Kodiak Oil & Gas (KOG)

[Wildbilly]

Bakken Update: Kodiak's Purchase Of Liberty Resources Could Make Or Break Its 2013
Jun 4 2013, 07:50  |  about: KOG

http://seekingalpha.com/article/1479051-bakken-update-kodiak-s-purchase-of-liberty-resources-could-make-or-break-its-2013?source=email_rt_article_readmore

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Kodiak (KOG) announced on June 3rd it was acquiring 42000 net acres in Williams and McKenzie counties. This added production of 5700 Boe/d. The acquisitions ups Kodiak's Bakken acreage to 196000 net acres. It will pay $660 million in cash. Kodiak continues to add acreage, and seems willing to pay market value (or a little more). Liberty Resources is a privately held company, and many believed it would be an IPO sometime in the near future. There are no indications Liberty was hurting financially, or was motivated to sell. I would guess Liberty got the deal it wanted, and Kodiak thought there was added value to the purchase.

Given the infrastructure and daily production, Kodiak received a reasonable deal. I also like the transaction, as Liberty is a very good operator and is on acreage I believe to be outside the top tier, but still very good. I do have some issues with respect to timing and leverage as Kodiak continues to add debt and difficulties for management to execute through 2013. Without the deal, Kodiak was well positioned to grow without worries of raising equity. My biggest worry is how it plans to pay for this deal. Kodiak will probably have to go back to its shareholders in the second half of the year. It probably won't be working with in cash flow for another year or two. Managing the new acreage could also be difficult as there have been difficulties with other bolt on acquisitions.

Looking at the acreage, it is still pretty good when considering pad development. Definitely not as good as the Koala Prospect, but it is better than most give credit. The middle Bakken is still productive in this area, but focus should be on the Three Forks. This acreage is in some of the deepest parts of the Williston Basin. With added depth we see higher well pressures, especially the deeper benches of the Three Forks. Not to get too far ahead of myself, but we also have to consider the Red River as a horizontal target.