Although all of its businesses were affected by historic flooding in the second quarter, Bismarck, ND-based MDU Resources Group Inc. saw its production in the Bakken Shale play in its home state jump 10% as part of quarter-over-quarter results that were down slightly.
CEO Terry Hildestad in a conference call Tuesday with financial analysts, reaffirming 2011 earnings guidance despite the foul weather’s widespread impact. For the second quarter, MDU’s consolidated net income was $44.9 million, or 24 cents/share, compared with $48.4 million, or 26 cents/share, for the second quarter in 2010. Exploration and production (E&P) through its Fidelity E&P unit accounted for nearly half of the profits, earning $21.3 million in the second quarter versus $24 million for the same period last year.
Calling the weather conditions “harsh” for exploration and production (E&P) operations throughout the first half of this year, Hildestad said MDU experienced short-term drilling delays but still saw Bakken oil production increase 10% quarter over quarter, and he reiterated that the company is bullish about its growth plans in the shale play. “We have two wells operating in Mountrail County [ND] and are very pleased with our most recent wells in that area,” Hildestad said.
Overall, the results were more somber as MDU acknowledged that the average prices it realized for natural gas production in the second quarter declined 9%, and oil production stayed essentially flat compared with a year ago. “In large part, this was the result of weather that impacted producers throughout the Bakken,” a company spokesperson said.
Fidelity E&P CEO Kent Wells called the Bakken “arguably the more prolific and economic” of the shale basins right now. “It is highly contested, but I think we understand this basin really well and are focused on certain areas. We’re continuing to pursue other blocks in the area, but we won’t go where we think it is too expensive. There are still some opportunities, but overall it largely tied up at this point.”
Hildestad said MDU is eyeing E&P expansion plans, and he sees similar expansion opportunities for the company’s pipeline businesses. He cited forecasts of Bakken natural gas as a byproduct of oil drilling “doubling over the next several years,” and “this means compressor and pipeline construction opportunities for MDU units,” he said.
In its utilities business, profits were up, said Hildestad, noting that retail natural gas sales overall were up 11% quarter over quarter, reflecting colder-than-normal temperatures in many of the areas it serves.
E&P will command a lot of MDU’s capital expenditures in the years ahead, with $2.1 billion slated for developing existing assets in that business during the next five years, Hildestad said. “We’re also prepared to invest in new and producing properties.”
Separately, a new third-party report showed it is becoming impossible to ignore the Bakken Shale in North Dakota, which may be at the center of a domestic upswing in U.S. production.How big the Bakken becomes will be largely determined by geology, technology and government policy, according to a report released Wednesday by the Washington, DC-based Energy Policy Research Foundation Inc. (EPRINC). Among the 17-page report’s conclusions are that the art and science of shale gas have helped unlock shale oil in the Bakken, and the play now offers “potential for technology transfer” to other U.S. basins and worldwide.
“The Bakken Boom” is meant as an introductory document on North Dakota’s shale oil, which the report describes as “conventional, light-sweet crude oil, trapped 10,000 feet below the surface within shale rock,” EPRINC said. The Bakken is really three layers: an upper layer of shale rock, a middle of sandstone/dolomite, and a lower layer of shale.
The Bakken has made North Dakota currently the fourth largest oil producing state and one of the biggest onshore plays in the United States. “It is largely responsible for reversing two decades of declining oil production [in the United States],” EPRINC said.
Calling it “prolific and exciting,” the report authors also acknowledge that the Bakken carries many questions and uncertainties, particularly regarding the sustainability of the play. Nevertheless, a combination of factors has led to the success of the Bakken as an oil play, and they provide “lessons to future shale oil development.”
A relative lack of federal land in North Dakota and a favorable regulatory environment have contributed to the Bakken’s rapid success as the state’s oil production has doubled since 2008, hitting a high of 360,000 b/d in April before flooding caused that number to decline. Since 1995, the U.S. Geological Survey’s Bakken reserve estimates went from 151 million bbl to 4.3 billion bbl in 2008. In January North Dakota’s estimate jumped to 11 billion bbl.
“The oil companies involved have shown a remarkable capability to deploy new drilling and completion techniques necessary to match the growing knowledge of the geology,” the report concluded, adding that a shortage of takeaway capacity eventually should be rectified. “Interest to expand [takeaway infrastructure] capacity among both railroads and pipeline companies suggest that constraints will be alleviated in the near future.”
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