Whiting Buys Kodiak – A Big Energy Deal With Potential to Spare (KOG, WLL)

by Aaron Levitt | July 14, 2014 1:43 pm

News broke today that No. 2 Bakken player Whiting Petroleum (WLL[2]) has made a big-time offer for Kodiak Oil & Gas (KOG[3]).

And really, it was just a matter of time.

As one of America’s most important and prolific oil producing regions, the Bakken shale was destined to became a hotbed of M&A activity. Production in the region continues to surpass even the most bullish analyst estimates, and the potential of looming oil exports could see demand for shale formation’s liquids production surge even higher.

However, this time it wasn’t an outside oil player looking to cash in on the shale formations bounty — it was Whiting Petroleum snagging a smaller, independent producer in KOG.

It was one of their own snagging-up a smaller rival.

That deal is not only transformative for both WLL and KOG stock holders, but the entire Bakken region as well.

And it’s a great illustration of why every investor should have some Bakken in their portfolio.

A Big Buyout For KOG Stock

Whiting Petroleum’s “Merger Monday”[4] move should cement WLL as the leading producer in the Bakken. According to the terms of the deal, Whiting will pay a total of $6 billion to acquire smaller rival Kodiak and its net debt of $2.2 billion. KOG stock investors will receive 0.177 shares of WLL stock for each share of Kodiak they own. That works out to be a small 5% premium to KOG’s current value.

Overall, Whiting shareholders will own 71% of the combined company after the merger goes through — a transformative buyout for anyone holding WLL stock.

By snagging Kodiak, Whiting will now be the biggest producer in the Bakken and leave current kingpin Continental Resources (CLR[5]) in its dust. The new WLL/KOG combo will now own 855,000 net acres in the Bakken and Three Forks regions of North Dakota. That prime acreage currently produces around 107,000 barrels of oil equivalent (BoE) per day, according to Reuters — and that’s about 10,000 more barrels per day than CLR.

The duo estimate 2015 production of around 152,000 BoE per day, and Kodiak’s contribution to that production will be the main driver. The firm’s usage of high-tech ceramic proppant from Carbo Ceramics (CRR[6]) as well as it acreage locations have allowed it to see a doubling of production last year. Whiting and Kodiak already identified 3,460 new drilling locations across its acreage.

To quote Whiting’s CEO James J. Volker[7], “Our two acreage positions fit together hand in glove.”

The buyout also means some pretty big things for shareholders aside from rising production. KOG is expected to be accretive to cash flows[8] and earnings per share by the start of 2015. Additionally, the combined firms will be able to see cost savings of around $1 billion over the next five years. Not to mention, a larger WLL will be better able to access capital needed for drilling at cheaper rates.

 So Should You Buy KOG Stock?

From an investment standpoint, KOG stock might be a great pick to buy even with the deal going through.

If it goes through as planned, shareholders will then own a piece of a much larger WLL, giving them all the aforementioned benefits. In a way, KOG stock is a back door into owning that big-time Bakken player.

But the real benefit of owning KOG comes in another way. Namely, a rival bid. Kodiak has always marketed itself as the “pure play” Bakken firm, and it has always been touted as perfect buyout candidate for a much larger energy firm. And while $6 billion is a lot of coin, it’s not too much for a bigger energy or foreign integrated rival to top to get access to the prolific region. Buying KOG or rival Oasis (OAS[9]) instantly gets you plenty of heft in the Bakken.

We could see some counter-bids coming in the next few weeks here as the E&P industry digests the deal. Some that could actually top the relatively nonexistent premium for KOG shares that WLL is paying. Heck, Continental Resources could even make an offer to keep its crown. CLR has already spent a pretty penny acquiring just over a million acres in North Dakota. And like with Whiting, Kodiak’s acreage “would fit like a glove.”

Under either scenario — the WLL buyout or a rival bid — KOG stock investors will be laughing all the way to the bank. Buying shares now either gets you access to a much larger Bakken player today or in the near future.

All in all, KOG could still be the best Bakken buy. As such, there’s more potential upside to Kodiak than owning WLL at the current time.

As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2014/07/kog-wll-clr-bakken-shale/

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