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Kodiak: A Long-Term Story

July 11, 2014 | About:
abirk

abirk

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Kodiak Oil & Gas Corp. (KOG) is an independent energy company focused on the exploration, exploitation, acquisition and production of crude oil and natural gas in the United States. The Company has developed an oil and natural gases asset base of proved reserves, as well as a portfolio of development and exploratory drilling opportunities. Its oil and natural gas reserves and operations are concentrated in the Williston Basin of North Dakota.

Financials

Kodiak's production growth has been exceptional over the last few years. The company had production growth of close to 100% for the last year. At the end of 2011, Kodiak had $120 million in revenues, which has gone up to $905 million by the end of the last year - this represents an average annual growth rate of over 200%, exceptionally strong for an oil and gas company. Over the same time period, the stock price has only gone up by 78%. Furthermore, the company has an operating margin of over 38% and net margin of over 15%.

Continued growth can also be seen in KOG registering Q1 oil & gas sales of $257M despite facing very harsh weather conditions & ongoing effects of a Crimea standoff. Oil & gas sales for this quarter represented a 56 percent growth, up from $165.1M reported in the Q1 of 2013. The adjusted EBITDA was one more impressive performer in the quarter and registers earnings of $179.9M in comparison to $124.4M that were reported in the Q1 of 2013.

Kodiak completed the total of 20 gross operated-wells in the Q1 & completed an additional 26 gross non-operated wells. The drilling operations are now expected to continue in this year as it plans on continuing with its non-operated activities. Well-drilling in the quarter had been heavily impacted by the reduction in its drilling costs. In the quarter, KOG invested a total of $208.6M related to the oilfield operations & leasehold operations. This was a little lower in comparison to its previous guidance of approximately $940M.

A Peek-a-Boo into the Future

The region holds approximately 950 net potential future drilling locations which will add substantial production throughout in the coming years. Moreover, the Polar pilot projects, conducted in the last year, also showed significant results with 12 wells in each 1,280 acre drilling spacing unit {DSU}, testing 800 foot spacing between wellbores.

Moreover, the company has allocated $940 million as capital expenditures, down 8% compared to the last year, with $890 million allocated towards drilling completion costs, $40 million for infrastructure and approximately $10 million allocated for small leasehold acquisitions in order to achieve 35-40% growth rate. Further, Kodiak anticipates drilling and completing around 100 wells in the current year, of which 19 wells were completed in the first quarter. So the next three quarters should be yielding around 27 wells each in order to meet the guidance.

KOG will focus on increasing production in 2014 in the three regions in the Williston Basin, North Dakota, that are at the heart of the company's oil and gas production. These three regions - Polar (Williams County), Koala and Smokey, in McKenzie County -- have wells with an estimated ultimate recovery, or EUR, of 6,00,000 barrels of oil equivalent, or boe, to 950,000 boe. The EUR of these three regions is one of the best within the company's acreage in the Williston Basin. Kodiak operated around 77% of its wells in these three regions for 2013 and plans on the same percentage in 2014.

Kodiak will also increase production in this region through its downspacing program. The company has completed downspacing of 12 wells in the Polar and Smokey regions and will extend the downspacing program further in 2014. Within the Polar region, downspacing occurs in the Bakken and Three Forks rock formations. The average 120-day production of an initial pilot project (Polar Pilot Project) revealed around 618 barrels of oil equivalent per day, or boepd. An assessment of the U.S. Geological Survey in 2013 found more oil reserve could be recovered from these two Williston basin formations. The combined oil resources in the two formations is around 7.38 billion barrels of oil, or bbo, with Bakkenn holding around 3.65 bbo and Three Forks around 3.73 bbo.

In addition to its production increase, Kodiak also plans to maintain its margin on oil sales. The Bakken crude price trades at discount to the West Texas Intermediate, or WTI. Kodiak assumes a differential of around $10 per barrel to the price of the WTI for the coming quarters of 2014, with the WTI price estimated to be $93.33 per barrel of oil in 2014. Kodiak hedged the price of 26,105 barrels per day of oil production, or around 62% of production per day, at $93.29 per barrel.

To End

KOG has grown tremendously over the last few years by enhancing its assets portfolio and growing its revenues at an impressive rate. The asset base of the company differentiates it from the other players in the market. Moreover, the company's unique asset structure gives it a competitive advantage over its peers and also helps the company manage the price volatility in the commodities sector.

Kodiak proved itself as one of the most productive energy companies in the sector. Kodiak has a unique set of assets, which will continue to enhance the production of the company. Kodiak Oil & Gas has all the hallmarks of a fast-growing oil producer -- revenue and earnings have soared.

Growth is now set to be very highly driven by the strong line of an asset portfolio as the markets continue to improve within the industry. KOG has already grown over the last 3 years and this is shown by the very impressive revenue-growth with very impressive cash-balances. Kodiak Oil and Gas Corp commands 1 of the very unique assets structure in this industry that should effectively act as the competitive advantage in the forthcoming months.


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