Kodiak Oil & Gas (UNKNOWN:KOG.DL) is an oil-focused exploration and production company headquartered in Denver. With a market cap of around $2.3 billion, Kodiak's size is comparable to that of SandRidge Energy (UNKNOWN:SD.DL), another oil-focused explorer and producer with a market cap under $4 billion.
Kodiak's assets are almost exclusively located in the Bakken Shale, a highly prolific oil and gas play that covers parts of North Dakota and Montana, as well as Canada. As a small-cap producer lacking the financial resources of some of the Bakken big boys like Continental Resources (NYSE:CLR) or EOG Resources (NYSE:EOG), Kodiak faces a host of unique challenges.
But there are advantages to its smaller size and unwavering focus on one basin, as well. To explore these advantages, as well as numerous other crucial factors affecting the company, I created a premium research report on this oil and gas junior. 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 briefly lays out Kodiak's opportunities and addresses the pros and cons of focusing solely on the Bakken. It's just a sample of one section, but I hope you find it useful.
Kodiak's story is quite simple. As the company itself admits, it's highly leveraged to the Williston basin, which encompasses the famous Bakken formation. Kodiak's CEO Lynn Peterson has stated: "Kodiak is a one basin show at this point. Nearly all of our assets are in the Williston basin, primarily in North Dakota."
Rapid growth in production and reserves
Kodiak's growth has accelerated tremendously in recent years, in terms of both production and reserves. The company has been increasing its acreage in the Williston gradually over time. It has nearly tripled its acreage since August of 2010, when it had around 55,000 acres, to 155,000 acres currently. Kodiak's production mix remains heavily weighted toward oil, with 86% of its reserves consisting of crude oil.
The PV-10 value of Kodiak's reserves has also improved significantly over year-end estimates from 2011. This commonly used metric represents the present value of estimated future revenues from the production of a company's proved reserves, net of estimated production, and future development costs. Kodiak's PV-10 value has increased nearly 65% over the $850 million PV-10 value as of the end of 2011.
And growth in production has been nothing short of remarkable. In 2010, the company was cranking out an average of just 1,290 barrels of oil equivalent per day. Last year, that number rose to 3,920 barrels of oil equivalent per day. And since then, average production has more than tripled, with an estimated 2012 exit rate of 27,000 barrels of oil equivalent per day.
Benefits versus risks of focusing exclusively on the Bakken
Right off the bat, this unwavering focus on one play poses some major risks, yet also offers some crucial benefits. First, let's look at the benefits. The Bakken is one of the most prolific onshore oil plays ever discovered. Since the play's potential was unlocked through advances in drilling technologies, output has soared and continues to rise.
In addition, according to a 2008 study by the U.S. Geological Survey, the Bakken may contain reserves totaling 3.6 billion barrels of recoverable oil. While that's a massive number already, some say these figures are far too conservative. A director at the North Dakota Department of Mineral Resources recently placed estimates between 10 billion and 14 billion barrels of oil.
The expansive play spans portions of North Dakota and Montana, and straddles the border with Canadian provinces Saskatchewan and Manitoba. The Bakken's allure is that it's primarily an oil play, though substantial reserves of natural gas underlie some portions of it. The Bakken sports one of the most favorable gas/oil ratios of any North American play, routinely yielding more than 90% oil.
But of course, there's a flip side to the coin. Along with its tremendous rates of production, the play comes with extremely high operating costs. Well completion and drilling costs routinely average more than $10 million, as compared to conventional plays like the Mississippian where they're only around $5 million.
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.
Fool contributor Arjun Sreekumar has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.