Kodiak Oil and Gas: Setting the Stage for Pure Bakken Players

by: Michael Filloon

The market's 512 point drop on Thursday created fear selling in oil names. The question is "how does this affect my Bakken investments?" I believe this drop is a great buying opportunity. The reasons for this are quarterly earnings releases from companies currently operating in the Williston Basin. Hess (NYSE:HES) realized flat production in the Bakken in the second quarter. This company reported a very large well backlog due to the harsh winter and recent flooding. The first and second quarter averaged production of 25,000 Boepd. At the end of the second quarter Hess reported production of 34,000 Boepd. This is a very promising number as the weather is now better and should continue to drive Bakken production. It has reported a 38 stage frac design, and stated this was going very well. I am not a bull on Hess, but like the prospects of its Bakken acreage. Hess should continue to increase Bakken production quickly as it is rebounding from the first and second quarter.

Whiting (NYSE:WLL) was punished for its second quarter numbers as expectations were high. On July 19th, Whiting reached a new Williston Basin production record of 58000 gross and 31161 Boepd. Whiting has 2 full time Halliburton (NYSE:HAL) and a Baker (NYSE:BHI) half time frac crew working its Bakken acreage. These crews are estimated to frac 18 to 20 wells per month. It has 17 rigs working in the Williston Basin. Whiting believes its wells shut ins from bad weather in North Dakota will be placed in production by its 11 service units working the Sanish Field. Whiting announced an increase is cap ex for 2011 from $1.35 billion to $1.6 billion. Much of this will be spent on the Bakken in the form of additional wells.

  • Hidden Beach prospect in McKenzie County-18 wells
  • Cassandra prospect in Williams County-6 wells
  • Starbuck prospect in Richland County-5 wells

Whiting stated it was concentrating on the Williston Basin due to a payback of approximately one year. This is very good and why Whiting has been using a liberal balance sheet. It seems to be financing much of its Bakken expansion. It also added 76000 net acres in the Williston Basin to 680,000 total net acres. The Sanish wells continue to impress with an IP of 3612 Boepd from its Hecker 21-18TFH. More importantly is the production from the Greater Three Forks as it announced average IP rates of 1974 Boepd. These numbers are much better than expected. Whiting believes its Lewis and Clark wells will have EURs of 300,000 to 500,000 Boe. It has had very good results from 30 frac stages and sliding sleave technology. Whiting reports its Sanish wells will produce 3 Bakken and 3 Three Forks wells. I like Whiting here but continue to watch its debt and its ability to increase production in the Williston Basin. It one year payback makes its Bakken wells very lucrative.

Continental (NYSE:CLR) had a great second quarter. This quarter was inflated by an unrealized gain on mark to market derivatives and a property impairment charge. Clean earnings were 60 cents per share. This was a one cent second quarter earnings miss. Continental estimated July production of 61,000 Boepd. The most important statistic on Continental's North Dakota wells was an EUR increase from 518,000 Boe to 603000. This is something I have been expecting and guess will continue as marked improvements are still being seen in IP rates. Continental is using 30 frac stages as a minimum for current wells. Its 18.2 net wells in the quarter had an average IP of 1,188 Boepd. Its top North Dakota well had an IP of 2,240 boepd. ECO-Projects have seen improved production while decreasing costs by 10%. An important factor to Continental's growth is its Anadarko Woodford acreage. Watch this liquids rich play as I think it will be very profitable. Continental is a solid company and a good investment. It had a decent quarter and I think the third quarter will be even better. This quarter also shows mark to market derivatives losses in the first quarter will benefit oil companies when the price lowers.

EOG Resources (NYSE:EOG) seems to be focusing on it Eagle Ford Assets, as poor weather in the Willston Basin has made production difficult over the last eight to nine months. Wells completed in the second quarter were:

  • Fertile 1929H had an IP of 1008 Bopd
  • Fertile 45-29H had an IP of 1223 Bopd
  • Liberty LR21-36H had and IP of 1201 Bopd
  • Hardscrabble 13-3526H had an IP of 1474 Bopd

The Hardscrabble well is very important as it is in EOG's Stateline project. This helps to de-risk acreage outside EOG's core. It has ten rigs running in the Williston Basin this year. This company plans to drill 106 wells in the Williston Basin this year. EOG's estimates have Bakken wells producing:

  • 86% oil
  • 11% NGLs
  • 3% gas

Three Forks wells consist of:

  • 81% oil
  • 16% NGLs
  • 3% gas

Newfield's (NYSE:NFX) recorded its best well to date with an IP of 5200 Boepd. This was just 100 Boe lower than the highest one day well production in the Williston Basin. This was accomplished with a 5300 foot lateral, 26 frac stages and at a cost of $5.9 million. If the statistics on this well are correct, it could be the largest revenue generating well to date. Newfield has 150000 net acres in the Williston Basin and drilled nine wells in the second quarter. The other eight wells had an average IP of 2100 while using 9500 foot laterals at the cost of $9.8 million. I am unsure as to why a shorter lateral produced a higher IP than the others with longer laterals, but will continue to monitor its progress.

Denbury (NYSE:DNR) has had some good results in its Bakken play. It saw an increase in production by 33% from the first quarter. Denbury increased production 69% year over year. It currently has five rigs in the Williston Basin, and anticipates seven by year end. 16 operated Bakken wells were drilled during the first six months of this year. Denbury decreased full year production estimates due to poor weather in the Bakken. Denbury is a very good investment and may be the best EOR company in its industry.

SM Energy (NYSE:SM) had a great second quarter. It did state projects slowed in the Williston Basin due to poor weather, but this seems to be the norm, and was not a surprise. SM's shut in Bakken wells are estimated to be back on line in the beginning of the third quarter. This should make up some of the lost production. SM stated it will have to decrease its gross well completions from 34 to approximately 29. It also has experienced cost pressures as it is drilling bigger projects, and prices are rising. SM is currently emphasizing its Eagle Ford acreage, and is more of a play on that area. Even so, SM is a very good investment.

Kodiak (NYSE:KOG) finally announced a very good quarter. Over the past four quarters Kodiak has come up short of expectations, but changed things in the second quarter. It beat on revenues and reported 8 cents in earnings, which was aided mark to market derivative gains of 3 cents. Without this it reported 5 cents per share which matched the high of 16 analysts covering its stock. Kodiak has some very good numbers year over year:

  • Oil and gas sales had an increase of 261%
  • Sales volumes increased 149% increase
  • Adjusted EBITDA had a 377% increase

Kodiak has four rigs on drilling pads with two in McKenzie and two in Dunn County. A fifth rig will be mobilized sometime after its construction in the fourth quarter of this year. Kodiak plans to drill 7.5 net operated wells and 2 net non-operated wells in the third quarter. It completed two net wells in the second quarter with very good results:

  1. Koala #3-2-11-13H (IP rate of 2514 Bopd)
  2. Koala #3-2-11-14H (IP rate of 2816 Bopd)

In 7 days, these two well produced a total of 10946 and 12508 Boe. This was undoubtedly Kodiak's best quarter to date. It currently trades for 7.59 times forward earnings. With the possible growth in this stock, it seems incredibly cheap. Be careful, the market could continue to beat up some of the growth names as long as a double dip is still on the table.

Kodiak's earnings create optimism for pure Williston Basin Bakken names. On August 8th, these companies have earnings announcements:

  • Brigham (BEXP) Estimated earnings of 31 cents/share and $91.33 million in revenue
  • Northern Oil and Gas (NYSEMKT:NOG) Estimated earnings of 19 cents/share and revenue of 39.07 million
  • Oasis (NYSE:OAS) Estimated earnings of 16 cents/share and $63.73 in revenue

I believe that Kodiak Oil and Gas set the stage for good quarters in these three names pure Williston Basin Bakken names. Both Northern and Brigham are trading at around 11 times forward earnings. Weather in North Dakota is clearing up and I would expect companies to increase guidance. As for the sell off today, it may not be a bad idea to hide out in a bigger oil names until the smoke clears. I think that companies like EOG are good bets as hedging protects these companies from large moves in oil price. The situation seems to be the same as companies are starting to get wells on line as the weather in North Dakota has been better.

Disclosure: I am long BEXP, KOG.