Bakken Update: 2013 Top Bakken Stock Picks, Part 3

| About: Kodiak Oil (KOG)

In parts one and two, I covered two Bakken levered stocks picks. The first was Northern Tier (NYSE:NTI) and Kodiak Oil and Gas (NYSE:KOG). Northern Tier is benefiting from very good Canadian and Bakken differentials. Kodiak is growing production quickly, and proved itself as a top notch operator. Well costs will have a significant impact in 2013. Proppant costs are down 40%. Water costs have also pulled back to 50 cents/bbl from 75 cents in 2012. Service costs are down and infrastructure is being built.

All of this has contributed to lower well costs. More importantly, it has allowed Kodiak to expand its well design. Specifically, it has increased proppant and water. In the deepest parts of the Basin, Kodiak is using 100% ceramic proppant. The increased use of water and proppant produces much better IP rates. It leads to a decreased depletion, and higher EURs. Kodiak's uses the best of everything when drilling and completing wells. This is why its numbers continue to be some of the best in the Bakken. The well results below will show an improvement in Kodiak well design, which is better than in 2012. It is also better than most of its competitors.

Fourth quarter well results didn't disappoint. We saw the same consistent operator, producing better results in the same area. The table below covers Kodiak results from the fourth quarter off 2012 of confidential status.

Kodiak Q3 2012 Well Results

Well County IP Oil IP Mcf Lateral Choke Stages Water Proppant
22466 Dunn 1370 744 8465
22467 Dunn 1975 1179 8460 40/64 27 84563 4059685
20511 Dunn 2647 2168 8999 41/64 28 89363 4253349
21390 McKenzie 2151 3359 8657
21439 McKenzie 2134 5847 9475 38/64 28 95818 3963860
21443 McKenzie 2036 4712 9695 36/64 28 97120 4073522
21468 McKenzie 2522 3613 9709 34/64 28 100768 4049177
21308 McKenzie 2461 3446 9324 34/64 28 88480 4097535
21309 McKenzie 2027 3006 9588 36/64 28 4334933
21202 Williams 978 170 9529 36/64 31 69109 2376644

These new wells have changed since the beginning of 2012. The table below shows Kodiak's completion style at the beginning of 2013.

Kodiak Q1 2012 Well Results

Well County IP Oil IP Mcf Lateral Choke Stages Water Proppant
21064 Dunn 1939 1407 9260 36/64 30 80059 4550000
21224 Dunn 2303 2262 9369 24/64 28 80347 3829100
18517 Dunn 1595 943 9902 31/64 24 75787 3569950
20596 McKenzie 2010 5083 8045 49/64 27 73266 2934600
20413 McKenzie 702 0 5090 12/64 18 53752 2290368

The first two Dunn County wells are in Skunk Creek wells and in the same area as 22466 and 22467. The third well is in Two Shields Butte and in the same prospect as well 20511. The fourth well is in the Smokey Prospect with wells 21390, 21439, and 21443. The fifth well is in the Koala Prospect near wells 21468, 21308,and 21309. Well 21202 is in the Wildrose Prospect and does not have a comparable well from the first quarter of 2012. Kodiak has not drilled any of its Wildrose wells. It did completion work on the three it took over during the acquisition from North Plains Energy.

These two tables are an important comparison. The numbers are not dramatically different, but it shows a transition in the Bakken. Water costs have decreased significantly. Over the past year, Kodiak has done a better job of decreasing this as a percentage when compared to its peers. As a percentage, it had a much larger build out of infrastructure to do than many of its peers. Proppant costs are down 40% year-over-year. The size of these cost reductions should've translated to lower well costs than the 13% realized in 2012. Instead of pushing well costs lower, it is using more water and proppant per well. It is also expanding the number of stages. In reality, costs could be lower, but Kodiak is taking the opportunity to expand its well design for better recoveries. On average, it will use long laterals with 28 stages, 90000+ barrels of water and over 4 million pounds of ceramic proppant. Year-over-year these wells should deplete slower and model to better EURs.

Kodiak's Skunk Creek and Two Shields Butte wells have been quite good. The best way to judge is through comparison. Here are wells completed by other operators in the same Heart Butte Field.

Skunk Creek Q4 2012 Well Completions

Well Operator IP Oil IP Mcf Lateral Choke Stages Water Proppant
22092 (NYSE:QEP) 1073 524 12537 48/64 37 47315 3238120
22649 (NYSE:WPX) 709 465 9131 16/64 15 55471 3183123
21551 QEP 2757 629 12434 40/64 37 55093 3023355
21552 QEP 2351 630 11087 36/64 35 48808 2738060
21553 QEP 2202 775 10418 34/64 35 52869 2234031
21554 QEP 2430 766 9466 48/64 30 44188 2497541
21556 QEP 2376 939 8544 29 44231 1452387

QEP Resources has improved IP rates in Heart Butte Field. Its well design produces a very good 24-hour IP rate, but this may have a higher depletion rate than Kodiak's. QEP is using smaller amounts of water and proppant. This becomes more evident when broken down into lateral lengths. Water helps transport the proppant into the fractured source rock. Larger water volumes will push proppant deeper, effectively propping these fractures open wider and deeper. By doing so, more resource is garnered from the source rock stimulation. QEP seems focused on each well having more feet of contact. This helps early IP rates, but will do little if the proppant is crushed under the weight of the formation, cutting of oil flow from the fractures. I still believe the best well design is one that better stimulates each individual stage as companies like Kodiak and Helis have done.

Comparing Kodiak's Smokey wells were a little more difficult. Its completions are in Pembroke Field, but no other company had a fourth quarter completion there. Sivertson and Haystack Butte fields are adjacent to Pembroke and will be used in this comparison.

Q4 2012 Well Results In Sivertson and Haystack Butte

Well Operator IP Oil IP Mcf Lateral Choke Stages Water Proppant
20956 (NYSE:COP) 962 2320 10146 28/64 28 51362 3403700
21923 COP 2968 1780 8758 32/64 29 137925 3417500
21924 COP 2897 2260 10029 32/64 40 61452 4188480
22610 (NYSE:DNR) 950 1344 8965 20/64 22 35704 1482415
22832 DNR 1739 3848 8547 25/64 22 42635 2045160

Burlington Resources second well is a great completion. This well used more water than any other in this article. This includes wells with laterals 4000 feet longer. Water amounts are just as important as the type and amount of proppant, but it is the mix that optimizes recoveries. Some companies utilize HiWay fracs, which use less water and proppant. There has been some success, but in general, the more water and proppant the better the EURs. Conoco has done a nice job with its well design over the past year. Well refinement should continue to lead to better returns. Denbury continues to lag other operators in the basin, but its specialty is EOR.

Kodiak's initial Koala wells brought positive attention to the company. In 2011, it had a couple of results with EURs of 1000+ MBoe. Kodiak sells this acreage as some of the best, but in reality it is not considered the best, but is a very close second to Sanish, Parshall and Alger fields. Poe Field produces a higher percentage of natural gas. This generates higher IP rates, but is not as economic. Comparable well results were pulled from Poe and Banks Field. Some of these results were pulled from late Q3.

Q3/Q4 2012 Banks Field Well Results

Well Operator IP Oil IP Mcf Lateral Choke Stages Water Proppant
23050 (NYSE:CLR) 954 0 10208 30 60685 2258819
23051 CLR 505 0 10210 30 58924 1974181
21791 (NYSE:STO) 989 3043 10122 28/64
21543 STO 3203 8955 9801 125/64 30 79040 3813070
22541 STO 951 1365 9707 84/64 37 80221 3587177
21694 STO 3347 3705 9497 100/64 39 78157 3758120

Continental continues to use less proppant and water than Kodiak. It has improved its well design to a thirty stage average, but each stage averages 340 feet. In my opinion, it would stimulate the source rock better at 300 feet. Brigham continues to outperform as part of Statoil. It continues to use a less restrictive choke, but seems to vary this depending on geology. Stage length varies from 327 to 244 feet. The 39 stage well seems to have stimulated the source rock better as it had better results from a lateral 400 feet shorter and with a more restrictive choke. Part of the reason for Brigham's higher IP rates stem from a larger choke. Choke size has two theories with reference to well pressures. An old school of thought believes well pressures should be kept high for better long-term production. It is believed the loss of pressure hinders production and can hurt ultimate recoveries. Brigham seems to believe by using a less restrictive choke more resource can be garnered in the short term, reducing payback times without hurting longer-term production. So far Brigham seems to be right. It could take decades to prove this. Brigham uses large amounts of water and proppant. Continental has been more conservative keeping well costs low. It has lower IP rates, both in the short term and several years out.

Kodiak's Wildrose Prospect is much different than the areas covered above. The source rock is not as deep reducing drilling costs. It is lower pressured, decreasing initial and ultimate recoveries. The play sees little media attention, but is considered an economic area. Although well pressures are lower, the middle Bakken still has good thickness and should support multiple well pads. The upper Three Forks is also a target, adding upside. The table below provides well results from the third and fourth quarters of 2012 in Wildrose and Corinth fields.

Q3 And Q4 Of 2012 Well Results In Wildrose and Corinth Fields

Well Operator IP Oil IP Mcf Lateral Choke Stages Water Proppant
22784 (CSCTF.PK) 286 291 9547 32/64 35 49196 2805000
22540 CLR 291 390 9659 32/64 29 59664 3854134
22591 CLR 115 149 9781 42/64 30 56045 3711170
22284 CLR 148 166 9635 44/64 30 54291 3866550
22422 CLR 331 327 9706 24/64 30 56786 3673340
22362 CLR 593 616 9312 30/64 30 56614 3616730

Crescent Point has a large Bakken acreage both in the United States and Canada. Much of its capex is spent on the Canadian side of the border, with only 3% going to North Dakota and Montana. The majority is located in Divide and north Williams counties. Crescent's well design uses a large number of stages with an average choke and below average water and proppant. Less water and proppant are being used in this part of the basin. Due to lower recoveries, it is necessary to keep costs down. Sand and resin coated sand are used instead of ceramic proppant. Continental's wells all use more proppant than Kodiak's Wildrose well in the first table. Kodiak did use more water. All of Continental's wells had lower IP rates. The choke didn't seem to be as much of a factor as Continental used several different sizes. Choke size is less important in areas of lower pressure.

In summary, Kodiak continues to outperform the competition with a better well design. Costs are higher, but it now uses 85000 to 100000 barrels of water per completion and over 4 million pounds of ceramic proppant. Kodiak has been able to increase both and still see a substantial decrease in well costs. This design is shared by Helis, which sold its acreage at a large premium to surrounding prospects. It also had a large number of wells that modeled over 1000 MBoe, with several above 1500 MBoe. The increased water and proppant usage will slow depletion and increase IP rates and EURs. The improvements seen here should translate to better overall production numbers for 2013.

Disclosure: I am long NTI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not a buy recommendation. There are many economic variables that can affect the price of a stock, especially the price of oil. It is impossible to predict how this will affect a stock and can cause a loss of some or all of an investment. I have other articles at