This Kodiak is No Bear

By Kirk Spano - August 30, 2012 | Tickers: KOG, MDU, TSO | 0 Comments

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Among the most discussed Williston Basin stocks is Kodiak Oil and Gas (NYSE: KOG). Separating hype and hope from reality and reason is becoming more difficult by the day as more people become vested in their bets either for or against Williston stocks in general and Kodiak in particular. 

The Williston Basin, which I discuss in my article Rockin' Bakken Party is Just Startin', is in fact THE most prolific oil play in America in decades.  Owning companies that benefit from the Williston can lift almost any portfolio. 

Kodiak is one of the companies working the Williston that is on a very fast growth track.  According to their August investor presentation the company expects to have an average of 17,000 BOE/day for 2012, with a year-end exit rate near 27,000 BOE/day.  This is more than eight times the 2011 exit rate of 3922.

In touring the Williston Basin, I visited several of the company's sites and each was cleanly producing.  In talking with personnel in the field it was apparent that there was some learning curve endured earlier this year with a new process.  Judging from recent production rates that curve was well navigated.

Three of Kodiak's newer wells in the Koala had production rates in excess of 1100 BOE/day in the first 30 days, two of which trumped 1300.  For the year, Kodiak expects production to approach a 1300 BOE/day average for new wells.  I am not certain they will hit that as several wells were merely taking up natural flow and not pumping.  I am not certain what the decision making process is behind that, it may have just been timing of the visits.

In McKenzie County, home of some of the best acreage in the Williston, Kodiak's Koala and Smokey fields are both increasing the number of wells per pad often to four, up from one just a year ago and completing wells several days faster than a year ago.  These changes will improve efficiency, potentially driving costs down over a million dollars per well on average, from the planned for $10.5m per well. 

The company has over 800 net well sites to drill in the next decade or so and is improving their techniques daily.  Their reputation at least is very good.  Production is what counts though. As the number of producing wells increases and well costs decrease profits should surge.

Over time Kodiak can benefit from improving infrastructure in the region which could help reduce the persistently wide spread between Williston crude and WTI, improving the price Kodiak receives for its oil. The company is building a pipeline from its Polar field in an effort to thwart potentially severe winters, as well as, connect to other pipelines, possibly Enbridge's national network should difficulties with capacity be resolved. 

Rail capacity in the region is also improving as companies like Burlington Northern add capacity.  In addition, Tesoro (NYSE: TSO) just added 10,000 bpd at their Mandan facility in North Dakota which handles light sweet crude which is what Williston produces.  There is also an increasing likely surprise in increased natural gas earnings as MDU Resources (NYSE: MDU) builds out its pipeline network in the region which Williston E&P companies will be able to connect to rather than flaring off.

In the long run, Kodiak's prospects look good.  Investors ought to keep an eye on a few things however.  If Kodiak cannot continue to improve efficiency and maintain enough cheap working capital it may not see revenue fall to the bottom line as earnings.  A wild card for Kodiak is that it is drilling its own disposal wells rather than paying to have its waste water taken by a disposal company.  While this helps reduce costs, water disposal is a potentially problematic issue should the current methods run into regulatory issues. 

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