Whiting Buy Of Kodiak Oil & Gas Should Be Good For Both Companies' Investors

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 |  About: Whiting Petroleum Corporation (WLL), KOG, Includes: CLR
by: David White

Summary

The WLL and KOG combination will have the greatest oil production level in the Bakken, although CLR will be a close second.

KOG shareholders will get 0.177 shares of WLL for each share of KOG. KOG shareholders will end up owning 29% of the combined company.

When you compare a number of relevant KOG+WLL statistics with competitor CLR's statistics, you realize the combination company should be a great one.

On July 13, 2014 Whiting Petroleum (NYSE:WLL) and Kodiak Oil & Gas (NYSE:KOG) announced that KOG has agreed to be acquired by WLL for $6B, including the assumption of debt ($2.2B). KOG shareholders will receive 0.177 shares of WLL stock for each share of KOG stock. This represents approximately 29% ownership in the combined company for KOG shareholders. Both companies' stocks are up on the news on Monday July 14, 2014. The arbitragers have made sure the stocks have stayed approximately in sync with the 0.177 shares exchange rate. At the close July 14, 2014 KOG sold for $14.91; and WLL sold for $84.58.

In Q1 2014 WLL had production of 100.1 Mboe/d. It had proved reserves of 438.5 MMBoe. These were 79% oil and 89% liquids. Its main development area is the Williston Basin (Bakken / Three Forks) with Q1 2014 production of 73,325 Boe/d. WLL has a 30% CAGR on production in this area since 2009. It had 3,738 gross potential future drilling sites as of Q1E 2014. WLL had 1,098,158 gross acres and 683,804 net acres of lease holdings in the Williston Basin as of March 31, 2014. WLL also has 123,000 net acres in the oil-rich Redtail-Niobrara prospect in the NE DJ Basin.

KOG had 171,000 net acres in the Williston Basin at the end of Q1 2014. As of its conference call on May 21, 2014, the company said it had production of 38,000 to 40,000 Boe/d (about 39,000 Boe/d). Approximately 87.43% of production was oil in Q1 2014. It had proved reserves of 167.3 MMBoe (83% oil) at Q1E 2014.

The above statistics give the combined company production of roughly 140,000 Boe/d. From the Williston alone that figure is approximately 112,325 Boe/d. Total proved reserves of the combined company are 605.8 MMBoe. Total net acres in the Williston are now 854,804. Investors will have to wait for the combined companies exact earnings and revenues figures. The combination of the companies is bound to slow development in 2014. However, the combined company should grow nicely in 2015, as both companies were good growers prior to the combination. Plus one would expect KOG's greater growth philosophy to rub off on WLL to some extent.

On of the reasons investors like the merger so much is that some are claiming that the combined company is now the biggest producer in the Bakken. Continental Resources (NYSE:CLR) had formerly claimed that title. In Q1 2014 CLR production from the Bakken was 97,500 Boe/d. This was slightly less than the combined WLL-KOG recent production from the Bakken of about 112,325 Boe/d. CLR's production from the SCOOP was 29,400 Boe/d. CLR's combined production from these two areas was 126,900 Boe/d. This is much closer to the combined figure of about 140,000 Boe/d for WLL and KOG. However, CLR's proved reserves are still greater at 1.08 BBoe as of December 31, 2014.

Also CLR has 1bout 1.2 million net acres in the Bakken and about 425,000 net acres in the SCOOP. CLR's 1.2 million net Bakken acres are easily more than the net Bakken acres of 854,804 for the combination of WLL and KOG. While the WLL-KOG combination may have temporarily grabbed the crown as the biggest producer in the Bakken, CLR's proved Bakken reserves and net acres in the Bakken should still give CLR the edge longer term. However, KOG has been a faster grower than WLL. It may be that some of KOG's fast growth acumen will rub off on the combination of KOG and WLL.

In fact CLR is forecasting approximately 175 Mboe/d of daily production by the end of 2014. This seems likely to surpass the total from the combination of WLL and KOG even by the end of 2014.

Another apt comparison is the combined market cap and enterprise values. KOG had a market cap of $3.97B and an enterprise value of $6.03B. WLL had a market cap of $10.06B and an enterprise value of $11.59B. This gives the combined company and approximate market cap of $14.03B and an enterprise value of $17.62B. CLR has a market cap of $27.98B and an enterprise value of $32.95B. The combination of WLL and KOG seems like the slightly better bargain based on the ratio of proved reserves to enterprise value. CLR's ratio is about $30.5 of enterprise value per Boe. For the WLL and KOG combination this ratio is $29.08 of enterprise value per Boe of proved reserves.

All told this merger makes the WLL and KOG combination competitive with CLR. The assets are great; and KOG's smaller company, faster growth mentality should help the WLL-KOG combination be more successful in the future. If you like CLR, you probably should also like the WLL-KOG combination as an investment. This combination may make EOG, CLR, and the WLL-KOG combination perhaps the three top U.S. shale oil producers. Of course, Chesapeake Energy (NYSE:CHK), which also produces a lot of natural gas and NGLS should probably be included in the picture. This is heady company for both WLL and KOG.

I am not sure how much more investors want to bid WLL and KOG up in the near term from their current prices. However, the WLL and KOG combination is a stock you will want to keep on your radar. It should be a good long term grower. In other words, it seems to be a shale oil blue chip with this merger.

The five year charts provide some technical direction for this trade.

The five year chart of WLL is below.

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The five year chart of KOG is below.

Click to enlarge

The five year chart of CLR is below.

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Both CLR and KOG have very strong charts. WLL has a semi-strong chart. Investors will be hoping that some of the fast growth mentality of KOG will transfer to WLL with the merger. The combined company will be called Whiting Petroleum Corp. . It is a long term buy, although I would probably wait for a better time to start buying. Remember there are bound to be some combination pains that will negatively affect earnings for a few quarters. Still you have to like this combination.

NOTE: Some of the fundamental fiscal data above is from Yahoo Finance.

Good Luck Trading.

Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in WLL, KOG, CLR over the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.