Why Kodiak’s downspacing initiatives are positive

Market Realist

Overview: A guide to the Whiting-Kodiak transaction (Part 7 of 9)

(Continued from Part 6)

Kodiak’s closest competitor

Kodiak (KOG) has a net acreage of ~170,000 net acres in the Bakken. One of KOG’s closest competitors is Oasis Petroleum (OAS), another pure-play Bakken producer. However, Oasis’ acreage at ~507,000 net acres is considerably higher than KOG’s.

Downspacing initiatives

KOG has been making progress on improving its well costs through its “downspacing” initiatives, which have helped reduce well costs from over $10.5 million per well to under $9 million in 2014.

Kodiak’s downspacing projects have been successful compared to similar initiatives by other companies. This could be positive for the Whiting-Kodiak acquisition. Downspacing and Whiting’s (WLL) superior well completion technology combined could help drive the overall well costs for WLL-KOG.

In its Polar Pilot 1.0 project, the company drilled six wells in the Middle Bakken and six in Three Forks region.

Downspacing work continues in the company’s Polar operating area. In the Polar Pilot 2.0 project, the company plans to test 16 wells within 1,280-acre drilling spacing unit (or DSU) with two wells in the Middle Bakken and two wells in the Three Forks region.

Expertise from KOG and WLL contribute to the competitiveness of the combined company

Combined, WLL-KOG will compete with big guns like Continental Resources (or CLR). As covered in the previous parts of the series, CLR still remains the largest acreage holder in the Bakken. However, the new company will be able to achieve higher production through this enlarged acreage position. CLR’s 1Q14 production was 97,500 barrels of oil equivalent (or boe/d) compared to WLL-KOG’s 107,000 boe/d.

However, it’s important to note that for 2014, CLR is forecasting ~175 million boe/d of daily production. This is a significantly larger number. If successful, it will help CLR surpass WLL-KOG’s forecasted 152,000 boe/d by the end of 2014.

The combined company will have a better bargaining power. It will also have a distinct advantage of leveraging the expertise of both the companies to achieve greater operational efficiency.

Key stocks and exchange-traded funds (0r ETFs)

It’s important to note that WLL, KOG, CLR, and EOG are all components of the Energy Select Sector SPDR ETF.

The next section in this series discusses how the market reacted to the news of the combination.

 

Continue to Part 8

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