Recently, the Bakken Shale (also often referred to as the Williston Basin) in North Dakota has been the source of enormous growth in oil drilling, which has caused costs to increase there. Higher costs eat into the margins of oil companies operating in the area such as Occidental Petroleum (OXY), Whiting Petroleum (WLL), Oasis Petroleum (OAS), and Hess Corporation (HES). Decreasing margins are a negative for valuation and therefore stock prices. Two data points that can indicate the direction and pace of cost changes are income figures and real estate valuation in the Bakken area.
The below chart displays average hourly wages in North Dakota versus national wages on a percentage change basis from January 2007 to present.
As one can see, wage growth in North Dakota has far outpaced wage growth on a national basis. In fact, labor costs have increased by nearly 30% since January 2007. Note that this includes wages across North Dakota and does not concentrate specifically on the western area of North Dakota where the oil boom is happening. Additionally, this includes wages for the entire private sector, and not just those in the energy industry. It is likely that wage growth for the energy sector in western North Dakota is even higher. This is an indication that labor costs have increased significantly for energy companies operating in the Bakken, which is a negative for earnings.
Another indicator to watch for is real estate prices. Many energy companies operating in the Bakken provide housing to employees that are brought into the area specifically to work on drilling projects. Even if housing is not provided, companies must pay employees enough money so that they are able to afford housing. The above graph displays the change in housing prices in Bismarck, North Dakota compared to the national average from January 2007 as reported by Freddie Mac. Bismarck real estate has appreciated significantly over the past several years, while nationwide housing has suffered. Also, note that Bismarck is close to the oil boom area of Williston, but not directly adjacent. Housing has become a valued commodity in the Bakken oil areas lately, and a recent review of a company website targeted towards oil workers found a 260 square foot one bedroom cabin renting for $1,750/month, a level not far from Manhattan’s rates.
This data means that costs are eating into oil companies’ profits, and some have even reduced activity in the area. For example, on its 3Q12 earnings call, Occidental Petroleum (OXY) stated, “In the Williston Basin in North Dakota… we have recently slowed our drilling activity and significantly reduced our rig count in the basin as a result of cost pressures.” These trends are especially negative for companies with a majority of assets in the area such as Oasis Petroleum (OAS), because they may not even be able to shift capital spending to other areas.
Therefore, investors holding stocks which operate in the Bakken/Williston Basin may want to track North Dakota wage and real estate trends as a proxy for the labor costs for these companies. Such companies include but are not limited to OXY, WLL, OAS, and HES. Many of these companies are also found in the Energy Select Sector SPDR ETF (XLE). Investors should note, however, that labor is just one component of cost and it is possible that other components are stable or falling. Market Realist will discuss drilling costs in the Bakken in future articles.