Energy Prospectus

On May 3rd, Bloomberg News reported that Bakken oil had strengthened to a premium against West Texas Intermediate crude after Tesoro (TSO) said it was ahead of schedule in construction of an offloading terminal for the grade at its Washington refinery.

According to CFO Scott Spendlove, the rail terminal with a capacity of 60,000-barrel-a-day will begin operation in September. Though the terminal has got the permission to receive 30,000 barrels of oil a day, the announcement was reason enough for Bakken oil to further strengthen its stand.

Bakken oil strengthened $3 to a $1 premium to WTI. That's the first time since December that the grade has traded at a premium.

A prudent long-term investor should definitely take advantage of this sudden closing of the gap between Bakken crude spot prices and West Texas Intermediate crude prices. In February, this gap was a deficit of over $25 and is now at a $1 premium. This spread has been volatile and this favorable pricing may or may not last. However, the takeaway capacity is finally running much faster than the growth in production.

I called Denbury on May 17th to confirm this. DNR sold their Bakken oil at a $17/bbl discount to NYMEX during the 1st quarter. The primary cause was a refinery that was taking a lot of the Bakken crude was down for a major turnaround (annual maintenance) and a lot of wells getting completed. Too much oil and not enough takeaway capacity.

The problem was fixed by the end of March and the discount actually turned to a premium in April. BTW Bakken crude oil is higher quality than WTI, so it should get a premium.

I was told that using a $5/bbl discount to NYMEX for Bakken oil in the 2nd quarter in my models would be appropriate.

What this means for investors is that we may see higher realized prices for oil in the 2nd quarter from our Bakken companies, despite the recent dip in NYMEX crude prices. This will help CLR, DNR, GEOI, OAS, EOG and WLL. They will also report significant mark-to-mark gains on their hedges, so reported earnings should be quite impressive. Keep in mind that the unrealized gains on the hedges are non-cash items.

DNR also told me that a lot of infrastructure is being completed this year and takeaway capacity should not be an issue going forward.