When Kodiak Oil & Gas Corp. sailed into the Williston basin of North Dakota and Montana in 2004, it was a small independent hoping to cash in on the rich promise of the region. During the ensuing eight years, the company has grown rapidly from a pure explorer of the Bakken with a $6 million annual budget in 2005 into an aggressive producer targeting 2012 capital expenditures of $585 million. In many ways, Kodiak’s rise mirrors the tsunami of exploration and production activity that has engulfed the Bakken/Three Forks/Sanish Play.
Today, Denver-based Kodiak is an impressive petroleum producer in the Bakken, boasting dramatic recent growth in reserves, production, cash flow and prospects. The company’s success is due in no small measure to a steady hand at the helm, that of Kodiak Chairman and CEO Lynn A. Peterson.
A certified public accountant educated at the University of Northern Colorado, Peterson, 57, has more than 25 years of experience in the oil and gas industry. He became a director of Kodiak in November 2001, and was appointed top executive of the company in 2002. Before that, Peterson was an owner of CP Resources LLC, an independent oil and natural gas company, from 1986 to 2001. He also served as treasurer of Deca Energy from 1981 to 1986 and previously worked for Ernst and Whinney.
A ‘team mentality’
“The key to our success is directly related to our people,” Peterson told Petroleum New Bakken in an email May 17. “The geologist defined the play early and the land group successfully negotiated the rights to the lands. Once this was in place our engineering staff has done a commendable job of drilling and completing wells. Clearly none of this would have happened without the contributions of the finance department that put funding in place for all of this to transpire. We have focused our acreage and activity in the deep, over-pressured part of the play where we continue to develop robust wells.”
The CEO said everything done at Kodiak is done with a team mentality. “We all try to work together and are willing to take chances when we deem the risks appropriate. I’ve been fortunate to surround myself with a very capable staff. … We have managed our growth with a conservative balance sheet, which has allowed us to push our operations forward without taking on an excessive amount of debt.”
Observers agree, saying much of Kodiak’s recent success stems from the hard-charging and focused approach of Peterson and Kodiak’s management team and their ability to rapidly expand the company’s operations within the heart of the Bakken.
“Lynn and his team at Kodiak have done a fantastic job developing the Bakken in North Dakota,” said Ron Ness, president of the North Dakota Petroleum Council.
Certainly, Peterson’s annual compensation, which has steadily increased in recent years, reflects the company’s satisfaction with his performance. In 2011, the CEO’s risk-based compensation totaled $1.4 million, of which $455,000 was comprised of salary and bonus incentive award.
Stellar growth, strong promise
Kodiak grew production 211 percent and oil and gas sales 287 percent in 2011, with the company racking up oil and gas sales of $120 million in 2011. Proven oil reserves climbed 255 percent in 2011 to 35.6 million barrels of oil equivalent, and the company drilled 25 net new wells and acquired 88,000 new acres that included 25 net productive wells.
Between mid-October and January, Kodiak brought on line eight gross operated wells averaging 1,682 barrels of oil equivalent per day. Kodiak currently has a working interest in five non-operated wells in Dunn County that have been completed. In addition, thanks to a second large land acquisition in recent months, the company averaged 12,500 boe per day in sales volumes in March, up from 10,100 boe at the end of 2011.
Kodiak reported average sales volumes of 10,578 boe per day for the first quarter 2012. This represents a 467 percent increase over average sales volumes of 1,864 boe for the first quarter 2011 and a 47 percent increase over fourth quarter 2011 sales volumes of 7,195 boe. The company reported average daily sales volumes of 3,922 boe per day for 2011, representing a 204 percent increase over average daily sales volumes of 1,290 boe during 2010.Crude oil accounted for 91 percent of first-quarter 2012 sales volumes, down slightly from 94 percent of fourth-quarter sales volumes and is a result of more natural gas being captured as sales.
Rig count up
Earlier this year, the plain-spoken Peterson said, “As we have increased our rig count from two operated rigs in early 2011 to six operated rigs currently, we anticipate that 2012 should be another year of robust growth in all areas. Because management plans to bring on 51 net wells this year, it is targeting an exit rate of 27,000 barrels of oil equivalent per day.”
In order to eliminate limited leasehold expiration issues, Peterson’s team aims to have Kodiak’s 155,000 net-acre Williston basin land position held by production by mid-2013.
To wit: Kodiak has more than doubled its planned 2012 capital expenditures to $585 million and set aside $25 million for investments in infrastructure. The company expects to drill 73 gross new wells in 2012 (51 net) and is adding a seventh rig to operations during the second quarter. It has contracted for a second completion crew on an as-needed basis to back up the full-time 24/7 completion crew from Halliburton it already has in place.
Working out the kinks
Analysts say 2012 could be the start of a banner three-year run for Kodiak, based on projections and management’s full-steam-ahead approach.
Achieving the company’s goals, however, will require Peterson and his team to juggle a variety of issues and meet a host of unexpected challenges as they pop up.
During the first quarter of 2012, for example, Kodiak focused on integrating the October 2011 and January 2012 acquisitions into its operations. A shortage of workover rigs early on led to delays while installing artificial lift on some of Kodiak’s wells. The result was production from these wells did not come online until mid-February. The company also substantially completed a number of wellbores gained in the acquisitions that required additional completion procedures to bring the wells to production.
Kodiak also completed three wells in its Grizzly project area which met internal well performance expectations. This area in southwest McKenzie County is characterized by lower reservoir pressures which do not yield the robust initial production rates common in other parts of the basin. The wells are being placed on artificial lift.
In addition, Kodiak continued repair and remediation work on the wells that encountered mechanical issues during completion procedures at the end of 2011 and in early 2012. The company is working on optimizing wellbore density and will continue to test the concept.
“The operations team is working closely with our service providers and with our industry partners that have experienced similar problems. This collaborative effort is yielding solutions that we believe will allow Kodiak and our industry partners to effectively remediate the wells. …We believe we have put this situation behind us as we are now using mostly cemented liners,” Peterson told analysts May 4. “However, we now anticipate the wells coming on line during the last three quarters of 2012, as opposed to the first half of 2012, as initially expected.”
The company’s current guidance to the Street is average daily production of 17,000-21,000 boe, and it expects to exit the year on Dec. 31 producing 27,000 boe, signifying robust growth.
Availability of services improving
Peterson said the availability of Williston basin oilfield services continues to improve, which should result in better field-level efficiencies in the coming months and lower well costs.
“We’re certainly seeing it from a trucking and pipe standpoint. One of the items we’re hoping will start working its way down is the pressure pumping side of the business. As we look down the road 12 months from now, I’m willing to say that I think some of these costs will start to come down,” he said.
Averaging $10.5 million per well, Kodiak’s well costs tend to be on the higher end of the spectrum, but Kodiak is “chasing the reserves,” he said.
Most of Kodiak’s acreage is situated in the deepest and most over-pressured part of the Williston basin, primarily in McKenzie, Dunn and southern Williams counties.
“That’s where we’re seeing the largest reserves. So Kodiak’s attention is focused right around the core of our leasehold where we can drill high working interest wells for the remainder of 2012,” he said.
“We believe the bulk of our acreage will deliver 750,000 to 1 million barrels EUR, so you can see that even with the $10.5 million-$11 million in well costs, we’re getting some pretty robust rates of return here,” he told analysts May 10.
Peterson also said he expects the company to achieve more internal cost savings as it moves more into development mode, drilling more wells per pad.
“We know we’re out of the gates a little slow (this year), but we’re excited about what we’ve got going on. The company is solid financially with plenty of runway ahead of us to grow,” he said. “We believe we have a 10- to 12-year inventory ahead of us, somewhere around 800 net (1,100 to 1,200 gross) locations remaining to drill with 70-80 percent average working interest.”
