In the past four articles of this series I have focused on Kodiak's (NYSE:KOG) Koala and Polar prospect. Additional Polar acreage will be acquired in January of next year. This acquisition (pdf) is for 50000 net acres, 30000 of which are located in the Polar prospect, with the other 20000 in north Williams very close to the Divide County border. As with the BTA Oil acquisition in October, there was motivation to sell. Both BTA OIl and North Plains Energy had prime real estate in Williston Basin, and it is rumored both were motivated. This shouldn't be big news as more often than not, a company will look for buyers and not vice versa. Increasing completion costs are a big concern for a company having IP rates half that of a company like Kodiak, Brigham (BEXP), and Newfield (NYSE:NFX). This has been consistent for both selling companies, when compared to other completions of these three companies.
In part one of this series, I listed the most recent BTA Oil wells on the acreage Kodiak just purchased. Of those five wells, BTA Oil averaged an IP rate of 915 Bo/d. North Plains Energy has completed several wells in southeast Williams and northeast McKenzie counties:
- Nelson 5-18H: IP rate of 502 Bo/d
- Evitt 16-12H: IP rate of 1031 Bo/d
- Wold 16-7H: IP rate of 866 Bo/d
- Hellandsaas 16-8H: IP rate of 1342 Bo/d
- Flatland 9-9H: IP rate of 929 Bo/d
- Sorenson Federal 15-5H: IP rate of 801 Bo/d
These are the North Plains wells completed in 2011 with an average IP rate of 912 Bo/d. Statistics show both companies purchased by Kodiak had similar initial production rates. If we compare these wells to the IP rates of Kodiak in its Koala prospect the difference is significant.
- Koala 9-5-6-12H3: IP rate of 1919 Bo/d
- Koala 9-5-6-5H: IP rate of 2526 Bo/d
- Koala 3-2-11-14H: IP rate of 2816 Bo/d
- Koala 3-2-11-13H: IP rate of 2514 Bo/d
These four Koala wells had an average IP rate of 2443 Bo/d. North Plains' Hellandsaas 16-8H well was the best producer in 2011, but it was completed with 26 stages. Kodiak's Koala wells have been completed with 24 stages, which translates to savings of approximately $120000/stage as estimated by Oasis (NYSE:OAS) in its most recent presentation. In this specific case using the average of all four Koala wells and comparing to North Plains' best 2011 well, Kodiak not only averages more than double the 24 hour initial production rate but also does it with two less stages. Given the significant outperformance by Kodiak, it would produce a much higher cash flow. This Polar acreage is worth much more to Kodiak on what could have EURs of 800000 to 900000 Boe, as opposed to 500000 to 600000 Boe if operated BTA Oil or North Plains Energy.
Kodiak believes the BTA Oil acquisition provides 13400 net acres with EURs that of the Koala. It is very possible the acreage purchased from North Plains could have even better production numbers. BTA Oil's last well completed in Epping Field not on confidential status had and IP rate of 1223 Bo/d. This well was completed in 30 stages. When compared to North Plains most recent completion not on confidential status, we see the Hellandsaas well had an IP rate 119 Bo/d better, and done with four less stages. Both of these wells had dramatic increases when compared to just a few months earlier, but its still significantly lower than that of Kodiak.
To better understand the importance of these two acquisitions, one must look at where Kodiak's acreage is focused and the EURs. Initially it was believed Kodiak's best acreage was in Dunn County. This could still be the case as it has had some very good producing wells. After the Dunn County acreage, the next best prospect is its January of 2012 purchase in western Polar. The Koala and eastern Polar acreage is probably the next best. South of Koala is its Smokey prospect, which could be identified as the next best. Grizzly is in southwest McKenzie County and is still commercial, but less that of the others plays listed. Kodiak's Sheridan County acreage in Montana, could be productive, but it will take some time before this area is de-risked although there have been some promising results. What I believe to be Kodiak's least valuable leasehold is in north Williams near the Divide County border. In its purchase of North Plains acreage, it received approximately 30000 net acres in what we will call its eastern Polar play. The remainder of this acquisition is an estimated 20000 net acres. Continental has been the most active here, but many of these wells have IP rates of 200 Bo/d to 400 Bo/d. I do believe this rate will increase with Kodiak operating, but how much is anyone's guess. Kodiak's acreage breaks down like this:
- Dunn County: 34000 net acres and 186 potential locations (Kodiak Estimates)
- Polar: 46000 net acres and 252 potential locations (My Estimates)
- Koala: 10000 net acres and 55 potential locations
- Smokey: 16000 net acres and 88 potential locations
- Grizzly: 25000 net acres and 98 potential locations
- Sheridan County: 4500 net acres 14 potential locations
- North Williams County: 20000 net acres and 109 potential locations (My Est.)
Polar, Koala, and Dunn County all share roughly the same EURs, with Smoky also being productive. Here is a breakdown of these estimates:
- Polar, Koala and Dunn County: 800 to 900 MBoe
- Smokey: 750 to 850 MBoe
- Grizzly: 350 to 450 MBoe
- Sheridan County: 300 to 400 MBoe
- North Williams County 250 to 350 MBoe
For those unfamiliar with Bakken/Three Forks EURs, it is obvious how big these well results are. Especially if we consider the long laterals were done with 24 to 26 stages. If these wells were done with 30+ stages it is possible we could see even better numbers. The acreage in Koala, Polar and Dunn are estimated to produce 4 middle Bakken and 3 upper Three Forks wells. I believe these prospects will produce 4 upper Three Forks. If I am correct is will provide an additional 70 locations. Given the low end of estimates, 70 locations will produce a total of 56 million barrels of oil equivalent over the life of these wells.
In summary, Kodiak's acquisitions are probably its best operated acreage. I think it may be the acreage with the most upside, as it is one of the few good areas that has not yet been de-risked. More importantly are the Three Forks results, as the best results from this pay zone have been in the Koala. Kodiak has 90000 of its 155000 net acres are in this area, making it more levered to this area than any other companies. Kodiak assumed significant risk with these two purchases, and this type of stock is not for the faint of heart. If an investor wanted to purchase a stock with a significant amount of risk/reward, this would be a good place to invest.