Sunday, July 08, 2012

ND Economy So Good, It's Like Another Country

MANDAN, N.D. — "The economy is so good in North Dakota, it’s almost like being in another country. 

Although Friday’s lackluster national jobs report may have intensified the already deep anxiety among voters about the sluggish state of the economy, here in the nation’s northern reaches, the concerns are exactly the opposite: how to build roads and schools and houses fast enough to keep up with an astounding population boom that has sprung up alongside the country’s most roaring state-level economy. Good years for North Dakota farming, a new technology sector and — most significant — a dramatic oil rush in the state’s west and north have combined to produce an economic explosion that is the envy of the rest of the country — a 3 percent unemployment rate and rising household incomes and state revenue."

21 Comments:

At 7/08/2012 5:08 PM, Blogger PeakTrader said...

The economy of North Dakota will rival the economy of Silicon Valley.

"According to a 2006 study, Silicon Valley was the third largest high-tech center in the United States, behind the New York metropolitan area and Washington metropolitan area, with 225,300 high-tech jobs.

Silicon Valley has the highest concentration of high-tech workers of any metropolitan area, with 285.9 out of every 1,000 private-sector workers. Silicon Valley has the highest average high-tech salary at $144,800.

The San Jose-Sunnyvale-Santa Clara, California Metropolitan Statistical Area has the most millionaires and the most billionaires in the United States per capita."

 
At 7/08/2012 6:45 PM, Blogger Info Source said...

The only problem with North Dakota is that it gets really really cold in the winter. I talked to someone who has lived there all of their life and they said that the population dramatically decreases when winter arrives. Not just the normal migration of people looking for warmer weather...but workers who can't take the frigid temps.

 
At 7/08/2012 7:17 PM, Blogger VangelV said...

The economy of North Dakota will rival the economy of Silicon Valley.

I find this hard to believe. The Silicon Valley companies make a lot of money and are strongly cash flow positive as a group. The ND shale producers have negative cash flows and have to keep borrowing in order to stay in business. Since most of the ND economy now depends on those producers the boom times do not seem to be sustainable.

 
At 7/08/2012 11:27 PM, Blogger Don Culo said...

Who in the hell wants to dig themselves out of the snow during the winter months?

 
At 7/09/2012 1:13 AM, Blogger kmg said...

Who in the hell wants to dig themselves out of the snow during the winter months?

What about the other 100m Americans who live in snowy-winter areas?

By your logic, the mass exodus would have been so total that today, no one would still be living above 38 N latitude..

 
At 7/09/2012 1:25 AM, Blogger PeakTrader said...

I agree with KMG. In Denver Colorado, for example, it's 100 degrees every day for six weeks in the summer and well below zero in the winter, including with the wind chill and blizzards (even in April), with snow two or three feet deep. You can get high altitude tans in the thin air.

 
At 7/09/2012 6:51 AM, Blogger gasminder said...

Vangel said "The ND shale producers have negative cash flows and have to keep borrowing in order to stay in business"

While that's true it's not because of their ND drilling ops. The Bakken is a true money maker - the boom is intense because it is where they put their capital that has been pulled away from the money losing gas shale plays. If oil prices drop that may change.

The real issue for North Dakotans is what happens after the boom? I've seen this time after time - the joy of the booming hydrocarbons play but when it's gone you decline back to the baseline. It's hard because with a 3% UE rate and high salaries even for fast food workers how do you invest the money into a business that will grow post-boom?

 
At 7/09/2012 8:41 AM, Blogger drj said...

The boom should continue as in fill drilling should last for at least 15 years. They will eventually have multiple wells (3 to 7 ) per 2 square miles .

 
At 7/09/2012 8:59 AM, Blogger VangelV said...

While that's true it's not because of their ND drilling ops. The Bakken is a true money maker - the boom is intense because it is where they put their capital that has been pulled away from the money losing gas shale plays. If oil prices drop that may change.

I think that you are missing my point. The money losing shale operations were producing negative cash flows even though the companies were reporting profits. That was because of the accounting rules that permitted them to use estimated ultimate recoveries that could not be supported by the actual production data. I am not convinced that outside of the core areas in the Bakken that it is possible to make a real profit in oil. But the accountants can create a profit by using estimates that would cap depreciation costs at a very low level. Given the depletion rates, it is not a given that the AVERAGE ND WELL will be profitable. The core areas should be profitable but they are a small part of the Bakken play in ND.

The real issue for North Dakotans is what happens after the boom? I've seen this time after time - the joy of the booming hydrocarbons play but when it's gone you decline back to the baseline. It's hard because with a 3% UE rate and high salaries even for fast food workers how do you invest the money into a business that will grow post-boom?

All that is required is liquidation. After the boom prices will have to fall sharply to reflect the real world economics. Those that were smart and took their profits early will have the opportunity to buy back their properties free and clear and still have money left over. Those that went along will have to take their losses. The key is government growth. If the state is prudent and does not add too many full time jobs or provide too many concessions to public sector unions the tax burden may turn out to be manageable. If it does as California did during the tech bubble bankruptcy is inevitable.

One of my friends actually suggested that a prudent governor will load up with debt to build infrastructure and default after the boom is over. The infrastructure will remain after the boom to serve the need of residents and the default will ensure that they do not have to pay for it.

 
At 7/09/2012 9:09 AM, Blogger Ken said...

VangeIV,

Where are you getting your information that these operations produce negative cash flows and why you think it's bad.

What I primarily think of when I read your comments is that expanding companies often operate in the red to finance their expansions. Is there a reason to think these expansions are not good or that something other than expansion is responsible for operating in the red?

It's like saying that a person who recently purchased a house and financing $200,000 of it is going to go bankrupt soon because this person's total liabilities jumped by $200,000.

 
At 7/09/2012 9:21 AM, Blogger VangelV said...

Where are you getting your information that these operations produce negative cash flows and why you think it's bad.

The SEC filings and the conference calls.

What I primarily think of when I read your comments is that expanding companies often operate in the red to finance their expansions. Is there a reason to think these expansions are not good or that something other than expansion is responsible for operating in the red?

It is reasonable to assume that as operations expand you will have negative cash flows and need more debt. The problem is that many of the companies in question have been operating for many years and should be past the need to add as much debt as they have because operations should be self financing. The fact that they aren't is setting off the alarm bells for many analysts but they are drowned out by all the hype coming from the industry and Wall Street.

It's like saying that a person who recently purchased a house and financing $200,000 of it is going to go bankrupt soon because this person's total liabilities jumped by $200,000.

No. It is like saying that the person who bought a house five years ago for $200,000 now has increased his liabilities by $560,000 since then.

 
At 7/09/2012 11:12 AM, Blogger Moe said...

Hooray for ND; now, about the other 52 states....

 
At 7/09/2012 11:23 AM, Blogger Ken said...

"In those 29 years the average 2011 Bakken well will... [g]enerate over $20 million in net profit".

Maybe you're not so good at reading SEC filings and conference calls. Or maybe those things contain misleading or wrong information. Either way, it looks like these wells are operating well within the black.

 
At 7/09/2012 12:11 PM, Blogger VangelV said...

Maybe you're not so good at reading SEC filings and conference calls. Or maybe those things contain misleading or wrong information. Either way, it looks like these wells are operating well within the black.

You mean to tell me that the companies are deliberately lying to the SEC to make their operations look WORSE? On what planet do you live?

"In those 29 years the average 2011 Bakken well will... [g]enerate over $20 million in net profit".

Let us look at the claims on the blog, where people don't lie the way they would to the SEC. :)

We read, "A typical 2011 Bakken well will cost $7,925,000 to drill and complete, and will produce oil for 29 years (27 years longer than the average stimulus-funded "green" company, as Che comments)."

Shale wells deplete rather rapidly. Those $10 million wells will lose 65% of their IP rate within the first year and by the time a decade has passed you are looking at 20 bpd or less. That is a steep hill to climb and given the costs there is no chance that the companies will be able to turn out a profit unless taxes and royalties are reduced by a significant amount.

Let me note that your 'source' is North Dakota Department of Mineral Resources which cares more about the state's take than it does about the company profits. To look at how the companies are doing we have to pay attention to what they tell investors in the SEC filings and the conference calls. And in those filings and calls the companies admit that the large payouts to service companies, governments, and royalty holders are making it impossible to generate positive cash flows from operations. Instead of the hype coming from all sources I suggest that you take a look at the 10-Ks.

 
At 7/09/2012 7:02 PM, Blogger Craig Howard said...

Who in the hell wants to dig themselves out of the snow during the winter months?

Anyone who needs a job and finds it there. This isn't rocket science.

 
At 7/09/2012 9:00 PM, Blogger gasminder said...

I think that you are missing my point. The money losing shale operations were producing negative cash flows even though the companies were reporting profits.

Not at all, and if you check back to some of my previous comments on these topics you will see that I am in agreement with much of your commentary on shale gas production (and the associated accounting dodges). However it appears that you are conflating a lot of the problems with shale gas plays to the Bakken. Core Bakken wells are reaching payout is 5-6 months. Ultraflat & unrealistic decline curves are not necessary to make the play economic at $80 oil. I don't have access to "average ND" Bakken decline curves but unless you are a consultant in the trend I doubt you do either. I'm not even sure how to define that.

The critical difference of opinion here is that you are equating gas shale plays and all their issues with plays that are referred to (incorrectly) as "oil shale" plays. The Bakken and Eagleford are not producing from shales. The oil from both is being produced from thin carbonate layers contained within the shales. It requires hz & frac to access economically but once that is done the Bakken in particular behaves more like a large tight conventional reservoir.

That's probably too much detail for this forum - bottom line is if wells are paying out in 6 months they are making money.......

 
At 7/10/2012 10:19 AM, Blogger PeakTrader said...

"The economy is so good in North Dakota, it’s almost like being in another country."

However, the U.S. economy has become weaker. It seems, the ECRI was correct, or at least the economy slowed in 2012:

ECRI’s Achuthan ‘Recession Has Started’
July 10, 2012

"What we said back in December was that the most likely start date for the recession would be in Q1 and if not then, by the middle of 2012. I’m here to reaffirm that. I think we’re in a recession...it is very rare that you know you’re going into recession when you’re going into recession. It often takes some big hit on top of the head."

 
At 7/10/2012 1:37 PM, Blogger VangelV said...


"What we said back in December was that the most likely start date for the recession would be in Q1 and if not then, by the middle of 2012. I’m here to reaffirm that. I think we’re in a recession...it is very rare that you know you’re going into recession when you’re going into recession. It often takes some big hit on top of the head."


How about that; the realists on this thread may have been right. What are the odds that they could see something that the optimists chose to ignore?

 
At 7/10/2012 10:23 PM, Blogger VangelV said...

However it appears that you are conflating a lot of the problems with shale gas plays to the Bakken. Core Bakken wells are reaching payout is 5-6 months. Ultraflat & unrealistic decline curves are not necessary to make the play economic at $80 oil. I don't have access to "average ND" Bakken decline curves but unless you are a consultant in the trend I doubt you do either. I'm not even sure how to define that.

Which companies are reporting payouts in 5-6 months? Have you checked their cash flow statements and balance sheets to check on these claims? As I have stated many times, I have looked long and hard for companies that were not adding massive amounts of debt to their balance sheets and showing positive cash flows that could finance future drilling. So far I have not been very successful in finding them. And when I ask for examples all I hear are crickets.

 
At 7/11/2012 11:02 PM, Blogger Bakken1515 said...

Vangel look at denbury onshore for an example

 
At 7/12/2012 8:49 AM, Blogger VangelV said...

Vangel look at denbury onshore for an example

Where would one find the SEC filings?

 

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