development of the Bakken over the past few years. I had heard the stories of Williston and “suburbs” being the wild west and all that went with that. Then, last year, along with the big drop in oil prices, the consensus flying all around the financial media was that all/most of this newly started fracking production would be shut in as a result of the big drop and the boom would become a bust. With that came the talk that there would be widespread layoffs in the whole industry. Not so fast…

I have a bias/prejudice that a great deal of what shows up in the mainstream financial media every day is not much more than highly-charged hot air only loosely based on facts. The problem is that most investors simply accept those daily conclusions as fact and act accordingly. Witness the across-the-board selling in the last quarter of last year and into the first couple months of this one of anything even remotely related to energy.

With these things in mind, and inasmuch as I now have this definite personal interest in how Williston is doing and wanting to find out how the drop has really been affecting people, I decided to head east and see for myself.

A little shale geology

The Bakken (bok-ken) Formation covers about 200,000 square miles and is part of the Williston Basin. It’s located in northeastern Montana, most of western North Dakota, as well as parts of Saskatchewan and Manitoba. The recent development of the hydraulic fracturing, (fracking), technology, together with the refinement of directional drilling where the operator can, in essence, aim where the drill bit goes, has had a major impact on our ability to get to those assets. Additionally, as opposed to traditional wells, these recoverable pools are at, relatively, shallower depths so it’s quicker (i.e., less expensive) to recover the oil and gas than for the older methods. Put another way, operators can drill more wells for the same money and spend less time per prospect.

For the record, there was NO shale production anywhere just 10 years ago. According to Oppenheimer & Co.’s oil analyst, the shale sector today alone produces 4.5 million barrels of crude per day; that’s up to just about half of our current total US production. The Bakken itself has only really been under focused development since about 2010. That has quickly ramped up rather spectacularly as North Dakota has moved past Alaska to become our second largest oil producing state in 2014.

In April 2013, the US Geological Service projected that the Bakken had recoverable assets of about 7.4 Billion barrels of oil, 6.7 Trillion cubic feet of natural gas and another 530 Million barrels of natural gas liquids. This is a major field.

Living there

Williston – or the other towns I saw- are not, by any means, out-of-control, anything goes western cowboy towns. There are families, schools, churches – all the normal stuff. There is the smell of crude oil in many places – and did I mention the 24/7 truck traffic? It’s just really busy…and this is now supposedly a slack time.

Scattered around the area are the so-called “man camps”. That 40%+ growth in population was tough to absorb and initially led to a lot of stopgap, band-aid type responses to the need for housing, among other things. The man camps were created to help alleviate camping on the city streets, parks and yards that came with the initial movement of workers to town.

These camps are large clusters of single-wide connected residential buildings run by private logistical companies for the transient workers. They offer basic accommodations for a healthy chunk of money. The camps are neither shabby nor run down in any instance I saw. They mostly reminded me of military barracks. In the case of those on working drilling rigs, many stay in housing right at the site.

One big surprise to me was that the area is like a mini-UN. There are people from, literally, everywhere working there. For instance, many of the people working at my son’s place are from foreign countries such as South Africa, Congo, Cuba and Brazil. By contrast, in Alaska during the pipeline days, most of those workers were from Texas and Oklahoma – though some might say those are foreign countries as well. As opposed to Alaska, Williston, with its airport, train station and access to interstate highways, is a whole lot more accessible. The point is that in today’s wired world, everyone knows what’s going on and where it’s happening.

What Williston and the surrounding area is not is a place for someone seeking a place of tranquility. Sure, to attract all the workers of all types needed to run the whole economy and infrastructure there, pay is well above norms for almost all positions. The trade-off is that working conditions due to the weather can be quite challenging with temperature extremes, high constant winds and an emphasis on long, hard, physical work. And make no mistake; it’s all about the work.

Many people have gone there to make their fortunes without realizing all that’s involved in terms of work requirements. They don’t last long. This is not a 9 to 5 world by any stretch. This is the epitome of 24/7/365. Many of the people work for a period of weeks, go home or vacation for a couple weeks, and then come back and hit it again. Bottom line; if you don’t want to work hard…don’t go.

Having said that, I really liked the underlying – forgive me – energy of the area. The overlying attitude of all who are there is definitely of the can-do type. The majority of the people there appear to be entrepreneurs and/or risk-takers. They’re risk-takers in terms of the main industry that supports them, the work they do daily, as well as what many of them did to get there. These are hard-working, salt-of-the-earth, plain-talking type individuals who, interestingly, all seem to be able to give you a pretty accurate idea as to the current price of US crude.

Current oil pricing

Since last Thanksgiving, the global price of oil moved from what had been effectively a set price determined largely by Saudi Arabia and OPEC into the wild world of free market pricing.

In terms of at what price Bakken shale prospects can be profitable, The Bakken Magazine recently provided an analysis from the ND Department of Mineral Resources which was created for the ND State House Appropriations Review. The breakeven prices for the various counties around the field were determined. Breakeven (B/E) refers to the price at which new drilling – not existing production – would stop.

In Williams County, where Williston is located, the B/E is $36/bbl. For McKenzie County, just south of Williams, and actually the largest producing county in the Bakken, that B/E is just $30/bbl. For a couple counties on the fringe, it’s as high as $73 to $77/bbl.

Further, according to the analysis, by the third quarter of this year – and assuming that oil cratered to $25/bbl, ND would still be producing around 1 million bbl/day and, even if prices stayed that low, 800 thousand bbl/day in the third quarter of next year. Not a likely event but it does show that drilling will go on in those fields. Lower prices would cause slowing – not abandonment.

I think the oil price is settling in at current levels of between $50 and $60 per barrel. A lot of the current production cutbacks have been due to companies operating in a floating price world; not having had any idea as to what either their costs or incomes would be. Can’t run a successful business of any kind like that. The drop in rig count that’s talked about is mostly for drilling rigs – the new prospects. There is also a type called workover rigs. These are brought in to frack and/or develop a well. I saw lots of those still in operation.

Once the companies are comfortable with what passes for price stability in oil, projects will come back online. Companies will drill their best, lowest cost prospects first and then the fracklog will be worked down. Fracklog, a term meaning a huge backlog (hence the name) of production that’s sitting and waiting for oil prices to come back, refers to those wells which have been drilled and then stopped within weeks of completion. All that must be done to complete them is inject high-pressure water, sand and chemicals into each well to crack the rock that’s holding the oil (frack the well). Some suggest that more than 500,000 barrels per day of production would hit from this fracklog if oil rebounded to just $65/bbl.

Investing

There’s lots more to crude than what the price at the local gas pump is or even where and how to invest. Today’s world is ultra-dependent on crude oil and its derivative products. Not just for fuel but for the many different products that use it in and for manufacturing.

As I review the companies involved with fracking, and the energy business in general, it definitely seems that infrastructure throughout the shale fields is what’s really lacking, especially in storage and transport. Many sources refer to the multi-billions of dollars that will be spent in this sector over the coming years.

The weak link today in getting the Bakken production to market is this total lack of major pipelines. Mr. Buffett’s BNSF Railroad is the only game in town for getting the oil to refineries or other users. In that regard, the US and Canada have now rolled out new oil railcar standards that require a new tank car design to be phased in. These will apply to new cars being built after 1 October this year, with existing tank cars having to be retrofitted to meet the new standards. Companies in the railcar business will likely be beneficiaries of this, both in terms of the new cars, as well as all the refurbishing that will have to be done.

Regarding infrastructure, it’s my belief that one of the best ways to participate in that space is through midstream Master Limited Partnerships. Midstream refers to the transport and storage component of the energy business. Through a MLP, there can be tax advantages for investors, in addition to nice cash flows and capital appreciation potential.

Highly-leveraged companies are going to have it tough. Costs are staying about the same yet income is down and the debt service remains. We’ve seen a couple companies file bankruptcy who were caught by this.

Prices can still fluctuate quite a lot as the market searches for a level. However, this volatility creates opportunities for investors. Energy companies will likely use market inefficiencies to reposition asset bases for the long term, opening the door to increased merger and acquisition activity. Production growth will likely still occur, at somewhat lower levels for a time, along with lower service cost increases.

US oil producers have shown a willingness to make fast responses to lower energy prices and have moved to aggressively rein in near-term capital expenditures. All of that seems to have already helped to stabilize prices and should continue to have a positive impact over the course of this year.

Summary

During my drive, I passed by Anaconda, Montana. About 100 years ago, Anaconda, located near Butte, was a boom town, also based on a commodity. In this case, it was copper and it benefited from the growth and development of electricity in homes, as well as telephone services. Today, all that remains is a really, really big smokestack sitting by itself in the countryside. While no one knows the future, I feel fairly safe in saying that it doesn’t appear that Williston is in any real danger of becoming a ghost town anytime soon.

This oil price drop isn’t a death blow for the oil industry on any level; it’s that business’s normal ebb and flow. Further, local-area businesses that grew to meet the demand and companies that may have missed out on the boom altogether will, I believe, receive a second chance on capitalizing on the revenue the shale business brings to the area. This feels like just the start of the development there.

While the wind is quite significant in and around Williston, even it can’t blow away what’s going on over there right now. The oil biz is very much there to stay and, in my opinion, will continue to grow – though in a more, relatively speaking, subdued manner.

If you have questions about how to invest in the shale energy sector, please let me know.

Cheers!

Mike

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