The Bakken shale fueled an economic boom in North Dakota in the early part of this decade. Oil drillers flocked to the region for a chance to unlock the treasure trove of oil trapped in that tight rock formation. The state's oil boom, however, quickly went bust when oil prices began crashing in late 2014.
While the region has started coming back in recent years as oil prices have lifted, it's not as in demand as it once was. That's due in large part to the emergence of the Permian Basin . Yet while many in the industry have turned away from the Bakken to that red-hot area, Hess (NYSE: HES) has remained focused on getting the most out of its position in North Dakota. Now, the company is on the cusp of cashing in on its oil riches.
Image source: Getty Images.
Ramping back up
Like many drillers, Hess pulled back on drilling in the Bakken during the oil market's recent downturn. It dropped down to just two rigs in 2016, which was enough to keep its production from falling too much. It started ramping back up in 2017, slowly increasing its rig count back up to six by the end of last year. The company plans to keep that six-rig drilling pace through the end of next year.
At that activity level, Hess believes it can grow its production at a 20% compound annual growth rate through 2021. That should boost its output from 110,000 barrels of oil equivalent per day (BOE/D) at the end of 2017 to more than 200,000 BOE/D by 2021. That makes the Bakken a key near-term growth engine for the company.
Releasing the cash flow gusher
Hess expects to transform the Bakken into a cash flow machine after next year. It plans to begin slowing its drilling pace in 2021 so that it can keep production roughly flat, at around that 200,000 BOE/D level. That will enable Hess to cut capital spending so that it can generate more free cash flow. The company estimates that the Bakken will "generat[e] approximately $1 billion of annual free cash flow post-2020 at a $60 per barrel WTI (Western Texas Intermediate) oil price," according to comments by CEO John Hess on the recent first-quarter conference call .
Hess has a big enough resource base in the Bakken to continue producing a gusher of cash flow from the region for years to come. The company currently estimates that it has a "15-year inventory of high-return drilling locations," said the CEO on the first-quarter call. That gives the oil producer high confidence in its long-term plan, which has it on track to grow companywide cash flow at a 20% compound annual rate through at least 2025 when combining the Bakken with its position in offshore Guyana . The company believes it could produce between $2 billion and $4 billion in annual free cash flow in the coming years assuming oil ranges between $55 and $65 a barrel.
Hess has few uses for that money given its plan to convert the Bakken into a cash flow engine after next year, especially since it can also fully fund its Guyana development with cash generated as that project's first phase comes on line in early 2020. So the company will likely return the bulk of its rapidly growing stream of free cash flow to investors through either a higher dividend or a share-repurchase program.
From a forgotten region to a money-printing machine
Hess is nearing an inflection point in the Bakken. It has breathed new life into this once-neglected area and has turned it into a near-term growth engine. However, the company expects to idle it after next year so that it can transform the Bakken into a cash gusher. That should allow the company to start returning increasing amounts of money to investors, which could in turn allow its stock to produce market-crushing total returns in the coming years.
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