Whiting Petroleum didn’t have to go far to make a great deal. The key to becoming the leading Bakken producer was just across the street. On July 13, Whiting Petroleum, which does business in North Dakota as Whiting Oil and Gas, announced its acquisition of Kodiak Oil and Gas. The two companies’ corporate offices sit across the street from each other in Denver, Colorado, and together they plan to do much more than they could have done separately. The total purchase is valued at about $6 billion which includes $2.2 billion in debt, and it creates a powerhouse that is expected to operate more efficiently and tap into additional drilling opportunities.
“The Whiting and Kodiak asset bases in the Williston fit hand-in-glove,” said Whiting President and Chief Executive Officer Jim Volker in a July 14 conference call with analysts. “We see substantial financial benefits from applying Whiting’s technological expertise to Kodiak’s extensive inventory of drilling locations which will allow us to enhance overall recoveries while reducing drilling and completion costs.”
The transaction will bump Whiting’s acreage to 855,000 net acres with an inventory of 3,400 net future drilling locations in the Williston Basin.
Leaderboard change
It also catapults the company to the top of the production charts, dethroning Continental Resources and Hess Corp. as the traditional leaders. As of May, the latest month for which North Dakota production data are available from the Department of Mineral Resources, Whiting was the No. 3 Bakken oil producer in the state averaging 75,552 barrels per day for operated, non-confidential wells. Leading the way was Hess Corp., filing as Hess Bakken Investments, with 88,847 bpd and Continental Resources at second with 87,598 bpd (see pages 9 and 16). Kodiak took the No. 9 spot with output totaling 46,330 bpd, and combined with Whiting, their pro forma North Dakota Bakken production rises to 121,822 bpd for May. That not only makes Whiting the top Bakken producer in the state, but by a relatively wide margin.
The company said it plans to grow Kodiak’s fleet of seven rigs to 12 operated rigs within 12 months of closing on the transaction, scheduled to occur in the fourth quarter of 2014. The transaction will leave Kodiak shareholders with about 29 percent of the combined company. Kodiak Chairman and Chief Executive Officer Lynn Peterson said the acquisition will allow his company the exposure to continue development in the Bakken and Three Forks within a much larger entity.
“We view this transaction as significantly de-risking the Kodiak story,” Peterson said. “The increased size and scale of the combined company provides greater access to capital for accelerating of drilling on our acreage. The rig increase is not something we felt comfortable doing on our own with our financial profile.”
Gas capture challenges
Whiting has historically kept its flaring under control, capturing its gas well beyond the targets set by state regulators, whereas Kodiak hasn’t been as successful. The state’s Department of Mineral Resources Director Lynn Helms referred to the acquisition in his monthly press conference as he addressed flaring issues, noting that the two companies are at opposite ends of the spectrum when it comes to gas capture (see related story, page 1).
“That’s going to change (Whiting’s) gas capture number,” Helms said. “Whiting was well above 74 percent and Kodiak was well below, so they’ve got to get their pencils sharp and determine how they’re going to deal with their acquisition.”
Volker said it is something Whiting reviewed very closely and he is impressed with the work that Kodiak has done over the past six months to get the company ready to meet the Oct. 1 requirement of capturing 74 percent.
“I’m pleasantly surprised that they will be well ahead of schedule to meet the capture percentage that is set by the NDIC,” Volker said. “As a combined entity, I can assure you, we will certainly have plenty of cushion with respect to those rules.”
Complementary companies
Peterson said Kodiak has always been impressed by Whiting’s technological expertise and sees the benefits of applying that to Kodiak’s drilling program. He is also excited to utilize the diverse set of resources within Whiting’s acreage in Colorado’s Niobrara play. Since most drilling locations in the Williston Basin are already leased to other companies, explorers are limited to expanding through acquisitions. Volker said the combination of Whiting and Kodiak takes two successful, focused businesses and creates a leading Williston Basin player (see map). Both companies have established acreage in the core of the Williston Basin and he noted that Kodiak has experienced some of the best well economics throughout the basin.
“You can see just how complementary the two really are,” Volker said. “The combined companies will benefit from offset acreage positions, and together we create an extremely attractive position in the central and eastern Williston Basin fairway.”
The neighboring acreage creates efficiency advantages and Volker thinks Whiting can achieve a $700,000 per well savings, resulting in more completions in 2015. Whiting has completed 80 net wells so far this year and with a substantial rise in rig count, Volker expects a strong impact on production and cash flow from the Bakken and the first and second benches of the Three Forks. The company recently completed a well in the second bench which is producing 6,000 barrels of oil per day. But Kodiak has seen explosive production growth lately, too.
“A 40 percent-plus projected growth in 2014 is a very nice growth rate,” Volker said of Kodiak’s production.
Whiting Senior Vice President of Exploration Mark Williams said with Whiting’s completion techniques and Kodiak’s acreage, the combined company is positioned to drill many more wells.
“We look at Kodiak’s position not just what they are now but what we think they can become as we continue to develop new completion techniques. I believe we’re still very early in the game of optimizing completion techniques,” he said.
One of the strategic aspects of the transaction is Whiting’s growth in the Bakken and Three Forks’ production and reserves. Whiting advances its exposure in these areas from 76 percent to 82 percent and similarly on a proved reserve basis, improving from 46 percent to 61 percent (see chart).
“Considering our expertise in the region, and the high cash margins that we currently realize in the area, that’s a pretty compelling opportunity,” Volker said.
A look into Whiting’s history in the Williston Basin highlights a company with increasing value. Volker noted that when the company first acquired acreage in the Bakken, it produced only a couple thousand barrels a day. Currently, Whiting is realizing 10,000 barrels a day and Volker said it’s on its way to 20,000 barrels a day.
“We love that field because it is so predictable,” he said.
Based on recent robust oil pricing sending stocks to all-time highs, Whiting and Kodiak executives say the two companies tried to strike a balance to come up with a fair deal.
“We all have to look at this as a combination of efforts,” Peterson said. “I think by combining with Whiting who provides a superior balance sheet, we’re able to accelerate this activity level and I think that’s what we’re really trying to do through this combination.”
