Kodiak's (NYSE:KOG) Q3 numbers were good, as it continues to outperform on the top line, with a slight bottom line miss. Revenues came in at $299 million. This was a year over year growth of 167.2%. Kodiak had an EPS of 22 cents, which missed estimates by 1 cent. The bulls were with Kodiak going into earnings as the stock has run up significantly over the past month. I am bullish on Kodiak, as it is one of my 2013 top stock picks. I still like the company, but it may have run a little too far, too fast. I am treating pullbacks as a buying opportunity.
On October 22nd, Kodiak provided a Q3 sales volumes report. These were very good numbers with sales volumes at 35.4K Boe/day. It had a year over year increase of 123%. Quarter over quarter sales volumes increased 54%. Kodiak's Q3 sales mix was 90% oil. Kodiak now estimates FY 2013 production to average of 30K Boe/day. This is more than double FY 2012 production of 14400 Boe/day. I liked the report, as Kodiak continues to outperform with respect to production.
Price realizations were very good in Q3, as WTI pricing was above $100/Bbl for the majority of the quarter. The average price received per barrel of oil was $98.19/Bbl. The WTI/Bakken Light differential expanded to $7.50/Bbl. Expectations are that this will widen to $12 to $13/Bbl in the fourth quarter due to scheduled refinery maintenance. It is important to watch this differential closely, as it could have a big impact of revenues. The realized oil price was an improvement of 10% sequentially and 18% quarter over quarter. Kodiak received $6.32/Mcf which was up 3% sequentially and 22% quarter over quarter. Below I have created a table to show Kodiak's trends with respect to expenses.
|Expense ($/Boe)||Q3-13||Q2-13||Q3-12||Y-o-Y (%)||Q-o-Q (%)|
Lease operating expenses were up this quarter. Much of this was due to produced water costs. Kodiak has done a very good job of getting pipe in the ground, reducing trucking costs. It is possible the Liberty acquisition was part of the reason for this increase, but costs were still manageable. I was pleased with Kodiak's cost control in Q3. This continues to improve as management has been a big reason for this turnaround.
Kodiak is known for its excellent well design. This is why it continues to outperform. Much of the run in Kodiak's stock price has been attributed to its down-spacing pilot well pads. We are finally starting to get good production data from these wells, which has been bullish. Kodiak has stated it has had no communication with 12 wells per 640 acres. This could indicate tighter spacing is possible. Kodiak's first test was in its Polar Prospect of southeast Williams County. Those wells are listed below.
|Well||Interval||Lateral||Stages||Water||Proppant||IP 30||IP 60||Total Oil @ 60 Days|
Kodiak's first 12 well pilot was a definite success. Now that all of the wells have at least 60 days of production, we get an idea of how this size of pad will produce. Kodiak states it has not seen any communication between wells in this pad. This means the middle Bakken has ample spacing at 800 feet. This spacing is about 70 feet from the middle Bakken to the upper bench of the Three Forks. The top interval of the Three Forks has 1600 foot spacing, and is 50 feet about the second bench. The second bench is also spaced at 1600 feet. This pad is set up in this manner as it gives Kodiak the opportunity to fill in the 6 remaining first and second bench wells. While doing this, it will also be able to drill the third bench. It is important to understand that its 12 well pilot or three 4 well pad configuration had spacing Kodiak was almost certain would be 100% successful. It had a lot riding on this financially, but also with respect to valuation as it needed to prove this stacked play is feasible. Any failures would have been construed as a failure of the entire Polar prospect.
Although it is very early in the production curve, these 12 wells look to have very good economics. Well 24605 is the best to date, and surprisingly enough it is a Three Forks well. It currently models to a 900 MBo. Well 24604 is the best middle Bakken well, and it models to 800 MBo. As a whole, the middle Bakken outperforms the Three Forks. This is expected, but we continue to see Three Forks hot spots throughout the play. Below is a table of the 12 well pilot project in the Polar Prospect, and the approximate EURs in barrels of oil only.
Although this estimate could be significantly changed depending on depletion the total crude from this pilot is 7764 MBo. What's more important is about half of this will be garnered in the first 5 years of production.
The Polar Prospect is not best in play, although still considered very good. These results are not as good as in the Parshall or Sanish Field. It isn't as good as northeast McKenzie County, as Grail and Antelope fields are better. Both Polar and Koala prospects produce excellent returns, especially with the types of results Kodiak has had. A middle Bakken well with an EUR of 750 MBo will pay out in just 12 months. This is with a Bakken light realized price of $88/bbl.
I would keep in mind, there is considerable downspacing of the Three Forks taking place in the Williston Basin. The map below shows what operators are doing and where.
Kodiak's pilot projects in both the Polar and Smokie prospects are listed above. Continental (NYSE:CLR) is doing the most work with three 320-acre density projects. The most interesting is its Wahpeton project. At this point the project is a success at 660 foot same zone spacing. Whiting (NYSE:WLL) is currently downspacing in the Sanish Field, Pronghorn Sands and lower Bakken Silt. All of these projects are very important. For a long time, this play had been considered as a one interval play. The emergence of the Three Forks provides excellent opportunities in pad drilling. We are only beginning to understand how good this play can be.
In summary, Kodiak had a very good quarter although water costs created a bottom line miss. The bottom line number was still better than I had estimated and the top line was very good. Kodiak continues to outperform with respect to overall production. Going forward, the differential to WTI will widen and this could hurt revenues for many of the Bakken names.
Even so, the Bakken/Three Forks continues to prove to be a very good stacked play. Kodiak's results from its 12 well pilot on the Polar Prospect were excellent, and I would guess this will only get better. There is additional upside to its Liberty acquisition, as this acreage could prove to be much better than expectations. This area provides additional locations, as the lower Bakken silt is a new interval, that we are just beginning to understand. Overall, Kodiak has a bright future. In the short term, valuation is over extended but it is still a very good long term play.
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.
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 into 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. For more of my articles and other pertinent information on the oil and gas sector, go to shaleexperts.com.