Production growth a prime driver
Kodiak (KOG) will focus on increasing production in 2014 in the three regions in the Williston Basin, North Dakota, that are at the heart of the company's oil and gas production. These three regions - Polar (Williams County), Koala and Smokey, in McKenzie County -- have wells with an estimated ultimate recovery, or EUR, of 600,000 barrels of oil equivalent, or boe, to 950,000 boe. The EUR of these three regions is one of the best within the company's acreage in the Williston Basin. Kodiak operated around 77% of its wells in these three regions for 2013 and plans on the same percentage in 2014.
Kodiak will also increase production in this region through its downspacing program. The company has completed downspacing of 12 wells in the Polar and Smokey regions and will extend the downspacing program further in 2014. Within the Polar region, downspacing occurs in the Bakken and Three Forks rock formations. The average 120-day production of an initial pilot project (Polar Pilot Project) revealed around 618 barrels of oil equivalent per day, or boepd. An assessment of the U.S. Geological Survey in 2013 found more oil reserve could be recovered from these two Williston basin formations. The combined oil resources in the two formations is around 7.38 billion barrels of oil, or bbo, with Bakkenn holding around 3.65 bbo and Three Forks around 3.73 bbo.
A better downspacing program will increase production. The initial downspacing spaced wells at a distance of 800 feet between them, while the new downspacing program, Polar Pilot Project 2.0, spaces wells 600 feet apart. This means more wells will be drilled within the Bakken and Three Forks rock formations. The numbers of wells in the middle Bakken increases from six to eight within one mile.
Kodiak is also modifying its downspacing program in the Three Forks region to increase production. Earlier, Kodiak had three wells in the first bench of Three Forks (TF1) and three in the second bench of Three Forks (TF2). In Polar Pilot Project 2.0, the position of these wells has been changed to six wells being placed in the converging area of the first and second bench as Kodiak believes that these two reservoirs could act a single reservoir. The first bench of Three Forks is an oil-producing region in the Bakken, and the second bench is still largely exploratory. The wells in the TF2 have shown potential especially those in McKenzie county; wells drilled by Continental Resources (CLR), ConocoPhillips (COP) and EOG Resources (EOG) have been successful. Thus, a downspacing program could successfully increase the production output for Kodiak. In 2014, the company estimates production will grow by 45% over that of 2013. The average production rate guidance for 2013 is estimated to be around 29,200 boepd.
Better cash flows
In addition to its production increase, Kodiak also plans to maintain its margin on oil sales. The Bakken crude price trades at discount to the West Texas Intermediate, or WTI. Kodiak assumes a differential of around $10 per barrel to the price of the WTI for the coming quarters of 2014, with the WTI price estimated to be $93.33 per barrel of oil in 2014. Kodiak hedged the price of 26,105 barrels per day of oil production, or around 62% of production per day, at $93.29 per barrel. Hedging minimizes the loss that may result with fluctuation in oil prices and can protect Kodiak's cash flow in the coming quarters.
Kodiak has increased guidance on its production rate output by 45%, while it will have reduced capital expenditures for wells. In 2014, Kodiak plans to drill around 100 wells (same as 2013) at a capital cost of $940 million, a reduction of 6% over last year. This brings the cost per well to around $9.4 million this year and will increase cash flow for the company in 2014. One of the major players in the Bakken, Continental Resources, has reduced the cost of wells. Continental has around 1.2 million net acres in the Bakken with around 67% of its total production from this region. Continental plans to further reduce the cost of its wells from $8 million in 2013 to $7.5 million in 2014. At the same time, Continental plans to increase capital expenditure to $2.5 billion from $2.1 billion in 2013 to explore and develop the Bakken acreage.
Kodiak growing stronger
Kodiak continues to focus on increasing production in its Williston basin acreage, concentrating on growth in key regions such as Polar, Koala, and Smokey. The company's downspacing program could enhance the growth of oil production in the coming quarters. Kodiak is also experimenting in the Three Forks region, which also could result in future production growth.
Further, Kodiak could improve cash flow, through less spending on well drilling and development. The company also hedged a large amount of oil produced from price fluctuation. With reduced capital expenditure and hedging of the oil price, Kodiak is expected to improve cash flow in the coming quarters.