The Baron of the Bakken Shale

05/23/2012 7:45 am EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Exploiting shale reserves in the US with modern, unconventional drilling methods promises big returns for companies that are well ensconced in these shales, predicts Roger Conrad of Utility Forecaster.

I first recommended Growth Portfolio Core Holding MDU Resources (MDU) in September 1990. It’s since returned nearly 740%, including 8% a year for the past decade, fueled by a 64% boost in dividends.

MDU generates a third of its earnings from oil and gas production. The focus is output from 124,000 acres in the Bakken region, supplemented by properties in the Heath Shale (Montana), Paradox (Utah), and Niobrara (Wyoming) formations. Management is targeting a 20% to 30% boost in oil output for 2012.

Construction services and materials production contribute about a quarter of profit. The recession hit this business particularly hard, but it’s recovering thanks to the need for infrastructure to support drilling in the Bakken.

Regulated gas, electric, and pipeline services generated the rest of the company’s income. The utilities serve nearly a million customers, stretching across the northern tier of the US, also with a special focus on the surging Bakken. Customer growth of 5% is the highest in the industry, and investment is reliably recovered in rate base, thanks to positive regulatory relations.

The aggregate is a company with immense regional and energy business expertise and $3.7 billion in earnings-boosting capital projects planned for the next five years. And it’s backed by one of the industry’s lowest debt-to-capital ratios, just 34%.

Notable headwinds this year include weak natural gas prices, mild winter weather, and weak demand for construction materials. But with first-quarter 2012 results coming in on the high end of guidance, full-year projections of $1 to $1.25 per share look conservative, and management’s long-term earnings growth target of 7% to 10% secure.

Buy MDU Resources up to $24 if you haven’t yet.

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