Bakken Update: Kodiak Has Great Quarter And A Production Ramp Into High Crude Pricing

Aug. 4.13 | About: Kodiak Oil (KOG)

Kodiak (NYSE:KOG) crushed EPS estimates in Q2, reporting $.22 versus the Street's estimate of $.13. It had revenues of $178 million missing by $8 million. These results couldn't have come at a better time, with many analysts wary with its most recent purchase of Liberty. The EPS beat is important, as no one questions its abilities as an operator. It continues to outperform in the Bakken, using all the best stuff which continues to drive IP rates. Kodiak's issues have been around cost, and some believe management has increased its total acreage too quickly. This quarter is hopefully a sign of things to come.

Kodiak is an intriguing play based on excellent production growth. It increased oil and gas sales 102% year over year and 5% from Q1. Adjusted EBITDA grew 94% year over year and 5% sequentially. Average daily sales volumes increased to 23200 from 21700 in the first quarter. Kodiak continues to spend money to reduce costs. Its drilling of SWD wells and related infrastructure is very important, as water continues to dog bottom lines of Bakken operators. Current well costs without equipping runs between $9 and $9.2 million. On July 12th, it closed on the Liberty purchase, increasing its total Bakken acreage to almost 200000. Kodiak has 7 operated rigs running and plans to stick with this number through year end. It recently added a second completion crew, with a third crew to help complete some wells in the Liberty purchase. Those two crews are on an as needed basis. The production ramp continues as it completed 24 net wells compared to 18 in Q1. It estimates completing 29 Q3 wells. Differentials were excellent in Q1, with a slight drop off in Q2. Differentials averaged $5.50/Bbl, but with oil above $100/Bbl margins are approximately $60/Boe. This compares to $3.50/Bbl in Q1. Currently those differentials are in the $7 to $8 range.

Kodiak's pilot projects could be the biggest catalyst in 2013. There are a few reasons for this, but the biggest has to do with where its acreage is located. Almost all of its acreage is in very good Three Forks areas. When investors speak about the Sanish and Parshall fields, these are thought of as the best middle Bakken areas, but the Three Forks is not nearly as good. In Kodiak's acreage along the river, and also in its Smokey Prospect, we have found the Three Forks to be 200 to 250 feet thick. The majority of this acreage is prospective three benches. Because its acreage is on some of the best stacked play areas, its success is measured more on its Three Forks source rock than the middle Bakken. It currently has one pilot in the Polar Prospect and another in Smokey. The Polar pad is a total of 12 wells all of which are completed. The Smokey pad has 8 completed with 4 left. Kodiak provided the release below from the Polar pilot.

Recent Operated Well Completions

24-Hour
IP Rate

Well Name

County

Formation

BOE/d

P Wood 154-98-2-27-34-15H

Williams

Bakken

2,693

P Wood 154-98-2-27-34-16H

Williams

Bakken

2,912

P Wood 154-98-2-27-34-16H3A

Williams

Three Forks

2,205

P Wood 154-98-2-27-34-16H3B

Williams

Three Forks

2,525

P Wood 154-98-3-27-34-14H

Williams

Bakken

2,403

P Wood 154-98-3-27-34-14H3

Williams

Three Forks

2,457

P Wood 154-98-3-27-34-15H

Williams

Bakken

2,666

P Wood 154-98-3-27-34-15H3M**

Williams

Three Forks

1,204

P Wood 154-98-4-27-34-13H3

Williams

Three Forks

3,482

P Wood 154-98-4-27-34-14H3

Williams

Three Forks

2,289

P Wood 154-98-4-27-34-13HA

Williams

Bakken

2,771

P Wood 154-98-4-27-34-13HB

Williams

Bakken

2,982

Average

2,549

Click to enlarge

** Restricted surface facilities during initial flow period

Click to enlarge

The above table was modified to simplify the results. It's interesting that the best IP rate was a Three Forks well. The middle Bakken wells had an average IP rate of 2738 Boe/d. The Three Forks average was 2360 Boe/d. Keep in mind that one of the IP rates in the Three Forks was low due to restricted surface facilities. If I remove that well, the Three Forks average increases to 2592 Boe/d. These strong results make me optimistic, but remember these are only 24-Hour IPs, and we will need at least 90 days of production to see how these wells model. If the Polar and Smokey pads produce within 10% of earlier wells, production goals will easily be met. Kodiak's 2013 production guidance of 30000 to 34000 Boe/d looks achievable. Currently, I have them at the top end of guidance, but if its pilot projects have problems, Kodiak will come in at the low end or miss. Current production is 34000 Boe/d. Cap ex is revised up to $1 billion, as Kodiak is trying to get production on line while WTI pricing remains strong. This also increases risk, as a falling oil price would be tough on the operator, but remember it is well hedged. The reason I like Kodiak's move here to take advantage of high oil prices has to do with why WTI continues above $100/Bbl. Currently domestic feedstocks continue to U.S. refineries. Now that companies like PBF (NYSE:PBF) in the northeast and Tesoro (NYSE:TSO) in the southwest are able to use the rails for better oil prices, we see demand running down supply to Cushing. I do not know how long this will last, but I believe oil prices will remain strong through year end. Brent is still making its way to some of the coastal refineries, but this will slowly decrease through year end as more domestic crude hits the rails.

I still believe that Kodiak's Purchase Of Liberty Resources Could Make Or Break Its 2013. As I have studied Liberty's well results in Williams and McKenzie counties, my optimism has increased. This area's geology is different than other Kodiak prospects. These wells will not produce the very high IP rates of the Polar Prospect, but this area is still quite good. I believe Kodiak was getting a deal buying this operator for another reason. Liberty has had as good success in western Williams as any other operator. Keep in mind, EOG Resources (NYSE:EOG) is active here. Liberty's results are interesting because it uses more water than any other operator. I will include a series of operator production in this area. Kodiak should easily come in at the top end of guidance for 2013, since Liberty wells model at a higher EUR than any other operator. I am not just talking about this specific area, but in all of North Dakota. First we will go over well design. Liberty is unique in its design, and this is the reason it outperforms. Below I have provided a table that provides Liberty's water and proppant volumes.

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
Click to enlarge

As you can see above, Liberty uses approximately 25 barrels of water per foot of lateral. Kodiak, in comparison, uses 9 barrels per foot. Keep in mind, Kodiak is at the high end of this average. We rarely see an operator use more than 10 barrels per foot. Liberty, like Kodiak, uses significant amounts of proppant. It uses approximately 400 lbs./foot. Liberty was motivated to sell and this doesn't seem to have anything to do with its ability to drill and complete. This well design is expensive, and it would have taken Liberty a substantial amount of time to drill through any significant inventory. Kodiak, on the other hand, has the backing of banks and an already significantly levered company. Liberty's results have been fantastic. Below, I will provide a series of operators working Kodiak's new acreage. This will provide an idea of how much better Liberty results were before the acquisition. It will also provide an average out performance to guide production from these 42000 acres. The table below provides IP rates of some of Liberty's wells.

Well Lateral Ft. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
22067 10486 645 493 426
22495 9986 860 613 499
22068 9359 431 419 366
21481 9102 866 656 526
21198 10552 1032 754 617
23423 9657 1190 854 699
Avg. 9857 837 632 522
Click to enlarge

An average Liberty well produces 93960 barrels of oil in the first 6 months. This lower quality acreage, when compared to northeast McKenzie County, is out producing better fields by a significant amount of resource. As a comparison, I am providing data on other operators in the same general vicinity. Halcon's (NYSE:HK) well results underperform Liberty wells, but it has improved on Petro-Hunt's (previous operator) well design.

Well Lateral Ft. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
22822 9834 338 298 258
22823 9413 263 216 215
22054 9585 333 312 243
22545 9336 276 248 219
Avg. 9542 303 269 234
Click to enlarge

Halcon is relatively new to this area, but was able to improve production immediately. Marathon (NYSE:MRO) has not focused on its western Williams County acreage. It is a secondary area and not considered core. Because of this, results have lagged.

Well Lateral Ft. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
21575 8992 239 210 203
21613 9205 80 88 77
21407 8851 46 39 80
21335 9254 143 151 172
21361 9081 360 192 218
Avg. 9076 174 136 150
Click to enlarge

Obviously, Marathon had two wells that had early problems. The 180-Day IP would increase to just below 200 Bo/d if the two were removed from the list. In the table below, EOG performed better than all other operators except Liberty. Keep in mind, EOG has several short laterals on the list, which increases its production per foot.

Well Lateral Ft. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
19836 9106 599 411 328
20113 7588 388 264 229
21008 8602 553 373 310
19300 8479 711 519 383
19964 10217 617 413 322
19281 6518 417 286 210
20069 8648 504 367 302
19529 9056 559 403 343
19348 8732 572 406 323
19478 8793 669 458 320
18538 9408 599 389 333
20158 6072 325 178 186
19928 9118 608 414 313
20128 5846 324 266 231
20152 6328 379 282 230
20150 6082 459 329 256
19695 5122 365 269 217
Average 7866 509 355 284
Click to enlarge

The last operator is Continental (NYSE:CLR). It is one of the more active operators in the area. It uses a conservative well design, and good production levels.

Well Lateral Ft. 30-Day IP Bo/d 90-Day IP Bo/d 180-Day IP Bo/d
21641 9250 671 473 392
23054 9638 565 403 323
21639 9565 499 270 254
21027 9272 413 292 238
21778 9665 334 230 198
22329 9550 549 392 342
21966 9533 265 255 218
21971 9791 543 365 261
Avg. 9533 480 335 278
Click to enlarge

As you can see, Liberty may be the best operator in western Williams. Since Liberty has produced significantly more resource, the acreage becomes more valuable, but more importantly production guidance is easier to meet or beat.

Operator 180-Day Crude Production
Liberty 93960
EOG 51120
CLR 50040
HK 42120
MRO 27000
Click to enlarge

When the rate is broken into total barrels produced we begin to see how good of a deal Kodiak made.

In summary, Kodiak had a great quarter. It is managing to keep costs down and produce better bottom line numbers. Kodiak continues to drill SWD wells and get infrastructure in the ground to take help with water associated costs. It is on pace to meet the very large production numbers for 2013. Its Polar Pad released very good early rates, with no real bad news. Kodiak also stated its Smokey Pad was two-thirds done and is progressing as planned. Its Liberty purchase could be a home run, as production by this operator was as good as much better acreage to the east. Kodiak is ramping production and increasing cap ex while WTI pricing remains high, with tight differentials. Kodiak is well hedged if the price of oil falls, but I estimate the current environment will continue to support WTI pricing above $100/bbl. I would be a buyer on pullbacks.

Disclosure: I am long KOG. 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. 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 our website at shaleexperts.com. 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 shaleexperts.com.