Energy plays are performing well on Tuesday with (XLE) , the Energy Select Sector SPDR up about 0.6 percent after three straight down days. Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX), the two most heavily weighted companies in the index are essentially flat on the day, limiting advances.
Outpacing the index, Oasis Petroleum Inc. (OAS) and Continental Resources Inc. (CLR) are having strong days, boosted in part by Goldman Sachs initiating coverage on the companies with a buy rating. Goldman has put a price target of $65 on Oasis (closed Monday at $44.94) and a price target of $130 on Continental (closed Monday at $102.78). Goldman has a favorable view of the companies due to their exposure to the Bakken shale formation and the associated Three Forks in North Dakota and Montana, a region recently visited by Goldman analysts confirming a sense of confidence in efficiency and production for the oil- and gas-rich area. At 14,700 square miles, the Bakken is the largest continuous crude oil accumulation in the country and contains an estimated 24 billion barrels of recoverable crude oil equivalent. The investment bank is bullish on the small and mid-cap oil exploration and production sector in general and most companies that are focused in the Bakken area.
Oasis was added to the vaunted Goldman Sachs “conviction buy” list. Continental, Bonanza Creek Energy (BCEI) , Gulfport Energy (GPOR) and Approach Resources (AREX) are others that should benefit from a presence in the region for which Goldman has buy ratings.
Goldman is apparently seeing a strong uptrend in these companies without an immediate end in sight. Taking a look at the charts from Oasis and Continental shows the stocks steadily trekking upward and printing new 52-week highs on the coverage.
Oasis recently broadened its footprint in the Bakken region with the signing of four separate and unrelated purchase and sale agreements to spend $1.52 billion to acquire assets in the Williston Basin (in the heart of the Bakken shale formation) totaling 161,000 net acres. On a pro forma basis, the company will have 492,000 net acres that have recently produced about 43,000 barrels of oil equivalent per day. 13 rigs are running on the properties currently, but Oasis said it intends to increase that number to 15 or 16 rigs by the end of 2014.
Continental is the largest leaseholder and producer in the Bakken formation, with more than 1.14 million net acres under their control. It also has significant holdings in Oklahoma. The Oklahoma City-based company sees 2014 oil and natural gas production increasing between 26 percent and 32 percent with approximately 200,000 barrels of oil equivalent per day being produced by the end of the year across all of its wells. In 2012, Continental averaged 76,900 barrels of oil equivalent per day from its Bakken wells.
A typical Bakken well costs $9 million to drill and complete, but will produce about 665,000 barrels of oil over approximately 45 years, making the wells extremely profitable, especially in early years when production is at its highest.
The increased activity to bolster production and holdings in the Bakken formation dovetails smoothly with industry experts – outside of Goldman’s predictions – calling for the region to start to reach its potential and expand for years to come. Production in North Dakota averaged approximately 821,000 barrels per day in June, but according to market intelligence firm Industrial Info Resources in citing an official from SAIC Energy ($SAIC), that production level is expected to double by 2023.
It should be expected that Oasis and Continental will be leaders in that ramp-up in production.
Shares of OAS are up 4.7 percent today at $47.04 and shares of CLR have risen 3.3 percent to $106.10 with about one hour left in the trading day.