As prospects of finding oil go up in a particular region, so do the overall operating costs. The Bakken Shale formation is arguably the hottest oil play in all of North America. However, digging out the black gold comes at a price – operating costs are high. Therefore, it is equally important to ascertain if companies operating here are efficient from an operational standpoint. Bakken pure play, Kodiak Oil & Gas (NYSE: KOG), seems to be scoring well on this front.
A phenomenal growth story
So far, this year has been fantastic for the company in terms of production and revenue growth. Average third-quarter sales volumes stood at 16,000 barrels of oil equivalent (BOE) per day – a solid 26% rise from the second quarter and a remarkable 51% growth from the first quarter of 2012. And, it seems there's no stopping this Denver-based small cap. According to the latest update, average sales volumes in the last couple of weeks of November stood at a phenomenal 22,000 BOE per day!
How is the company achieving such growth?
The underrated term: efficiency
The reason is pretty simple – the company has become operationally more efficient. Average drilling days per well – from spud to rig release – has come down to between 20 and 25 days. Some rigs were even released in less than 20 days. Compared to last year, this means spending 30%-40% less drilling time per well. EOG Resources (EOG 3.88%) averaged 13 days per well in the third quarter. But Fools must keep in mind that EOG holds a diverse acreage, and the Bakken Shale play is just a part of it. In other words, Kodiak is slowing catching up with the big boys in the Williston Basin.
For the fourth quarter, Kodiak aims to drill 26 wells with the help of seven rigs. That boils down to 1.24 wells per rig per month. Continental Resources (CLR +0.00%), on the other hand, also averaged 1.2 wells per rig month. While Whiting Petroleum (WLL +0.00%) has some efficient rigs in the Sanish field with an average drilling rate of 1.25 wells per rig month, the company's overall efficiency has been dragged down due to its aging rigs elsewhere in the Williston Basin. It's evident that Kodiak is taking on the heavyweights of Bakken.
A chain effect
These drilling efficiencies have now prompted management to release another rig in the space of two months. From January next year, Kodiak aims to increase production further with the help of just six rigs – down from eight rigs operating this year. This should bring down costs considerably.
Thanks to these drilling efficiencies, completed well costs currently stand at $10.5 million – down from $12 million a year ago. Additionally, based on renegotiated contracts, management is now expecting to drive down these costs to less than $10 million per well in 2013. Continental Resources is already averaging $9.2 million per well, while QEP Resources (QEP +0.00%) is struggling to cap costs at $11 million per well. It's worth mentioning that Kodiak is comparatively smaller than both.
The Foolish bottom line
These figures should give us a fair idea where Kodiak is placed in terms of operational efficiency. The question investors should be asking is: Are these companies capable of driving up cash flows and margins by becoming more efficient from an operational standpoint? For Kodiak, the answer seems to be yes.
