Kodiak Oil & Gas (NYSE:KOG) has been very aggressive in building its oil and gas portfolio in the Bakken and finds itself highly leveraged to both the upside and the downside of oil prices. Right now West Texas Intermediate spot crude prices are the lowest they have been in nine months. The events in Europe are driving global asset prices and the key elections in Greece occur this weekend. It is unlikely Greece will leave the Euro even if the opposition groups win the election. But ongoing uncertainty over the future of the Euro and the debts of economically weaker members could continue to drive volatility in oil prices. Kodiak finds itself particularly vulnerable to further downside prices in oil.
Kodiak does have a large portion of its 2012, and a lesser portion of its 2013, projected oil production hedged at higher West Texas Intermediate spot prices. But the spread between Bakken spot crude prices and WTI prices has once again widened to double digits. Kodiak is not hedged against this differential in oil prices. Based on its current 7 rig drilling schedule Kodiak anticipates having almost all of its 157,000 net acreage position held by production by mid 2013. But if oil prices decline much further Kodiak will use most of its available liquidity before then to keep the rigs going.
Kodiak has a $585 million capital expenditure budget for 2012 and claims to have $400 million in available liquidity. As of March 31, 2012, Kodiak had $121 million in current assets and $178 million in current liabilities creating a working capital deficit of $57 million. The $400 million includes an additional $100 million of senior unsecured notes due in 2018 @ 8.125% interest borrowed in May. This raises Kodiak's senior long term debt to $800 million. Kodiak also has a $225 million available and undrawn against its bank line of credit. The $400 million in liquidity includes $100 million in cash and receivables as of March 31, 2012, but ignores $140 million in accounts payable. This leaves Kodiak with net liquidity of only $260 million. If oil prices remain weak it is unlikely Kodiak can issue much more unsecured highly leveraged debt. Kodiak continues to say its has a conservative balance sheet with 'only' $800 million in debt. But that is over $5,000 per net acre and more than 2 times first half 2012 annualized revenue. It also doesn't include future borrowings under its bank line of credit that must be tapped unless assets or shares are sold to raise additional liquidity. For comparison purposes, Oasis Petroleum (NYSE:OAS) also has $800 million in long term debt. But Oasis has a March 31, 2012, working capital surplus of $223 million. It also has nearly double the revenue and net acreage position compared to Kodiak.
Surprisingly, Kodiak has 85% of the stock marketcap of Oasis. Under Kodiak's rig contracts the company would owe a $60 million penalty if it chose to lay its rigs down. Investors in Kodiak shares should keep a closer eye than normal on oil prices in determining the value of its shares. Its aggressive acquisition strategy over the last year has left the company vulnerable to a continued decline in oil prices.