The Biggest Risk Facing Kodiak Oil & Gas

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As fields of "easy oil" have quickly been depleted over the past few decades, energy companies have had to work a lot harder to find the sticky black stuff. In response, they've been exploring everything from North American shale oil plays to deepwater locations off the coast of West Africa to harsh frontiers in the Arctic Ocean. Motivated by high oil prices, many are investing billions of dollars to acquire the necessary equipment and expertise.

Take the Bakken Shale, for instance, where Kodiak Oil & Gas (UNKNOWN: KOG.DL  ) carries out practically all of its operations. The expansive formation, which is spread out across North Dakota, Montana, and parts of Canada, is one of North America's most prolific shale plays. Thanks to the commercialization of technologies like horizontal drilling and hydraulic fracturing, the Bakken's vast resource potential has quickly been unlocked.

It's not just American companies who have rushed in to get a piece of the Bakken action, but also foreign firms like Norway's Statoil (NYSE: STO  ) , which gained exposure to the play through its acquisition of Brigham Exploration. Other energy companies with sizable acreage positions in the Bakken include Enerplus (NYSE: ERF  ) , Whiting Petroleum (NYSE: WLL  ) , Conoco Phillips (NYSE: COP  ) , EOG Resources (NYSE: EOG  ) , and Oasis Petroleum (NYSE: OAS  ) .

However, while the play has already yielded tremendous quantities of oil, operating costs are exorbitantly high. This year, the average cost to drill and complete a well was roughly $10.5 billion, though recent evidence suggests costs are gradually trending down. Still, well costs in the Bakken remain almost twice as much as costs in conventional plays, like the Mississippi Lime, for instance.

In addition to new technologies and generally favorable government policies, there is one crucial factor that has helped sustain America's energy boom – high oil prices. If oil prices, which are primarily driven by global supply and demand, see a sustained collapse, it would spell trouble for energy companies that rely primarily on oil revenue. Kodiak is one such company.

To explore Kodiak's vulnerability to a sharp decline in oil prices, as well as numerous other crucial factors affecting its future, I created a premium research report on the company. Hopefully, the report should help investors get a better picture of the company's future. It includes opportunities, major risks, crucial areas to watch, and a closer look at the company's management.

The following is an excerpt from the report that addresses the biggest risk Kodiak faces and measures it has taken to alleviate such a risk. It's just a sample of one section, but I hope you find it useful.

Risks to Monitor
A sustained decline in oil prices is by far the biggest risk Kodiak faces. Market prices for oil and other commodities are highly volatile and will continue to be volatile in the future. At oil prices above $90 a barrel, Kodiak's wells are highly economical. But if prices were to dip below $70 a barrel, they would become significantly less profitable.

However, besides its active hedging program, an additional advantage that Kodiak has is its staggered rig termination schedule, which offers a great deal of flexibility in quickly reducing its rig count. While the company is currently operating eight rigs, its rig count going forward will be largely determined by oil prices and well economics.

For example, if oil prices plunge due to any number of macroeconomic shocks, Kodiak should be able to reduce its operated rig count significantly in a matter of months without having to foot the bill for termination fees.

Regulatory and environmental risks come part and parcel with investing in oil and gas producers. Most of these are related to rules governing hydraulic fracturing. Two specific regulatory matters from the Environmental Protection Agency and the Bureau of Land Management that Kodiak addressed involve new requirements for installing new equipment in an attempt to control emissions and increased regulation of hydraulic fracturing on public lands. These regulations may lead to operational delays or higher operating costs.

Interested in other opportunities and risks facing Kodiak?
That was just a sample of our new premium report on Kodiak Oil & Gas. If you're debating whether the company is a buy or sell, the report may prove to be a crucial resource. In addition to an analysis of Kodiak's risks, areas to watch, and management, the report comes with complementary updates and delves into upside and downside catalysts looming on the horizon. To get started, simply click here now.

Read/Post Comments (3) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 14, 2012, at 10:10 AM, Dazoc1 wrote:

    Does anyone proof read these? 10.5 "Billion" to complete a well? Are you kidding me? MAJOR typo, or maybe just bad reporting? C'mon Fool & Arjun, get it right!

  • Report this Comment On December 15, 2012, at 9:17 AM, mitchjl wrote:

    Typing error, nothing to get worked up over. We all make typing errors.

  • Report this Comment On December 15, 2012, at 10:55 AM, Dazoc1 wrote:

    Nothing to get worked up over, really Mitch? The entire article is based on pricing, costs, etc and the author has one of the most key costs of the drilling operation completely wrong. Whatever...

    Clean it up MF, no credibility at all

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