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Kodiak Oil & Gas (NYSE: KOG) Boosts Bakken Assets

Written By Jason Stutman

Posted June 4, 2013

With the emergence of younger championing shale plays such as the Wolfcamp, Cline, and Eagle Ford formations, the Bakken has been spending an increasing amount of time behind the curtain.

The Bakken is becoming ‘old news’ to the masses, but that doesn’t mean there aren’t any developments worth following. In fact, North Dakota continues to set record rates of oil production thanks to the Bakken.

ND Bakken Production

Additionally, estimates of available Williston Basin reserves have more than doubled recently – the Bakken and Three Forks formations now hold an estimated 6.7 trillion cubic feet of recoverable natural gas as a result of advancement in production methods.

There are still investment opportunities in North Dakota.

Still Here

Kodiak Oil and Gas (NYSE: KOG) is increasing its stake in the Williston Basin. On Monday, the company announced its intent to acquire additional Bakken and Three Forks assets.

If all goes as planned, the deal will add 42 thousand net acres to the oil and gas company’s acreage holdings. This is approximately a 27 percent increase from Kodiak’s previous holdings in the Williston Basin.

The agreement includes 35 drilling units and is expected to close in July 2013 – Kodiak will add a seventh rig to its current six-rig fleet at this time.

Kodiak is purchasing the assets for $660 million from Liberty Resources, a privately owned energy company located in Denver, Colorado. The acquisition will be funded through Kodiak’s current credit facility.

The loan will mature in April 2018, which does raise questions about Kodiak’s need to raise equity. However, the value of these corporate expenditures is likely to alleviate these concerns.

Steady Growth

The additional assets will add an estimated 5.7 thousand barrels per day to current production levels immediately upon closing. Production is also expected to increase when a current completion project in the Three Forks is finished.

Kodiak’s total sales increased from $79.9 million in the first quarter of 2012 to $165.1 million in the first quarter of 2013 – a yearly growth rate of 103 percent.

Kodiak reported an average yield of 21.7 thousand barrels per day in its most recent quarterly report, making the expected addition of 5.7 thousand barrels per day a 26 percent increase.

This matches nearly perfectly with the increase in acreage holdings, meaning the acquisition should keep Kodiak on a steady track forward.

Kodiak is not taking a gamble here – the proposed acquisitions are located in the companies primary operating areas and will produce a similar rate of yield (both per day and per acreage). Kodiak’s chairman and CEO Lynn Peterson appropriately labeled the acquired assets as “accretive on all measures”.

Considering the “accretive” nature of this acquisition, you could expect a similar increase (close to 25 percent) in sales as long as yield continues at a steady rate throughout the remaining quarters in 2013. With plans for increased LNG exportation out of the United States, it also would not be surprising to see a hike in natural gas prices over the next several years.

No Risk, No Reward

There is definitely an upside here, and it looks like Kodiak will be receiving a pretty good deal. However, you can expect to see increased volatility in Kodiak – at least until uncertainties regarding equity and production rates surrounding this deal diminish.

And while the long-term upside for Kodiak remains strong, the company is clearly fixated on North Dakota shale. The potential for large growth opportunities in the Bakken and Three Forks is dwindling – companies like Kodiak are becoming few and far between.

Luckily, there are still hidden shale plays outside Texas and North Dakota, just waiting to be the next main-stream hype.


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