In a surprise Sunday afternoon announcement, Kodiak Oil & Gas (NYSE: KOG) revealed that it had agreed to be acquired by Whiting Petroleum (WLL) for $6 billion, including the assumption of debt. The all-stock deal will give Kodiak Oil & Gas investors 29% ownership of the newly combined company. It's a very interesting deal as it's seeing Kodiak Oil & Gas handing over control for a lower stock price than it was trading for just last week.
Drilling down into the deal
Under the terms of the deal, Kodiak Oil & Gas investors will receive 0.177 shares of Whiting Petroleum stock for each share of Kodiak Oil & Gas owned, which represents $13.90 per share. That price represents a 5.1% premium over the stock's average trading price over the past 60 days. However, it is a very peculiar price in that it's less than the stock's closing price on Friday, and about a dollar below its all-time high that was also set last week. While last week's stock price could have been fueled by rumors and speculation that a deal was near, obviously some investors thought this company was worth more.
The fact is that Kodiak Oil & Gas is only selling itself for an enterprise value of about 8.8 times EBIDA. That's well below the average of 11.6 times EBITDA that oil and gas deals over $1 billion have been completed for over the past few years according to data compiled by Bloomberg. Add to that the fact that Kodiak Oil and Gas is a fast growing Bakken Shale focused pure-play that has 171,000 net acres, 1,300 future drilling locations and was expected to grow its production by 35%-45% this year and the deal price seems lackluster. It's also much less of the premium multiple the company was rumored to have been seeking at this time last year.
What does the deal mean for investors
Still, this is not to say that Kodiak Oil & Gas investors are being cheated out of this potential upside. Because this is an all-stock deal, the future value created by Kodiak's assets will now be realized as part of the larger Whiting Petroleum. Likewise, Kodiak Oil & Gas investors will gain from the upside as well as the diversity of Whiting Petroleum's assets. In that sense the deal is more about reducing future risk to Kodiak Oil & Gas investors than relinquishing upside.
At its core this deal is about creating the top oil producer in the Bakken Shale. At a combined 107,000 barrels per day of oil equivalent production, the new Whiting Petroleum will lead the basin in production. Further, with 855,000 net acres and 3,460 future drilling locations, there will be plenty of room to grow. In addition to that Kodiak Oil & Gas investors will benefit from having the diversity of Whiting Petroleum's larger asset base. More specifically, Kodiak Oil & Gas investors will be part of a company that has upside to not just the Bakken but to the emerging Redtail-Niobrara prospect. Whiting Petroleum has enjoyed rapid production growth from that area, which holds 3,310 gross drilling locations. Lastly, Whiting Petroleum has another 3,587 prospective drilling locations as part of its exploration program that adds additional upside to the combined company.
Clearly Kodiak Oil & Gas sees more value combining with Whiting Petroleum at a less than premium price than by going at it alone in the Bakken. While this isn't the outcome some investors probably wanted to see, it's not a bad outcome at all for long-term investors. In turning over the keys to the growth engine to Whiting Petroleum, investors will own a company that has less risk and just as much -- if not more -- upside. That's a pretty good reason to keep holding on.