Kodiak Oil & Gas Makes A Steal Of A Deal

| About: Kodiak Oil (KOG)

KOG Makes Another Big Acreage and Producing Asset Buy, Announces Multiple Offerings, and Provides Big 2012 Guidance

The Basics: Kodiak (NYSE:KOG) is paying $590 mm for 50,000 acres in the heart of the Williston Basin and 3,500 BOEpd of current production from a private operator (my guess would be that they bought the foundation blocks of North Plains Energy (.pdf)).

Paying for the deal: KOG is set to pay $540 mm in cash and $50 mm in KOG stock (about 6 mm shares based on their deal math and my thoughts on a near end of year stock price) to the seller. They will then issue 37.5 mm shares to the public plus another 5.625 mm shares in the green shoe to raise a total of $284 mm assuming a 6% fee and a deal price of $7. It may turn out a little better for them than that. They are also selling $550 mm in senior notes to fund this acquisition, the last acquisition (from October) and set up the balance sheet with a little post transaction cash.

What they get:

  • 50,000 net acres in Williams and McKenzie Counties.

    • 30,000 of the acreage is located adjacent to KOG's Koala area in an area known up until last month as southeast Rough Rider and where long term rates of KOG's Bakken and Three Forks wells have been trending towards exceptional levels. It is very "good real estate" and HES and CLR are quite active here.
    • The rest of the acreage is in a bit less de-risked part of northern McKenzie and southern Williams counties, ND but CLR, XTO, and a number of privates have met with some success using really short laterals so it's not like it's goat pasture.
  • The properties are producing 3,500 net BOEpd with four more drilled but not yet completed wells to be tied in soon.

  • Proved reserves of 19.7 mm BOE (81% oil) for a proved only reserve acquisition price of $29.95 per BOE, not at all expensive when you consider the upside of this as of yet lightly drilled acreage.

  • Note that using SEC reserve valuation guidelines KOG put PV10 on the proved reserves alone at $464 mm.

How KOG Looks Post Deal (see table after the bullets as well):

  • Their Williston acreage increases 48% to 155,000 net acres, 70 to 85% of it in what I'd call core, largely derisked territory.

  • 2011 volumes were seen exiting the year at 10,500 BOEpd, and that rate shifts up to combined KOG Old Company plus October acquisition (now known as Polar and where they see EUR's as promising as the ones at Koala) plus this November acquisition (as of yet some unnamed type of bear, maybe Black?) exit rate of 17,000 BOEpd according to KOG.

  • KOG also went ahead and initiated first guidance for the combined company for 2012 of 22,000 to 24,000 BOEpd with an exit target of 30,000 BOEpd, and just like that KOG is within 12 months of being bigger than BEXP was at their takeout.

  • This comes with a big shift up in the capital budget. As they grow to 6 rigs by January and 8 over the course of the year, capex is driven from 2011's $230 mm (drilling only) to 2012's expected $585 mm.

  • Given the growth in production and little to no improvement in oil price realizations, a far too conservative view by my macro model, EBITDA generation should easily top $450 mm next year which along with their pro forma balance sheet places them in the "no need for another deal" realm for about the next 12 months, barring further acquisitions, which of course is a catch as catch can business and I wouldn't hold another acquisition like this against them.

click to enlarge

Nutshell: In less than two months KOG has made two acquisitions which have increased their acreage footprint in the Williston by nearly 70% and increased production (and probably reserves and certainly potential reserves) by well over 100%. Large, contiguous acreage blocks in the core of the play are rapidly becoming scarce and my sense is that post Brigham (BEXP), OAS and KOG are the go to names for pure Williston Basin players, with their smaller size enabling rapid growth and the leverage that provides to investors who like high growth, repeatable success, and falling per unit cost metrics. While either would appear expensive on conventional metrics of TEV/flowing BOE, at present they are also rapidly growing into their valuations, and as such, positioning themselves as targets.

Other metrics like $/acre, which have been of somewhat limited use of late except as relative position markers within the group, are also cheap as we look only a short distance into the future on a production adjusted basis. Furthermore, these metrics yield negative acreage valuations in only a year using a $100K/flowing BOE multiples for KOG. As more names leave the field, investors have fewer choices that offer significant play specific leverage, and I would expect the remaining few like OAS, KOG, NOG, TPLM and others to see an increasing bid.

Larger players are beginning to explore concepts beyond just middle Bakken and Three Forks, like CLR is planning with tests of multiple non-communicative benches within the Three Forks, not to mention the Heath, Nisku and other potential producing formations under those same acres. Stacked pays are a beautiful thing. I continue to own KOG as a full core position in the ZLT with a trading position on top and will likely add more on a deal related dip this week as I expect any such retrenchment in the share price to be short lived and KOG's secondary offering to be in high demand.

Disclosure: I am long NOG, OAS, KOG, TPLM.