Two major companies in the Bakken shale formation last week joined hands to create the largest producer in the region. Whiting Petroleum (NYSE:WLL) and Kodiak Oil & Gas (UNKNOWN:KOG.DL) entered into a definitive agreement under which Whiting will acquire Kodiak in an all-stock transaction. The acquisition comes after the state of North Dakota recently surpassed the 1 million barrel per day oil mark, driven by the Bakken and Three Forks formation. Given that the Bakken is a major contributor to U.S. oil production growth, it is not surprising that there is competition for assets in the region. Therefore, more deals can be expected in the Bakken as producers look to expand. Also, consolidation would help producers drive down costs and achieve operational efficiencies.
Whiting becomes largest producer in the Bakken
Whiting Petroleum, which itself was being seen as a takeover target, announced last week that it will acquire rival Kodiak Oil & Gas in an all-stock transaction valued at around $6 billion, including $2.2 billion of Kodiak's net debt. With the acquisition, Whiting has become the largest producer in the Bakken, surpassing Continental Resources (NYSE:CLR).
Under the terms of the agreement, Kodiak shareholders will receive 0.177 of a share of Whiting stock in exchange for each share of Kodiak common stock they hold. Based on Whiting's closing price on July 11, 2014, the last trading day before the deal was announced, Kodiak has been valued at $13.90 per share. This represents a premium of just 5.1% over Kodiak shares' volume-weighted average price for the last 60 days.
The meager premium being paid by Whiting does come as a surprise, especially given the prospects for the Bakken. However, the merged companies will achieve operational efficiencies, and this is why the deal is a win-win situation for both Whiting and Kodiak shareholders.
Shale producers have been looking to bring down costs and improve production. Indeed, this, along with the competition for assets in the Bakken, could lead to more deals in the future.
More deals possible
Shale producers have seen a sharp increase in spending. According to Bloomberg News, an analysis of 61 shale drillers showed that debt levels have almost doubled over the last four years even as revenue has just risen 5.6%. Bloomberg further notes that around a dozen of the companies it analyzed are spending about 10% of their sales on interest.
Kodiak itself has seen its capital spending budget exceed its cash flow. Indeed, bringing down costs and improving production is a challenge for shale producers. One way to do that is through consolidation.
The Whiting-Kodiak transaction will not only help in driving meaningful production but will also provide greater financial flexibility. Not surprisingly, Kodiak has agreed to a small premium.
Apart from the need to achieve operational efficiency, another factor that could lead to more deals in the Bakken is the competition for assets. The Bakken region, which includes parts of western Montana, crossed the 1 million barrel per day mark at the end of 2013, according to data from the Energy Information Administration (EIA).
North Dakota is the second-largest oil producing state in the U.S. after Texas, driven by development of the Bakken. According to the EIA, since April 2011, production from the Bakken increased 19,000 barrels per day each month. However, Bloomberg notes that majority of drilling rights on privately owned land in the Bakken have been taken up by corporations. Therefore, the only option for producers to expand in this prolific region is through acquisitions.
Varun Chandan Arora has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.