Over the past decade, North Dakota has risen to become the nation’s largest oil producer after Texas. In 2005, North Dakota’s oil production averaged just under 100,000 barrels per day (bpd), ranking it behind seven other states. By December 2014 oil production in North Dakota had grown by more than an order of magnitude — to over 1.2 million bpd.

North Dakota sits atop the Williston Basin that also lies under parts of South Dakota, Montana and southern Saskatchewan. Within the Williston Basin is the Bakken Formation, which was characterized in the 1950s but only became a significant oil producer with the shale revolution.

Perhaps no other place better typifies the recent boom and bust in the oil industry. McKenzie County, North Dakota is just south of Williston, North Dakota and in the heart of the Williston Basin. I spent last week in the Williston on an assignment for my day job (more on that below), but as always my mind was on investment opportunities as I traveled the area. Much of my time was spent driving around McKenzie County.

The massive expansion in production in the Williston Basin created numerous challenges and opportunities for the oil and gas industries, and for industries serving them. Because this wasn’t historically a region with much oil production there wasn’t a lot of infrastructure for moving the oil. This created a couple of problems as production expanded.

The first was that there weren’t good routes to market for the oil. Given the high prices being paid outside the region, this created a large incentive to develop such routes. A pipeline building spree ensued, but there was already substantial railroad infrastructure in the region. Railroads like Warren Buffett’s BNSF Railway moved quickly to capture market share, and in less than three years the amount of oil being moved by rail increased by over 700,000 bpd:


Source: North Dakota Pipeline Authority

But then the pipeline infrastructure began to catch up, and then oil prices crashed. Oil by rail is still a thriving business, but growth has stalled over the past two years. Pipeline infrastructure, on the other hand, has continued to expand. I will address this in an in-depth article in this month’s MLP Profits.

I mentioned that two major problems were created as a result of the rapid expansion in oil production. The second problem is the main reason I was up there. As oil production increased, byproduct gas production also increased. This associated gas is primarily methane, but also contains heavier gaseous hydrocarbons such as ethane, propane and butane. This gas has characteristics that make it less than ideal for running a generator, and it can be expensive to separate out the heavier hydrocarbons. As a result, this associated gas is of relatively low market value. And as was the case with oil, there was no infrastructure in place to get this gas to markets. So many producers opted to flare it.

You may have seen the nighttime pictures of the Bakken that shows the cumulative effect of all this flaring. Despite the fact that there are no major cities in the area, flaring in the Bakken is significant enough that the area looks like a major city when viewed from a satellite. Likewise for the Eagle Ford:  

This flaring wastes energy and emits greenhouse gases into the atmosphere. As a result, governments are clamping down on the practice, but oil producers are often left without economic options for dealing with this gas. As I heard one oil producer explain it, “The gas on my site has a market value of $600,000, but it will take at least $1.5 million in infrastructure to move it to market. So I flare it.”

In my day job, I am the Director of Alternative Fuels for a company in Arizona called Advanced Green Innovations. One of the problems we have been working to solve is this associated gas problem. I will provide more details in a later article, but we have worked closely with the shale oil and gas producers to engineer a solution to the problem.

In a nutshell, our unit takes high-energy content associated gas and converts it into a consistent quality gas that can be run through a generator, eliminating the flaring while supplying power for the site. One of our units is currently running in the Bakken, and I was sent up to check on its operation. Here I am surveying our unit and the surrounding Bakken from the top of a Weatherford (NYSE: WFT) Rotaflex Long-Stroke Pumping Unit that is producing oil in the Montana Bakken:

This is perhaps only incidental information for MLP investors, but was the reason for my trip. This month in MLP Profits, I will share some particulars of more direct interest to MLP investors. I will have a special article detailing the infrastructure developments in the Bakken over the past couple of years, and provide some first hand reporting on the current scene. I will also have a report in next week’s Energy Letter, and an in-depth report on the Bakken’s oil producers in next week’s Energy Strategist.

(Follow Robert Rapier on Twitter, LinkedIn, or Facebook.)

Portfolio Update

Big Bounces for MLPs, SunEdison   

The Energy Select Sector SPDR ETF (NYSE: XLE) is up 10% since the close a week ago Tuesday, while the Alerian MLP Index is up 21% over the same four trading sessions. This is either the kind of a bounce you see from a washout capitulation or the cruelest of mirages. We’re very hopeful that it’s in fact the start of an actionable shift in sentiment, despite the stubbornly low energy prices.

So what are we doing mucking around in the gutter with solar project developer SunEdison (NYSE: SUNE), which remains down 71% from its peak less than three months ago? We continue to recommend the stock because it continues to promise tremendous long-term upside. And, as the recent market action reminds us, every stray dog eventually gets its week.

That’s already been true of SunEdison, which has so far rebounded 36% from last week’s multi-year closing low of $6.66.

Monday’s push higher followed news that management will hold a conference call early Wednesday to promote ”a proposed series of actions to optimize business operations” and “accelerate cash flow positive operations.” SunEdison subsequently announced plans to cut 15% of its workforce.

While corporate promises of simplification and consolidation of functions along with cost savings on purchases can’t hurt, the sum of these initiatives is likely to fall short of the more fundamental changes needed to restore investor confidence, starting with the cancellation of the offer to buy out Vivint Solar (NYSE: VSLR).

SunEdison still trades below the runoff value of the projects it’s already developed or has under development, amid growing skepticism about leveraged income plays in general and alternative energy projects in particular.

The mistrust generated by the move to buy Vivint, a marketer of residential solar panels on shakier long-term ground than SunEdison’s core utility-scale projects, will need to be addressed with stronger medicine.

So while SunEdison’s long-term future still looks bright, buyers of shares at Monday’s highs are likely setting themselves up for another near-term disappointment.

SUNE remains a buy below the reduced buy limit of $11, but could offer a better entry point later this week.          

— Igor Greenwald