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Summary

  • Kodiak has one of the best assets portfolio in the oil and gas sector.
  • The impressive addition to the assets and reserves should support the growth in production and sales volume.
  • The oil heavy portfolio of the company will protect it against the price volatility in the commodities sector.

Kodiak Oil and Gas (NYSE:KOG) has grown tremendously over the last few years by enhancing its assets portfolio and growing its revenues at an impressive rate. The asset base of the company differentiates it from the other players in the market. Moreover, the company's unique asset structure gives it a competitive advantage over its peers and also helps the company manage the price volatility in the commodities sector. In our previous article about the company, we gave an overview of the performance of the company and its future prospects. However, the focus of this article is to pinpoint the most productive and lucrative assets of the company that will largely contribute to future growth of the company.

A Look at the Assets

Giving a brief recap of the asset base of the company, Kodiak owns an estimated proved reserves of 138.3 MMBbls of oil and 174 Bcf of natural gas as of the end of the last year. Moreover, using the distinct asset formation advantage, Kodiak's asset composition includes 83% crude oil and 17% natural gas on an energy equivalent basis, which will allow the company to hedge against commodity prices volatility as oil has been less volatile in the near past. Oil heavy companies have seen lower volatility and the performance of these companies have been far superior to the gas heavy companies. Furthermore, the company has all of its reserves located within the continental United States with 99.9% concentrated in the Williston Basin of North Dakota, providing geopolitical stability to the company, over acreage of approximately 327,751 gross and 173,011 net acres.

The remaining assets are in the Green River Basin with acreage of 34,599 gross and 10,127 net acres. With such asset acreage, Kodiak remains the most exciting play in the Bakken. Kodiak is growing its production at an impressive rate and the company does not intend to slow this growth. For the current year, plans are in place to drill over 100 wells, which should enhance the production for Kodiak.

Future Growth is Coming from the Impressive Assets Base

For any oil and gas company, useful reserves play a key role in the success and growth in the long run. Similarly, Kodiak is one of the energy companies that has been able to replace its reserves at an impressive rate. Polar/Ursid area has the highest remaining drilling capacity among the company's assets with 21.3% of the total proved developed formations. This region is expected to be a major contributor towards the total production of the company. Moreover, the company drilled more wells in the Polar region than anywhere else in the last year and also plans to increase its exposure in the Polar area with an intention to amplify its operated wells area to 69% in 2014 compared to 47% in the last year.

The region holds approximately 950 net potential future drilling locations which will add substantial production throughout in the coming years. Moreover, the Polar pilot projects, conducted in the last year, also showed significant results with 12 wells in each 1,280 acre drilling spacing unit {DSU}, testing 800 foot spacing between wellbores.

However, the increase in the total proved reserves is also due to drilling and completion activities in other Bakken properties in the last year. The other key growth drivers include Wildrose and Dunn County asset formations with acreage of 22,000 and 40,000 net acres, respectively. The estimated ultimate recovery {EUR} of the Dunn County asset reserves is approximately in the range of 800-950 MBOE, which is greater than the EUR of the Polar asset reserve with estimated ultimate recovery figure in the range of 600-950 MBOE.

Moreover, the results of the downspacing pilot projects have been impressive. The multiple wells in the Middle Bakken region ensure improved resource recovery and enhance the reserves. The company increased the number of proved but undeveloped locations from 193 gross to 458 gross in the last year. Furthermore, the company also expects to reap considerable production benefits from the downspacing pilot project by late 2014.

Fundamentals Remain Strong

Kodiak's production growth has been exceptional over the last few years. The company had production growth of close to 100% for the last year. At the end of 2011, Kodiak had $120 million in revenues, which has gone up to $905 million by the end of the last year - this represents an average annual growth rate of over 200%, exceptionally strong for an oil and gas company. Over the same time period, the stock price has only gone up by 78%. Furthermore, the company has an operating margin of over 38% and net margin of over 15%.

The production growth for the company is expected to be close to 45% during the current year. These production growth figures are substantially lower than the last year; however, it is still extremely strong for oil and gas company and Kodiak will continue to grow.

Conclusion

Over the last year, Kodiak proved itself as one of the most productive energy companies in the sector. We believe the strong asset base and impressive production figures will support the future growth of the company. Kodiak has a unique set of assets, which will continue to enhance the production of the company. We believe Kodiak's stock price will see a substantial rise over the next twelve months as the growth in production and sales will continue, and the growth in fundamentals will support the expected rise in the stock price.

Source: Kodiak Will Continue To Grow