The Bakken Shale oil field is a region that is bringing success for many oil and gas companies. This play is popular because it is thought that the light, sweet crude from this area will help to replace some of the more expensive West African and North Sea crude the U.S. depends upon.
One company finding success in this oil field is Kodiak Oil & Gas (KOG). The company has experienced fantastic production growth from a level of 12,000 BOE/d to a rate of 27,000 BOE per day for 2012. Several other companies are succeeding in this region as well, including EOG Resources (EOG), ConocoPhillips (COP), and Marathon Oil (MRO). EOG Resources' 90,000 net acre Core Parshall Field in this play has proven to be successful for the company with more oil still untouched. EOG Resources refocused its efforts to oil after the decline in natural gas prices and an increase in supply. Marathon Oil currently holds approximately 416,000 net acres in the Bakken play and has projected net production of approximately 38,000 barrels of oil equivalent per day (mboed) by 2016. The company began drilling and production, and operations initially started in 2006.
ConocoPhillips holds 558,000 net acres in the Bakken, spread across North Dakota and Montana. The company's average net production in 2011 amounted to 17,000 boed. ConocoPhillips had six rigs working at the end of 2011 with plans to add four additional rigs this year. Kodiak's success in the Bakken region is just one example of the company's persistence to explore new plays and increase production of both oil and gas resources. Because of the company's impressive growth story, I believe investors should jump at the opportunity to buy into this growing little giant.
For Kodiak, growth in the Williston Basin in Western North Dakota and Eastern Montana has been a success built upon the time-tested strategy of persistent hard work. The company owns and controls approximately 155,000 net acres in this region. In November 2011, in the heart of the Bakken Trend, the company agreed to acquire an additional 50,000 net leasehold acres and 3,500 BOE/d of current net production. The company now controls 155,000 net acres and over 800 net locations prospective for Bakken production. The primary focus within the Williston Basin is the Bakken Pool consisting of the middle Bakken and Three Forks formations.
In regards to the company's recent successes, Kodiak's Chairman and CEO Lynn A. Peterson stated the following:
"We are very pleased with our current exploration and development program. Overall improvements in the entire drilling and completion process are driving our operated well costs lower. We continue to eliminate drilling days on our wells and we are also seeing reduced third-party costs in nearly all facets of our operations. Our dedicated completion crew is gaining efficiencies on virtually every well they have completed, and with nearly all multi-well pads remaining in the 2012 program, we should continue to see additional efficiency gains. The most important component in the play continues to be our well performance. Clearly the well results from each of our operating areas through the fairway of the Bakken oil play continue to be robust and the results are very consistent between the areas. We continue to evaluate down-spacing between well bores and are encouraged that our work could lead to greater resource potential."
Many companies are seeing the great potential growth of the Bakken play, but not all are producing and profiting like Kodiak. QEP Resources (QEP) recently acquired additional acreage exposed to the Bakken play in North Dakota. QEP Resources plans to purchase 27,600 net acres in the Williston Basin for $1.38 billion. This purchase will give the company acreage with an estimated net proved and probable reserves of approximately 125 million BOE, with approximately 90% of the reserves composed of oil and other liquids.
Another player in the region is Northern Oil and Gas (NOG) with 150,000 acres under lease and a heavy drilling program in progress. Northern owns working interests in 664 discoveries, consisting of 659 targeting the Bakken and Three Forks formations, and five exploratory wells targeting other formations.
Kodiak expects 2012 production to average between 17,000 and 21,000 barrels of oil equivalent (BOE) per day during the year. The company is also on target to hit its 2012 production exit rate of 27,000 BOE per day. It expects to complete about five to six gross wells per month with its one full-time completion crew in the Bakken. Kodiak is expecting to add a second unit in October 2012. The company has worked hard on mastering cost reductions and appears to have been successful in lowering its lease operating expense (LOE) over the past several months. Kodiak reported a LOE of $5.60 per barrel of oil equivalent in the second quarter of 2012, compared to $10.08 per BOE in the final quarter of 2011. The company attributes the sharp decline in LOE to better efficiency in obtaining and disposing of water used during the completion process while at the same time reducing its drilling and completion costs over time. Kodiak now estimates that the average cost to drill and complete a Bakken well is approximately $10.5 million, reduced from $11.5 million during the first six months of 2012. The company plans to operate eight rigs on its properties for the rest of 2012, and then reducing down to one rig at the end of the year.
Second quarter results for Kodiak reveal oil and gas sales of $85.8 million, as compared to $22.1 million during the same period in 2011, resulting in a 288% increase. The company also reported net income of $93.1 million, or $0.35 per basic and diluted share, compared with net income of $14.0 million, or $0.08 per basic and diluted share, for the same period in 2011. The company had an overall 385% increase in quarter-over-quarter equivalent sales volumes of 1.2 million barrels of oil equivalent for the second quarter 2012, as compared to 238 thousand BOE in the same period in 2011. Crude oil revenue accounted for approximately 96% of oil and gas sales in the second quarter 2012.
There are several catalysts that will push Kodiak higher over the next several months. First, Kodiak intends to add a second completion crew sometime in early October. The company expects to complete five to six wells per month per crew. Second, I believe oil prices will stay between $85 and $100 in the near-term. T. Boone Pickens even predicts that oil will trade at $115 by the end of 2012. Third, a recent report showed that U.S. manufacturing rose in September, from a U.S. factory index of 49.6 in August, to 51.5 in September. This will help push oil prices higher.
Kodiak has a strong management team willing to stay the course in search for good plays and then capitalize on them, reducing drilling costs while maximizing profitability. This is a good, solid company to own for the long-term. Kodiak is currently trading around $9.32, between a 52-week range of $3.59 and $10.90. I predict this stock will maintain a price level between $11 and $12 by 2013.