Kodiak Oil & Gas (KOG) announced second-quarter earnings and showed that it has been successful in improving revenues and earnings so far this year. Total revenues at $85 million were up considerably over the comparable figure of $22 million on a year-on-year basis. Total operating expenses rose to $59.5 million from $13.1 million year on year and second quarter net income rose to $93 million from $14 million a year on year.
The main reason for the rise in net income was gains on commodity derivatives which came to $95.5 million against $4.85 million in the same quarter of the previous year. The increase in revenue was mainly due to increased volumes of production and the company expects operating cash flow to increase because of the recently improved rate of production. Total second quarter production increased to 1.155.4 MBOE from 962.6 MBOE year on year mainly because of operations in the Williston Basin.
Kodiak currently possesses more than 234,000 gross acres in the Williston Basin and 188 gross wells in production with a focus on the middle Bakken and Three Forks formations. The company drilled and completed 14 wells in the second quarter, and two of these are producing over 1,180 BOE/day, two over 1,350 BOE/day and one over 1,500 BOE/day in the first month of operation. The company expects most of its wells to have pipeline access for transporting oil by the end of the year. The company's portfolio includes almost 270,000 gross acres located between the Green River Basin and the Williston Basin.
Total combined proved reserves are in the region of 70 MMBOE which is a 36% increase year on year and around 86% of these reserves are oil so the company stands to benefit from the continued strength in oil prices while avoiding the negative effects of depressed natural gas prices in the US. Kodiak forecasts an average production of 17,000 BOE/day for 2012 but anticipates that it will be producing at a rate of 27,000 BOE/day by the end of the year. (Kodiak finished 2011 at a rate of 3922 BOE/day.) The new wells in Koala are expected to produce at a rate of around 1300 BOE/day and the company has plans to drill over 800 net wells over the next ten years and is presently building a pipeline from its Polar field to handle winter problems.
Exxon Mobil's (XOM) recent acquisition of Denbury Resources' (DNR) Bakken assets provide an interesting insight into the value of Kodiak because experts believe that the acquired assets are almost identical to Kodiak's portfolio. Denbury has estimated the price it will receive at just under $2 billion including $1.6 billion in cash. The current value of Kodiak is over $3 billion.
According to author Richard Zeits, "Well results are ultimately the sole reliable measure of acreage quality. The overall comparison indicates, based on this admittedly limited set of data, that Kodiak's wells have performed on average approximately 15%-20% better than Denbury's wells."
Overall, there is not much scope for a significant acquisition premium, and Kodiak would likely be better off developing its own assets in the expectation of a much larger premium to market price in the case of a future takeover. After all, the company has produced strong and consistent results in production from its wells and it is possible that the technology is making a large contribution to its success. After all, all the value does not come from acreage and a high-quality operator can add a significant amount of the value. The technology aspect could well be lost in an acquisition, and if the Bakken is as promising as it seems to be, the company can add the maximum value to its investors by going it alone. The same conclusions would apply to the other smaller Bakken operators such as Continental Resources (CLR), Whiting Petroleum (WLL) and WPX Energy (WPX).
Production growth for 2012 has been highly impressive and it expects to add a second completion crew that should boost its drilling rates. Over 50% of its acreage is still undeveloped and there was plenty of room for increased production. The company has not neglected the cost side of its business and has significantly lowered its lease operating expense (LOE) over the past several months from $10.08 per BOE in the last quarter of 2011 to $5.60 per barrel of oil equivalent in the second quarter of 2012. It now estimates that the average cost to drill and complete a Bakken well is around $10.5 million compared to $11.5 million during the first six months of 2012. This puts the company on course to grow production profitably. Because Kodiak is principally an oil producer, it has avoided the oversupply and depressed pricing problems of the natural gas producers.
I believe that crude oil prices will continue to remain strong and profitable for producers, and highly recommend investing in Kodiak.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.