For $3.8 billion in an all-stock deal, Whiting Petroleum Corp (WLL +0.00%) is buying out Kodiak Oil & Gas Corp (NYSE: KOG). Combined, Whiting and Kodiak produced 107,000 barrels of oil equivalent per day, or boe/d, in the first quarter of this year out of the Bakken/Three-Forks formation. To put this into perspective, the largest Bakken/Three-Forks producer, Continental Resources Inc (CLR +0.00%), pumped out 97,500 boe/d from the play in the first quarter.
The details
When the deal is completed, Kodiak Oil & Gas and Whiting Petroleum will have dethroned "King Bakken," but Continental Resources' land holdings of 1.2 million net acres in the Bakken/Three-Forks will still be substantially larger. Whiting Petroleum will hold 855,000 net acres in the prolific Bakken/Three-Forks, with 3,460 future drilling locations to keep growing oil-weighted output.
Kodiak shareholders will receive 0.177 of a Whiting share for each Kodiak share, and Whiting will take on Kodiak's $2.2 billion in debt. Due to the all-stock nature of this acquisition, Kodiak and Whiting see this deal as "credit enhancing" because the new entity will have a low debt to expected 2014 EBITDA ratio of 1.6x. Greater financial flexibility will allow the combined company to keep trying out new completion techniques to enhance the production of the wells yet to be completed.
Transferring expertise
In order to make sure Whiting gets the most out of each well it completes, it's changing its fracking technique. Previously Whiting used the sliding sleeve completion technique, which traditionally has 30 stages and 30 potential entry points. Now Whiting has deployed the cemented liner completion technique, which generally has 40 stages and 120 possible entry points.
To get an idea of just how important this technological innovation could be, investors should take a look at Whiting's Missouri Breaks drilling program. The Skov 31-28 unit was a test for this new completion technique, and the results speak for themselves.
One well that was completed with the old sliding sleeve technique had 30 entry points and cost $7.9 million to complete. By utilizing the cemented technique, Whiting was able to boost the number of entry points to 150 while increasing the initial production rate by 31%, all for just 3% more. By combining several of its best well completion techniques including cement completion, Whiting was able to bring the Skov 31-28-3H well online with 60 frac stages, 85 entry points, and an initial production rate 73% higher than a traditional well for 11% more.
Now that Kodiak's operations are going to merge with Whiting's, Whiting will be able to transfer what it has learned to Kodiak's operations, and vice-versa. Kodiak has already been tapping into the lower portions of the Three-Forks bench, which lays just under the Middle Bakken. Through the Polar pilot project, Kodiak tapped into both the upper and lower portions of the Three-Forks shale, while also targeting the Middle Bakken. Kodiak has other downspacing plans as well, which include trying to complete 16 wells on one unit. Now Whiting Petroleum will also be able to reap the spoils of Kodiak's tests, and the potential upside through downspacing is huge.
So much oil
Back in 2010, Continental Resources saw 577 billion barrels of oil equivalent in place, but that was when it and the rest of the industry was only factoring in the Middle Bakken and the first bench of the Three-Forks. Now that the second and third bench of the Three-Forks has been made accessible due to downspacing, Continental Resources now see 903 billion barrels of oil equivalent in place, which could yield 32 billion to 45 billion recoverable barrels of hydrocarbons.
Imagine the enormous hidden potential these companies are sitting on. Combined, Kodiak, Whiting, and Continental hold over 2 million net acres in the Bakken/Three-Forks, and could eventually pump out billions of barrels of crude, with a bit of natural gas production as well, from their respective assets. Even more upside could be found in the lowest bench of the Three-Forks, which has yet to be tapped into.
Foolish conclusion
Continental has had a good run, but now it is time to pass the Bakken/Three-Forks crown to the new king, Whiting Petroleum. This doesn't make Continental Resources any worse of an investment, but if it wants to regain the crown it will have to step its game up. Kodiak and Whiting shareholders seem to have gotten a good deal with this merger, as the new company will be able to use overlapping acreage to reduce costs while being able to leverage each others expertise to maximize the potential of each drilling location. As an added bonus, Whiting Petroleum announced that it will be able to grow its oil production faster now than if Whiting hadn't acquired Kodiak.
