Bakken-focused exploration and production company, Kodiak Oil & Gas (NYSE: KOG ) announced deal to acquire 42,000 additional acres in the Williston Basin of North Dakota. The deal will significantly boost the company's position in the Bakken, and will not only boost its drilling inventory, but will also increase its current production. Let's drill down into the deal and see what it means for investors.
Kodiak is paying $660 million to privately held Liberty Resources to add 42,000 net acres to the company's position in the Bakken, which will boost Kodiak's total position in the play to 196,000 net acres. That's a substantial increase as the deal boosts Kodiak's acreage by more than 30%. While Kodiak is still about a million acres behind top Bakken leaseholder Continental Resources (NYSE: CLR ) , the deal really does vault Kodiak's presence in the play. Even better, as you can see from the map below, these acres are close to Kodiak's current operations:
Also of substantial importance is that this deal adds to Kodiak's current production by 5,700 barrels of oil equivalent per day. For a company that averaged 14,400 barrels of oil equivalent per day last year, that's a very big boost. In fact, when combined with the production that the company has already added this year, it puts the company's pro forma production at about 30,000 barrels of oil equivalent per day.
Kodiak has been growing its production very significantly over the past few years. Just last December it was ranked tenth in total Bakken production at 20,423 barrels of oil per day. At the time, the company was producing less than a third of the oil that the top producers in the play where producing. That month Whiting Petroleum (NYSE: WLL ) topped production at 65,156 barrels of oil per day while Continental was second at 65,141 and Hess (NYSE: HES ) was third at 64,657 barrels of oil per day. While this deal won't leapfrog it to the top, when combined with its organic growth it's helping to turn Kodiak into a significant Bakken producer.
Kodiak's plan to begin this year was to drill 75 wells to boost its average production to about 29,000-31,000 barrels of oil equivalent per day. The deal with Liberty boosts its production to that point meaning the company's production could top an average of 37,000 barrels of oil equivalent per day. That's nearly a tenfold increase from the 3,900 barrels of oil equivalent per day that Kodiak produced in 2011. With a substantial growth runway from its current acreage, plus the additional growth from the acquired acres, Kodiak has an impressive inventory of future drilling locations.
When looking at Kodiak, the story here is how quickly the company has boosted its production. While it's still well behind more developed peers like Whiting and Hess, those companies have much larger operations which span several production basins. That's given them the financial flexibility to reinvest capital produced elsewhere into the Bakken.
Therein lies a key risk for Kodiak, its putting all of its eggs in the Bakken basket. Its focus there has led to tremendous production growth over the past few years; however, the Bakken is still an emerging play and many worry about the rapid decline rates really holding back production growth. While it will be increasingly tougher for Kodiak to keep up its triple-digit-growth rates, the company is making all the right moves to keep growing with this latest deal as a prime example.
Kodiak Oil & Gas really is a dynamic growth story – it offers great opportunities, but with those opportunities come great risks. To find out what they are and to determine whether Kodiak is currently a buy or a sell, you're invited to check out The Motley Fool's premium research report on the company, which comes with a full year of updates and analysis as key news breaks. To get started simply click here now.