The revelation that Whiting Petroleum Corp (NYSE:WLL) only paid a 5% premium to average prices over the last 60 days to purchase the stock of fast-growing Bakken producer Kodiak Oil and Gas Corp (NYSE:KOG) was clearly unusual. Typically, a growing company doesn't accept a buyout without a substantial premium. In this case, the deal creates a formidable producer in the Bakken to rival Continental Resources (NYSE:CLR).
Is it possible that Kodiak shareholders benefited more from accepting a meager premium?
Whiting Petroleum agreed to buy Kodiak Oil and Gas for .177 shares of WLL per KOG share, or the equivalent of $13.90 per share based on the July 11 closing price of Whiting. Though the deal offers a 5% premium above the average of price of Kodiak over the last 60 days, any investor in the stock might be disappointed that it accepted an offer below the prior closing price. The stock, though, is rebounding 5% as of this writing, suggesting that maybe accepting an offering around current market prices does allow shareholders to participate in the potential upside of the new entity.
All is not lost for Kodiak investors, as the deal provides for an accretive cash flow per share and earnings per share in 2015 for Whiting stock. This means that investors in Kodiak ultimately obtain shares of a stock probably worth more going forward. Typically the buyout target requires a premium price in stock that causes the acquirer to drop and leaves the target shareholders with a smaller buyout price.
The merger projects a Bakken/Three Forks oil exploration and production company with 855,000 net acres and an inventory of 3,460 net future drilling locations. In addition, Whiting includes an interesting position in the developing DJ Basin. For 2014, the combined entity expects production of 152,000 boe/d and proved reserves of 606 million boe with 80% oil.
Considering the combination of Whiting Petroleum and Kodiak Oil and Gas aims to create a leading oil producer in the Bakken/Three Forks region with over 107,000 boe/d, the valuation proposition is easy with a quick comparison to Continental Resources that previously held that position.
During the first quarter, Continental produced 97,457 boe/d from the Bakken with 70% of production linked to oil. In total, the oil producer had production of 152,471 boe/d. The new Whiting produced roughly 134,000 boe/d during the first quarter. So while the claims and focus are around it being the leading producer in the Bakken, the true value of the companies is based on total production. Continental has the SCOOP properties that produce over 50,000 boe/d while Whiting is making huge progress in the Niobrara region.
In total, the production at Continental during the first quarter matched the forecasted average production for the year for the combined Whiting Petroleum, but the new entity isn't too far behind. What is far behind is the market valuations. Continental Resources has a market value of $28 billion and an enterprise value of nearly $33 billion compared to the corresponding valuations of roughly $14 billion and $18 billion.
By purchasing Kodiak Oil and Gas at current market values, Whiting Petroleum created a leading producer in the Bakken to rival Continental Resources. More importantly, the oil exploration firm from Denver just created a company approaching the size of Continental in production, but not in valuation. The combination of the low leverage from Whiting and the fast growth from Kodiak makes an intriguing investment, especially compared to the rich valuation of Continental now trading at nearly double the valuation.
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