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Bakken Rich: MDU Sees Oil Production Soar

Setting aside low natural gas prices and unseasonably warm weather in the first quarter, Bismarck, ND-based MDU Resources Group Inc. is riding the continuing Bakken Shale boom in its home state, growing its oil production 19% for the first three months of this year and increasing its working rig count from two to 10 for its exploration and production (E&P) unit over the most recent quarter-over-quarter period.

CEO Terry Hildestad gave a bullish report on all of MDU's activities in the Bakken as part of a 1Q2012 earnings conference call Tuesday in which he reported decreased earnings ($35.6 million, or 19 cents/share, compared $42.8 million, or 23 cents/share, for the same period in 2011), but declared overall results as "solid." The oil production growth is in line with the company's goal of 20-30% increases for all of 2012.

"Our E&P business [Fidelity Exploration & Production] is well on the way toward its 2012 target for increasing oil production," Hildestad said. "The Bakken is huge for us, and we intend to invest a minimum of $160 million on our acreage there this year, or about 40% of our E&P budget."

MDU now has 10 rigs in operation, five in the Bakken, and they are focused on liquids-rich plays, Hildestad said. MDU holds 124,000 net leasehold acres in the Bakken, including an additional 27,000 acres in Richland County in the Montana part of the Bakken that were acquired early in the first quarter this year. "The company expects to invest about 40% of its $400 million capital expenditures budget for this year in the Bakken, Hildestad said.

Hildestad acknowledged that MDU ran into some "oil and gas piping challenges" that hurt quarterly earnings by $6.5 million. For oil in the Bakken MDU has traditionally experienced a $10/bbl discount compared to WTI prices, but this past March that discount widened to as much as $25. In April, however, the gap began to narrow to $20, and the outlook for the rest of the year is for more narrowing.

For natural gas, average prices were 32% lower in 1Q2012 compared to a year earlier, Hildestad said. E&P operations ramped up significantly during the quarter compared with a year earlier, he said. In the Bakken in March, MDU reached a new company high of more than 5,000 b/d.

The Bakken/Sanish/Three Forks play has seen the third largest increase in activity over the last year of all unconventional plays. Acoording to NGI's Shale Daily Unconventional Rig Count, 226 oil and gas rigs were actively drilling in the play for the week ending April 27. That marks a 28% increase over the 176 rigs from one year ago.

"In Mountrail County, ND, we continued to drill strong wells, reporting that our average 30-day rate on our most recent wells was 44% higher than all previously drilled wells," Hildestad said. "We've drilled about half the wells we ultimately plan to drill in that area, so there is still significant opportunity to grow production in this county."

MDU also has active E&P operations in the Niobrara in Wyoming, Paradox Basin in Utah, Texas (both disclosed and undisclosed locations) and Heath Shale in Montana. Hildestad is particularly bullish on the Paradox Basin where MDU's Fidelity unit has drilled a second well and hopes to have it in production by the end of May.

In its other business units -- utilities and pipelines/storage -- 10-year low natural gas prices and significantly warmer weather during the first quarter compared to the same period last year dampened earnings. And at the same time its construction business -- particularly in the Bakken -- continued to "see signs of stabilization," Hildestad said. "Our businesses are making good progress in executing their 2012 plans," he said.

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