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Michael Filloon, Split Rock (390 clicks)
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On May 3rd of 2012, I wrote Bakken Update: A Kodiak Miss Could Provide A Buying Opportunity. I had believed Kodiak (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 (CLR) and Burlington (COP) have both tested the second bench successfully in areas very close to the Koala Prospect. Whiting (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 NameIP Rate (BO/D)30-day IP Rate60-Day IP Rate90-day IP RateNumber Of Stages
Sorenson Federal 15-5H80148739332824
Wold 16-7H86671168464826
Hellandsaas 16-8H134290276466726
Flatland 9-9H92946237030826
Scanlan 3-5H81973757249821
Pankowski 4-6H358118  23
Kirby 9-7H91957243036226
Nelson 5-18H50236027723026
Reiger 9-11H106774263457426
Eide 5-13H74661349943818
Evitt 16-12H103162651444727
Wood 5-15H153366359453526
Netz 9-21H111663056148826
Ames 15-32-1H125   25
A.Cvancara 9-7H8058808525
Collyer 9-8H19722921818225
D Cvancara 9-11H34222418416425
Comford 9-12H22916915314421
Aarestad 4-27H3089612412525
Aarestad 4-34H24912611211322
Averages67844939835224.25

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 NameIP rate (BO/D)30-day IP Rate60-day IP Rate90-Day IP RateNumber Of Stages
20711 SACCARO 310 1-H105774468362530
20711 PAULSON 49 1-H714434178 
20711 KREIDLE 3229 1-H82364759753320
20711 SPRINGBROOK 58 1-H721510327230
20711 BIBLER 67 1-H126191484 
20711 STATE 1621 1-H141540934831318
20711 MILDRED 94 1-H 385340  
20711 ERICKSON 3130 1-H1223733647591 
Averages103137234735722

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 NameIP Rate (BO/D)30-day IP Rate60-day IP Rate90-day IP RateNumber of Stages
KOALA 9-5-6-5H2526104887872524
KOALA 9-5-6-12H3191977367864522
KOALA 3-2-11-14H281696289484524
KOALA 3-2-11-13H251485277770821
KOALA 2-25-36-16H3222780965055725
KOALA 2-25-36-14H370250  18
KOALA 2-25-36-15H1132924  
Averages183164664669622.33

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 NameIP Rate (BO/D)Number of Stages
Thomas 15-33-28-1H3242528
Thomas 15-33-28-2H300034
Averages271331

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.

Source: Bakken Update: Another Chance At Kodiak

Additional disclosure: This is not a buy recommendation.