Bakken Update: Kodiak's Purchase Of Liberty Resources Could Make Or Break Its 2013

| About: Kodiak Oil (KOG)

Kodiak (NYSE:KOG) announced on June 3rd it was acquiring 42000 net acres in Williams and McKenzie counties. This added production of 5700 Boe/d. The acquisitions ups Kodiak's Bakken acreage to 196000 net acres. It will pay $660 million in cash. Kodiak continues to add acreage, and seems willing to pay market value (or a little more). Liberty Resources is a privately held company, and many believed it would be an IPO sometime in the near future. There are no indications Liberty was hurting financially, or was motivated to sell. I would guess Liberty got the deal it wanted, and Kodiak thought there was added value to the purchase.

Given the infrastructure and daily production, Kodiak received a reasonable deal. I also like the transaction, as Liberty is a very good operator and is on acreage I believe to be outside the top tier, but still very good. I do have some issues with respect to timing and leverage as Kodiak continues to add debt and difficulties for management to execute through 2013. Without the deal, Kodiak was well positioned to grow without worries of raising equity. My biggest worry is how it plans to pay for this deal. Kodiak will probably have to go back to its shareholders in the second half of the year. It probably won't be working with in cash flow for another year or two. Managing the new acreage could also be difficult as there have been difficulties with other bolt on acquisitions.

Looking at the acreage, it is still pretty good when considering pad development. Definitely not as good as the Koala Prospect, but it is better than most give credit. The middle Bakken is still productive in this area, but focus should be on the Three Forks. This acreage is in some of the deepest parts of the Williston Basin. With added depth we see higher well pressures, especially the deeper benches of the Three Forks. Not to get too far ahead of myself, but we also have to consider the Red River as a horizontal target.
(Click to enlarge)

The picture above shows average Three Forks thickness. Its new McKenzie County acreage is over 200 feet thick. The majority of this acreage is held by production. This will allow Kodiak to drill and complete as it sees fit, and immediately big pad development. In the table below I have provided production data for Liberty wells in Williams and McKenzie counties.

Well Date County 30-Day IP 90-Day IP
21198 4/12 Williams 1032 754
21197 4/12 Williams 821 628
20748 5/12 Williams 511 412
22067 6/12 Williams 645 493
22068 6/12 Williams 431 419
21481 7/12 Williams 866 656
21578 7/12 Williams 317 285
22495 8/12 Williams 860 613
21141 8/12 Williams 827 565
22522 8/12 Williams 718 631
21680 9/12 McKenzie 656 543
22401 9/12 Williams 699 486
23132 9/12 Williams 851 611
22709 10/12 McKenzie 577 425
23398 10/12 McKenzie 772 496
23201 11/12 McKenzie 638 520
23423 12/12 Williams 1190 854

The above table provides initial production rates for Liberty wells in Williams and McKenzie County. These do not include natural gas or natural gas liquids. In this area, the production mix is about 80% crude to give an idea of barrels of oil equivalent. The Williams wells have outperformed Mckenzie, but all have produced well. All of the wells listed have targeted the middle Bakken. Liberty has not completed one well in the Three Forks formation, making it difficult to know its value at this time. I believe the first and second benches of the Three Forks will outperform the middle Bakken in this leasehold. It is possible Kodiak believes this as well.

Well Lateral Stages Water Proppant
21198 10429 35 262306 3838339
21197 9144 35 255051 3806161
20748 9240 32 192580 2948196
22067 10486 35 256297 4129852
22068 9359 35 250327 4103810
21481 9102 35 241234 4059653
21578 9881 35 224632 3774597
22495 9986 35 243250 4095724
21141 9777 35 248977 4070072
22522 9886 35 248103 4101909
21680 9427 35 252788 3906420
22401 9675 35 247741 4122587
23132 9816 35 240291 4111530
23398 9961 35 245481 4074751
23201 9337 35 245595 4156300
23423 9475 35 245826 4035679

Liberty is a very good operator. Its well design is good as well, with stages under 300 feet, large amounts of proppant and the largest volumes of water per stage I have seen to date. This could be the reason for its outperformance in this area.

In summary, Kodiak has purchased a good leasehold for a reasonable price. The value of this acreage is locked into three and possibly four targets. All 42000 acres should be a good location for pad drilling. This acquisition also adds production for a company that is already growing at a very fast clip. There is some downside to this deal. I like the company and it acreage, but it adds questions going forward. Kodiak will most certainly need to raise equity sometime this year. Before this acquisition, we had clarity in the short term as how Kodiak would progress over the next 12 months. Now that things are a lot less clear for Kodiak we could see significant volatility in its shares. I think Kodiak believes differentials will remain tight and WTI pricing will remain strong. If this is the case, it could turn out to be a great deal. If Kodiak is wrong, 2013 could be a tough year for its stock.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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. This is not a buy recommendation. The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results, do not take in consideration commissions, margin interest and other costs, and are not guarantees of future results. All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market or financial product does not guarantee future results or returns. For more articles like this check out my website at Fracwater Solutions L.L.C. engages in industrial water solutions for oil and gas companies in North Dakota. This includes constructing water depots, pipelines and disposal wells. It also provides contracting services for all types of construction at well sites. Other services include soil remediation. Please contact me via email if you are interested in working with us. More of my articles and other pertinent information on the oil and gas sector, go to