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
(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|
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.
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.
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