Whiting Petroleum: Dakota Access Pipeline May Reduce Oil Breakeven To $47

By Elephant Analytics, Seeking Alpha |

Summary

  • Whiting’s production comes mostly from the Bakken, which has high oil differentials of $8 to $9 per barrel.

  • The Dakota Access Pipeline is expected to reduce Bakken oil differentials by around $3 per barrel.

  • Although the pipeline has been stalled by controversy over the Lake Oahe section, it is likely to be completed in 2017 (perhaps with a different route).

  • Whiting’s unhedged oil breakeven point may fall to $47 with reduced oil differentials and its EBITDA may improve by around $75 million per year.

Whiting Petroleum (NYSE:WLL) is mainly concentrated in the Bakken with around 90% of its production coming from that region. The Bakken’s competitiveness has been hindered by high oil differentials as an $8 to $9 oil differential is substantial at $40 to $50 oil, while Permian producers often have minimal differentials. The Dakota Access Pipeline promises to significantly decrease Bakken oil differentials though, pushing Whiting’s unhedged breakeven point under $50.

The Dakota Access Pipeline

The completion of the Dakota Access Pipeline has been stalled due to protestsover the route of the pipeline. Most of the pipeline has already been completed, but the contentious part of the route involves a section running under Lake Oahe. A large portion of the Standing Rock Sioux Indian tribe is opposed to this section since the pipeline passes through sacred areas to the tribe and they also believe that the water supply from Lake Oahe would be put at risk by the pipeline. A large amount of protesters have also been drawn to the area to oppose the pipeline.

The Lake Oahe section runs through Army Corps land, and thus permission is needed from the Army Corps to drill under the lake. This permission was recently delayed as the Army Corps mentioned that more discussion with the Standing Rock Sioux was needed. Energy Transfer Partners (NYSE:ETP) and Sunoco Logistics Partners (NYSE:SXL) are now taking the matter to federal court.

There is a general belief that the Dakota Access Pipeline will eventually be completed, although with a decent chance that the pipeline is re-routed away from Lake Oahe due to the controversy over that section. Donald Trump’s victory improves the chances that the Dakota Access Pipeline is completed and should be positive for new pipelines in general. Baird mentioned that Trump’s election meant that “Dakota Access went from being in some doubt to being a solid bet”.

Bakken Differentials And Competitiveness

Whiting believes that the Dakota Access Pipeline would reduce North Dakota oil differentials from around $8.50 per barrel of oil to $5.50 per barrel of oil. BTU Analytics also forecasts a significant decrease in differentials due to new pipelines coming online with Q2 2018 Bakken differentials expected to be over $4 less than Q2 2016 Bakken differentials. The Dakota Access Pipeline should also reduce in pipeline takeaway capacity exceeding production in the Bakken.

A $3 to $4 reduction in oil differentials would make the core Bakken roughly on par with the Delaware Basin Bone Spring play in the Permian based on Raymond James’s Q1 review of the breakeven oil prices for US onshore resource plays. The Permian is continuing to make a lot of discoveries and improvements, so it would still have an edge on the Bakken, but the expected reduction in oil differentials will help the Bakken significantly.

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Source: Raymond James via Natural Gas Intel

Effect On Whiting’s Financials

A $3 reduction in Bakken oil differentials would reduce Whiting’s overall oil differential by around $2.70 per barrel. This would add around $76 million to Whiting’s EBITDA and reduce its unhedged oil breakeven point to around $47 (assuming conversion of its remaining mandatorily convertible notes). At an EV/EBITDA multiple of 6x, Whiting’s value would increase by around $1.25 per share if the Dakota Access Pipeline is completed and its Bakken oil differential goes down by $3 per barrel.

Conclusion

Despite progress on the Dakota Access Pipeline currently stalling out, it is expected to be completed in 2017. This will have a fairly significant impact on Bakken oil differentials, reducing the differential by around $3 and improving the Bakken’s competitiveness. For Whiting Petroleum, the reduced oil differentials could improve its EBITDA by approximately $75 million per year and bring its unhedged oil breakeven point down to around $47. If the pipeline is completed and Whiting’s oil differentials go down as expected, my valuation range for Whiting would be increased to $9 to $11.50.