Kodiak Oil & Gas: Investors Well Attuned to Opportunity

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Includes: AOIX, HES, KOG, OAS, WMB
by: Toby Shute

First it was Hess (NYSE: HES) backing up the truck with its proposed purchase of American Oil & Gas (AMEX: AEZ). Next came Enerplus Resources Fund (NYSE: ERF) padding its position in the play. Now Williams (NYSE: WMB) is joining the Bakken buyers' brigade.

On Monday, the integrated natural gas company announced that it's picking up more than 85,000 acres of core Bakken acreage for $925 million. The purchase is twice as large as the one Enerplus closed last month, and is located in the same Fort Berthold area in North Dakota. This lies to the south and west of the EOG Resources (NYSE: EOG) -dominated Parshall field, whose discovery broke the play wide open several years ago.

At more than $10,000 per acre, this acquisition provides another clear data point for valuing North Dakota Bakken operators. Williams picked up its acreage from private sellers, but there are plenty of publicly traded E&Ps with leasehold in the million-acre Fort Berthold Indian Reservation, which spans counties including Dunn, McKenzie, and Mountrail. Let's have a quick look at one of these operators.

Kodiak Oil & Gas (AMEX: KOG) has 35,000 net acres in Dunn County. Assuming the closing of an acreage deal announced last month, the firm's overall Williston foothold will weigh in at roughly 72,000 net acres. Well results by operators like Oasis Petroleum (NYSE: OAS) suggest that at least a portion of this western acreage may be just as prospective as the Dunn County core area. Assuming Kodiak could fetch $10,000 per Dunn acre, and $7,500 per acre for the rest of its Williston Basin acreage, that would give us a ballpark value of roughly $625 million. That's not far from the pro forma enterprise value, suggesting that investors are well attuned to the opportunity here.

I think it's just as important to point out the Bakken players for which this $10,000 per acre figure is not at all an appropriate shorthand metric. That would be the operators to the north, in southeast Saskatchewan. Up there, the Bakken is shallower and pressures are lower. A good Bakken well there initially produces 200 barrels per day and has an ultimate recovery of 125,000 to 150,000 barrels. In Kodiak's focus area, IP rates exceed 1,500 barrels per day, and ultimate recoveries are projected to be at least 750,000 barrels. We're talking apples and oranges, and it shows in the transaction values. Enerplus paid less than $1,200 per acre at a Crown land sale in Saskatchewan earlier this year.

North Dakota and Saskatchewan Bakken plays are both highly economic today, but they are very different animals. Don't make the mistake of treating them interchangeably in your valuations.

Disclosure: Toby Shute doesn't have a position in any company mentioned.