The second quarter has been consistent in the Bakken. Crude differentials and a drop in the price of NGLs has cut into producer margins. Marathon (MRO) reported Bakken differentials over $20 at times in the second quarter. Differentials have helped refiners in the mid-continent. Western (WNR) beat analyst estimates and HollyFrontier (HFC) should report good numbers on August 8th. NGL pricing slipped over 20% from the first quarter. Most producers do not hedge this commodity, which made the drop in price exceptionally painful.
Oil service, drilling and completion costs all decreased this quarter as rigs have been moved out of the Bakken. Also, pad drilling has increased which decreases overall time needed to drill and complete a well. With fewer days needed, it frees up more time for service companies, which frees additional days for these services. This has hurt pressure pumping day rates. The lower cost of natural gas has also caused a move of pump trucks to oily plays. Pressure pumping rates have taken longer to improve for one reason. Natural gas frac jobs require more pump trucks than oily ones. So the same number of wells requires less trucks. We may have seen a floor in companies levered to pressure pumping as RPC (RES) and Basic (BAS) both had very good weeks. Watch these companies closely, as these prices can affect producer margins significantly.
Kodiak (KOG) recently reported earnings. Pleased with its results investors pushed this stock almost 8% higher. This was a surprise as it missed on both the top and bottom lines. This loss translated into a big gain as investors thought the numbers would be worse.
Kodiak gave additional well results in Williams County. The Polar Prospect has higher GOR numbers than the Koala, which leads to better IP rates. The gas to oil ratio increased here for two reasons. Polar wells are deeper and have a higher geothermal history. Kodiak wells in northern Williams are quite good, although skewed by initial production numbers. The most recent Three Forks well in Wildrose had an IP rate of only 225 Boe/d. These wells produce less oil initially, but are only $7 to $7.5 with respect to well costs. EURs are 300 MBoe, which is economical even with oil at $80/barrel. It should be noted, this well was drilled by the previous operator, so initial results could improve with Kodiak as the operator.
Well costs came in the $11 million range, using 100% ceramic in the deepest parts of the basin. Costs have improved from $11.5 to $12 million in the fourth quarter of last year. Kodiak has reduced drilling times by 3 to 5 days. This is significant as rig burn rates are approximately $100000/day. Going forward, water costs are Kodiak's priority. In a recent article on completion style, Kodiak is seen as one of the more aggressive operators with respect to water usage. Given the amount of water used per well, Kodiak could save a significant amount of cash this and next year. In the second quarter, it had savings of 5% to 10% of total revenues. Kodiak expects this to improve through year end. LOE was a nice surprise. This expense was decreased through the drilling of its own disposal wells. Kodiak believes this number will continue lower in upcoming quarters because of this.
Kodiak believes it can complete 5 to 6 gross wells per month for the remainder of 2012, or 25 to 30 total. Kodiak will continue to use cemented liners and is focusing on two and four well pads. It is important to note, Kodiak believes it can hit its current exit rate estimate of 27000 Boe/d. Given the 2012 head winds, this would be an accomplishment. Kodiak has downspaced wells to 1000 feet, but believes tighter spacing is possible. On average, it plans to complete long laterals with 28 stages for the remainder of 2012. The reasoning is Kodiak has not seen improvements that warrant the extra costs associated with tighter stage lengths.
In preparation for winter, Kodiak has signed an agreement to build out a pipeline from its Polar Prospect. This would protect Kodiak to the downside if there is another difficult winter. This pipeline in concert with a stabilized Bakken rig count will help to bring costs down across the board. Kodiak's believes differentials will improve in the second half of the year. Burlington oil loading facilities have been a big part of this. Clearbrook is currently $5 under WTI price. This will be the key, as companies like Hess (HES) and EOG Resources (EOG) have done a great job of getting oil to better markets. Both companies are benefiting from this, and every barrel sent to St. James or elsewhere just improves the transportation from the Bakken. The macro situation is improving. Kodiak's presentation states the first half of 2012 take away capacity averaged 975 MBbl/d. By year end of 2013, this number improves to 1400 MBbl/d.
In summary, Kodiak continues to improve on costs. It has taken a big step in the development of infrastructure. This is important as costs have historically been a problem for this company. The Wildrose and Grizzly prospects will see less development than other areas, but Kodiak believes these plays are economic, even at $80 oil. This quarter's numbers also benefited from its "commodity price risk management", so the numbers were not entirely clean. I still liked the quarter and think Kodiak looks good going forward.
Additional disclosure: This is not a buy recommendation.