North Dakota’s Bakken Shale play is one of the country’s top producers of crude oil.
Over the last decade, Bakken production went from about 4,000 barrels per day to a high of 1.1 million barrels per day. At the end of April this year, production was just shy of 1 million bpd. And there were more than 10,500 producing wells.
Bakken production ramped so quickly that the biggest challenge has been getting all that oil to refineries.
It has created exciting opportunities for energy investors.
But before we get to that, we need to understand how commodity transportation has evolved in the Bakken.
From Big Rigs to Rails
Five years ago, there were almost no pipelines out of North Dakota. Producers had to haul the oil out in 18-wheeler tanker trucks. Most of those trucks could haul only 8,000 gallons.
That’s just 190 barrels of oil per load. That means 5,263 truckloads were required to haul 1 million barrels.
The 18-wheelers got the job done... but they were expensive.
Then, in 2010, a cheaper option arrived in the form of rail tank cars. “Unit trains” made up of 100-tanker cars hauled crude to East and West Coast refineries.
Each rail tanker car holds 34,500 gallons, or 821 barrels of crude. Four times the carrying capacity of one 18-wheeler.
A 100-car train could transport 82,100 barrels of crude on every trip.
With crude prices around $80 per barrel at the time, rail shipments were the most economical way to ship crude.
So, naturally, rail tank cars were in great demand. American Railcar Industries Inc. (NASDAQ:ARII) couldn't make them fast enough. As a result, profits -- and shares -- soared between 2010 and 2014.
Investors who got in back in 2010 saw their investment rocket more than 150% as of 2014.
But all good things must come to an end. Two factors have slowly eroded the boom in crude rail transport:
- A prolonged period of low oil prices
- Increases in pipeline takeaway capacity.
At current prices, it is far more economical to move crude via pipeline than rail car. So it’s no wonder that shares of American Railcar and other tank car manufacturers have been declining since 2014.
That brings me to the big opportunity for investors...
Nothing Beats a Pipeline
Pipelines are the commodity transport systems of the future. And they’re currently trading at a bargain.
How should you play it?
Longtime readers know I’m a big fan of midstream pipeline master limited partnerships.
Many MLPs sank along with the price of crude, shaking out investors. But to me, they became even more attractive...
Especially MLPs located in the Bakken.
One popular play is Oneok Partners L.P. (NYSE:OKS). It has a big position in the Bakken. It gathers, processes and transports natural gas and natural gas liquids from wells there.
While it’s not primarily a crude mover, it’s benefiting from North Dakota’s no-flaring rule.
This was a rule put in place to prevent Bakken crude producers from continuing to flare off natural gas from its oil wells. (That’s burning the natural gas that comes up while producing crude.) The practice was so bad, you could see all the North Dakota gas flares at night from space.
Bakken flaring is a huge source of greenhouse gas pollution. Under North Dakota’s new rule, all flaring has to cease by the end of this year.
That puts Oneok Partners in the catbird seat. Because exploration and production companies rely on the company to take away their unwanted gas.
It’s just one of the reasons why Oneok Partners is the dominant pipeline company in the region.
Another thing I like about Oneok Partners is its income-generating potential. It currently sports a very healthy 8.05% distribution yield. And it’s in no danger of not being able to pay it.
According to the company’s most recent financial release, its distribution coverage ratio in 2016 is a healthy 1.31. (Typically, I’m happy with a ratio above 1.1.)
Oneok Partners is also uniquely positioned in the Bakken. It’s the only natural gas liquids takeaway provider and natural gas gathering and processing company.
That’s an MLP with a sizable yield... growing demand... and a multi-channel business model. What more can you ask for?
And there are plenty of other well-positioned pipeline MLPs out there. So while crude prices remain low and rail-car companies fall by the wayside, this is the place to look.
Good investing