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Cash Perspective: The Big Three Bakken Shale Companies

It’s no secret that the Bakken shale in North Dakota is producing tons of crude oil and natural gas. As with many other shale rock formations in the U.S. and Canada, the increased adoption of advanced drilling techniques and fracking has allowed energy and production firms to finally tap the rich energy resources locked within its rocks.

For investors, the Bakken shale remains the place to be when it comes to big portfolio profits.

Current production from the field has already surpassed earlier estimates, but according to the state’s Mineral Resources Department, energy companies — along with investors — haven’t seen anything yet. The agency now predicts that the state’s 17 counties in the Bakken will churn out roughly 1.6 million barrels per day by the time 2017 rolls around. That’s nearly double the region’s current production numbers.

That volume will help the Bakken shale surpass several second-tier OPEC nations in terms of production, which is a huge win on the road to energy independence. And given the Bakken’s continually upped resource and production figures, investors need to own a piece of it in their portfolios. Here are three of the top picks:

Continental Resources

When it comes to the Bakken shale, perhaps no one does it better than first mover Continental Resources (CLR). Founder Harold Hamm saw the potential of the field early on and used the E&P firm to amass a huge 1.1 million-acre stake in the field. That significant acreage continues to pay benefits for the firm.

Just how significant? Continental expects to raise its total production by 38% this year, which will mark the fourth year of double-digit increases. Perhaps more impressively, CLR estimates that 2014 will see oil and natural production grow by another staggering 32% in 2014 — reaching an average daily production of 170,000 to 180,000 barrels of oil equivalent per day. Of that total production, 70% is expected to be higher-priced and higher-valued crude oil.

With West Texas Intermediate oil prices now hovering in the $100 to $105 per barrel range, Continental has become a cash flow machine. Operating cash flows have surged from less than $650 million back in 2010 to more than $2 billion for the last four quarters.

With a forward P/E of around 15, CLR shares aren’t exactly cheap. However, you’re paying a premium for the leading producer in the region and with price targets in the $130 range — a 16% increase over current prices.

Oasis Petroleum

Oasis Petroleum (OAS) is quickly becoming a Bakken pure-play.

The company has been on an acreage-buying binge, and earlier this month Oasis spent about $1.5 billion on four separate acquisitions of assets in the Williston formation — which includes the Bakken and neighboring Three Forks. Those acquisitions boosted its total acreage in the region by more than 49% to sit at a whopping 492,000 acres. The deals will now make Oasis the seventh-largest land holder in the Bakken.

I know what you’re thinking — seventh isn’t a prime position. But given how small OAS is, that’s actually pretty impressive.

According to Bloomberg, Oasis owns about 94 acres for each $1 million in enterprise value. Given how eager larger integrated oil firms are to boost their own production via M&A, that puts OAS in a great place and offers potential buyers some of the greatest value per acre among Bakken shale producers. Even more so than buyout rumor staples like Whiting Petroleum(WLL).

Meanwhile, oil production at Oasis continues to rise, making it even more lucrative. OAS shares currently trade with a forward P/E of just 12.83.

Oneok Partners

Oneok Partners (OKS) isn’t a producer of crude oil or natural gas. However, the firm is equally important to the future of the Bakken.

One of the biggest issues facing producers in the Bakken shale is the lack of sufficient pipeline infrastructure to get their energy to end-users. The prolific field is also producing a record 9.7 billion cubic feet of natural gas per day. In fact, producers are forced to “flare” or burn roughly 30% of that gas because there simply isn’t enough infrastructure in the region to capture and use all of that fuel.

That’s where the pipeline firm comes in. Oneok is undergoing a massive build-out in the region to increase capacity for natural gas transmission.

The master limited partnership already has the most exposure to Bakken natural gas liquids processing capacity, but still plans to invest $2.5 billion through 2015 for Williston basin projects. Those projects will increase its processing capacity to 610 MMcfd to help reduce the flaring problem. Likewise, a new pipeline is in the planning stages, designed to move crude oil from the Bakken to the storage depots in Cushing, Okla.

Overall, Oneok — and its 5.5% dividend yield — make it the best way to play the needed infrastructure in the Bakken.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

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