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North Dakota Oil-worker Digs – Black Goldmine or Pending Dime a Dozen?

Exceptional Yield Claims Should Give Pause for Thought

by Frank Quin

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Welcome to Watford City – Wannabe Property Investment Mecca

It was the title that caught our eye, amongst the raft of investment product promos we get daily in our e-inbox. “Invest in a high yielding property in the USA's largest oilfield”, it said. And when you open the email, one of the first things you see on the graphic is the words “46% Annual Returns”. We had sudden visions of getting rich in the oil business but the notion was just as quickly disabused. The property investment – being promoted on themovechannel.com – is not in an oil rig hauling black gold from under the Texan sun but what are described as ‘Executive Hotel Studios’, in ‘The Great American Lodge’, in Watford City ND.

Watford City, you say? Never heard of it, you say? And you are not alone. For despite its ‘big town’ name, Watford City, North Dakota, is well shy of being a city by any measure, with a population in the national 2010 census of just 1,744 souls within the ‘city’ limits, burgeoning to something over 6,000 for McKenzie County in its entirety. Putting the territory, with fewer than 10 people per square mile, amongst the least populated, and least densely populated, parts of the entire United States of America.

Bakken – The Great North Dakotan Oil Boom

So why would a UK-based property investment promotion website, on which real estate in Florida or The Bahamas are more familiar offerings, be home to an advertised proposal for a hotel property in an anonymous small town in the mid-America boondocks? The answer is in the heading of that email – oil. For Watford City, and the larger Williston – a real city, albeit of modest proportions – a 45-mile freeway drive to the north, occupy the epicentre of an oil rush the likes of which hasn’t been seen in over a century, since that 1901 gusher at the Spindletop prospect ushered in the Texas oil boom.

This time though, it’s the Bakken Formation, first identified for its shale oil deposits back in 1950 and covering an enormous swathe of territory, some 200,000 square miles, in two of the United States – North Dakota and neighbouring Montana – and the Canadian provinces of Saskatchewan and Manitoba. But for decades the discovery lay unexploited, for want of extraction technology and the glut of oil available internationally. By the turn of the current century though, an old technique – the fracturing of oil-bearing rock by very high pressure liquid injection – had been revived and refined into an efficient and cost-effective extraction technique, tailor-made for the geology of the Bakken Formation. Factor in a growing unease in the United States at continued reliance on oil supplies from increasingly unstable sources elsewhere in the world and the Bakken Formation came into its own. In the five years since hydraulic fracturing – aka ‘fracking’ – was first employed in 2008, North Dakota has overtaken Alaska to become the United States’ second-largest oil producing state.

Acute Accommodation Shortage

And of course the extraction of the vast reserves – estimates of ‘technically recoverable’ quantities range from the US Geological Survey’s 3.7 billion barrels to the over 20 billion barrels estimated by Continental Resources, Inc, largest leaseholder in the area – is requiring an ever-growing workforce. The flyer which came through our email contained a quote from the New York Times: ‘North Dakota has a novel problem:’, it reads, ‘plenty of jobs, but nowhere to put the people who hold them’. It’s a real quote – we checked – from a story back in April 2010 and the topic continues to generate plenty of Web content. A chronic shortage of housing in this sparsely-populated part of a sparsely-populated state for the thousands of oil-workers, 15 to 20,000 by some estimates, being employed on the now many hundreds of rigs which have sprouted across the Bakken. Stories of men – mostly it’s men, from all over the US and further afield – living in their cars or pickups as long as weather permits. North Dakota has fearsome winters and as the season approaches these otherwise itinerant workers either find adequate shelter – in the ‘man-camps’ which have sprung up all over, RV parks, home basements, motel rooms or wherever - or ship out.

The Great American Lodge Proposal

So given the need, cometh the entrepreneur. In this instance, a company operating out of Milton Keynes, Buckinghamshire – possibly as far from Watford City as might be imagined – called Property Horizons Group Ltd, which has engaged a US daughter, North Dakota Developments LLC, to build and operate what it describes as the aforementioned ‘Great American Lodge Executive Hotel Suites and Studios’. Using investor funds for the purpose. On offer are a half-share in a single en-suite ‘executive studio’, for $27,950, a full studio for $49,950 or an entire ‘suite’ of six such rooms for $289,700, in each case plus upfront and ongoing expenses. The astute reader will note the discount for bulk.

Hotel? Or Nissen Hut?

We saw CGI pictures of the project on the promoter’s website, northdakotadevelopments.com, which we note have since been removed. Whatever mental image you have of the word ‘hotel’, put it to one side for now. For those images brought to mind not so much an hotel as a Nissen hut (or Quonset hut as they’re known Stateside) – those prefabricated edifices built in large numbers in the world wars as troop accommodation. Common features - single-storey and pre-fabricated, for transport to and erection on site. Indeed, the only meaningful difference in appearance is that whereas Nissen huts had semi-circular roofs, the Great American Lodge is pitched. Once inside of course, the similarities cease. The Great American Lodge is to comprise individual rooms with private amenities, along with communal dining and recreational facilities.

So, lodge-style hotel or Bakken army barracks? Prospective investors can of course make their own assessment once they receive the 20-page presentation on the project which we received, promptly by email, on registering interest. They will also doubtless note that, according to the CGI pictures, the property is apparently to be located in a ploughed field, at an undisclosed distance from Watford City, and that egress to each of the ‘executive studios’ looks like it will be via a wooden veranda open to the elements, including the several feet of snow North Dakota typically receives every winter.

46% Yield - From A Gross of 94%?

But turning from the aesthetics to the financial aspects of this promotion, the big question for us is how those ‘projected rental yields of up to 46% per year’ – the wording of the first item on the first page of the promo document – are to be generated.

It transpires that to get the ‘projected’ 46 percent, an investor will have to pony up the $289,700 which as mentioned earlier is the asking price for a ‘suite’ of six ‘executive studios’. To be precise, what is projected is a 46.4 percent return yearly on this outlay. For the purchase of a single studio-cum-room, the projection is for 44.8 percent, dropping again to 40 percent for the smallest investment, the purchase of a half-share in a room. But these are still big – massive, really – numbers when the equivalent deposit with a UK building society is currently generating roughly a zero percent yield, and a British investor is doing well to be grossing around eight percent from the average residential property investment. So where do these projections come from?

They come from the claim, in the promo document, that each room in the Great American Lodge will generate a revenue of $139 per night for 329 nights per year – an occupancy rate of 90 percent. Quickly do the math and you’ll see that for an investment in a suite of six rooms, that’s $274,386 for one year, or a gross return of 94.7 percent – nearly the total purchase price generated in just the first year. But the deal on offer is that half that revenue will be retained by the promoter, from which it will fund ‘full turnkey rental management.’

Major Corporates Queuing Up?

Is a yield of over 90 percent from this project plausible, year in, year out? For this is what the promoter is claiming, albeit that investors are to receive only half of it. The promoter says yes, because of the enormous demand which now exists for worker accommodation in proximity to the main Bakken Formation oil-fields in the state. An average annual 90 percent occupancy, they say, ‘is much lower than current hotels and motels are achieving’. Many are claimed to be ‘booked out 6 months to a year in advance’ and to be ‘block-booked by the oil companies’.

There is, though, no suggestion in the promotional document that the Great American Lodge will itself benefit from such assured income, ie, that the promoter is going to stitch up a deal with a Chevron, or a Halliburton, to get $139 per night for rooms in the establishment. At best there is a hint that individual investors may succeed in doing so. It’s here, in the Q&A section, answering the question ‘How do workers pay for their rooms?’ - In 95% of cases, the large oil companies … provide housing and accommodation allowances for their workers. In many cases the owner is paid directly.

It could reasonably be assumed though, that any such ‘block-booking’ deals with major corporates working the Bakken Formation would be heavily discounted from the rack rates which hotels and motels post in their foyers, and by extension from the $139 per night which the Great American Lodge is apparently to charge. That’s the way it works. There is of course always the possibility that in Watford City ND, large American corporations – well versed in thrashing out the best possible procurement deals in other contexts – are absolute price-takers when it comes to housing their Bakken Formation work-force. We suspect not.

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