Bakken Update: Another Chance At Kodiak

May.20.12 | About: Kodiak Oil (KOG)

On May 3rd of 2012, I wrote Bakken Update: A Kodiak Miss Could Provide A Buying Opportunity. I had believed Kodiak (NYSE:KOG) was going to miss earnings, providing a buying opportunity. Kodiak's first quarter earnings were quite good, causing the stock price to rise above $9. Economic worries have pushed down the price of oil since, so we have another opportunity to start a position in Kodiak.

It is not surprising Kodiak has had some short term difficulties. After a sizeable acquisition, it is not strange for there to be growing pains. North Plains Energy and BTA Oil were both rumored to be motivated to sell, but the question is why. Kodiak Bakken EURs in this area are 800 to 900 MBoe. Upper Three Forks EURs are 700 to 800 MBoe, plus there is possible upside to additional benches. Continental (NYSE:CLR) and Burlington (NYSE:COP) have both tested the second bench successfully in areas very close to the Koala Prospect. Whiting (NYSE:WLL) is also testing the second bench of the Three Forks. There are also two benches below, for a total of four Three Forks benches. Continental has stated the second has been consistent throughout its acreage, but the third and fourth benches have hot spots throughout the Williston Basin.

I believe both North Plains and BTA Oil were having trouble keeping costs in check. This is not a surprise as it has been seen by many of the Bakken producers, especially the smaller companies. We are currently seeing oil service costs leveling off, with some producers stating these costs will decrease in the second half of this year. At the time of these two acquisitions, those costs were continuing higher, placing significant stress on smaller Bakken producers. The largest cost has been water. These costs have continued to increase, especially for those without disposal wells near by. Infrastructure is very important, and if possible should be constructed before well production is started. Once in place, fresh water can be piped to the well site, while produced water is sent to the disposal well by the same means. If infrastructure is not in place, water has to be trucked to the well site from locations at or around Lake Sakakawea. That same produced water is trucked to the disposal well, where trucks can wait 3 to 4 hours. Trucking costs are around $144/hour. With costs continuing to rise, it is paramount for production rates to be high. Companies like Kodiak are able to absorb rising costs, by increasing initial production which in turn increases revenue. It is very possible the acreage acquired could have had poor performing wells due to inferior operators/technologies. To test this theory, I will examine the well results of the acquired companies and compare those to Kodiak's. Here is a list of wells operated by North Plains energy:

North Plains Energy Wells
Well Name IP Rate (BO/D) 30-day IP Rate 60-Day IP Rate 90-day IP Rate Number Of Stages
Sorenson Federal 15-5H 801 487 393 328 24
Wold 16-7H 866 711 684 648 26
Hellandsaas 16-8H 1342 902 764 667 26
Flatland 9-9H 929 462 370 308 26
Scanlan 3-5H 819 737 572 498 21
Pankowski 4-6H 358 118     23
Kirby 9-7H 919 572 430 362 26
Nelson 5-18H 502 360 277 230 26
Reiger 9-11H 1067 742 634 574 26
Eide 5-13H 746 613 499 438 18
Evitt 16-12H 1031 626 514 447 27
Wood 5-15H 1533 663 594 535 26
Netz 9-21H 1116 630 561 488 26
Ames 15-32-1H 125       25
A.Cvancara 9-7H 80 58 80 85 25
Collyer 9-8H 197 229 218 182 25
D Cvancara 9-11H 342 224 184 164 25
Comford 9-12H 229 169 153 144 21
Aarestad 4-27H 308 96 124 125 25
Aarestad 4-34H 249 126 112 113 22
Averages 678 449 398 352 24.25
Click to enlarge

Of the wells above the last seven are located in north Williams or Divide counties. This is important as well costs are $1.5 to $2 million lower in this area than the Polar and Koala prospects. This is mainly due to the shallow depth of the play. These wells have much lower IP rates, as this area is also characterized by lower pressures. This lower pressure will decrease oil production initially, but still provides for very good production over the life of the well. BTA Oil's wells are all located in southern/southeastern Williams County. Its Polar Prospect well results are:

BTA Oil Wells
Well Name IP rate (BO/D) 30-day IP Rate 60-day IP Rate 90-Day IP Rate Number Of Stages
20711 SACCARO 310 1-H 1057 744 683 625 30
20711 PAULSON 49 1-H 714 43 41 78  
20711 KREIDLE 3229 1-H 823 647 597 533 20
20711 SPRINGBROOK 58 1-H 721 5 103 272 30
20711 BIBLER 67 1-H 1261 9 14 84  
20711 STATE 1621 1-H 1415 409 348 313 18
20711 MILDRED 94 1-H   385 340    
20711 ERICKSON 3130 1-H 1223 733 647 591  
Averages 1031 372 347 357 22
Click to enlarge

BTA Oil's well results are all in the Polar Prospect. The well data above was affected by a terrible winter in North Dakota and Montana. This poor weather not only made it difficult to get completion services, but overland flooding after the thaw made it difficult to get trucks in and out of the well sites. With oil service companies running behind, it caused a marked increase in costs associated with completions. A large number of wells were shut in, as there was no way to transport crude. These increased costs and time delays created further fears as a worse winter was predicted in 2011. Record snowfall estimates in 2011, painted a picture of the same difficulties. This is the main reason Kodiak was able to increase its acreage position substantially. To show how valuable the Polar Prospect is in Kodiak's hands as opposed to BTA Oil or North Plains, here are some wells completed by Kodiak in the Koala Prospect:

Koala Prospect
Well Name IP Rate (BO/D) 30-day IP Rate 60-day IP Rate 90-day IP Rate Number of Stages
KOALA 9-5-6-5H 2526 1048 878 725 24
KOALA 9-5-6-12H3 1919 773 678 645 22
KOALA 3-2-11-14H 2816 962 894 845 24
KOALA 3-2-11-13H 2514 852 777 708 21
KOALA 2-25-36-16H3 2227 809 650 557 25
KOALA 2-25-36-14H3 702 50     18
KOALA 2-25-36-15H 113 29 24    
Averages 1831 646 646 696 22.33
Click to enlarge

The final two wells on this list include those listed to have had difficulties with using sliding sleeves. If not included the first five wells have an average IP rate of 2400 Bo/d. Recently, Kodiak reported its first results in the Polar Prospect for which it both drilled and completed the wells:

Kodiak's Polar Prospect Results
Well Name IP Rate (BO/D) Number of Stages
Thomas 15-33-28-1H3 2425 28
Thomas 15-33-28-2H 3000 34
Averages 2713 31
Click to enlarge

These two well results probably do not seem that significant when compared to previous Koala results. When the Thomas wells are compared as a middle Bakken and upper Three Forks combination, we see it is the best to date in Williams and McKenzie counties. Not only did it produce good completions in the Polar Prospect, but Kodiak's best results to date. Although it is just an estimate, I believe the Thomas 15-33-28-2H well could have a 90-day IP rate of 1000+ Bo/d, given the choke, PSI, number of stages and IP rate. North Plains' average IP rate for its Polar Prospect was only 925 Bo/d, while BTA Oil averaged 1031 Bo/d. North Plains' 90-day IP rate in Polar was 460 Bo/d, while BTA Oil averaged 357 Bo/d.

In summary, a bad winter motivated two producers to sell Bakken acreage to Kodiak. Both had inferior results when compared to Kodiak, and some were completed in the first quarter. Now that all of the Polar wells drilled and/or completed by North Plains and BTA Oil are producing, it will no longer skew Kodiak's results. The combination of well results derived from previous operators, and sliding sleeve issues have provided a buying opportunity in Kodiak shares. I am additionally bullish given the recent leveling off of oil service costs. It is my belief we will continue to see very good completions in both the Polar and Koala prospects. It also had good results in Dunn County from its Charging Eagle, Skunk Creek and non-operated acreage. This coupled with better cost containment could producer very good results going forward.

Disclosure: I am long KOG.

Additional disclosure: This is not a buy recommendation.