Whiting Petroleum Corp. (WLL) will increase oil production by the most in a decade when it creates the dominant crude producer in the richest U.S. shale region with its $3.8 billion takeover of Kodiak Oil & Gas Corp. (KOG)
The deal will boost Whiting’s output by 50 percent next year, Chairman and Chief Executive Officer James Volker said on a conference call today. That would be the largest annual increase since 2005, according to data compiled by Bloomberg. Shares in both companies closed at a record high today.
Without Whiting’s financial heft, the company couldn’t afford to accelerate drilling on some leases, Lynn Peterson, Kodiak’s co-founder, chairman and CEO, said during the call. A slower pace of drilling means a longer wait time until oil profits flow.
The agreement will vault Whiting ahead of Oklahoma billionaire Harold Hamm’s Continental Resources Inc. (CLR) as the premier oil supplier in the Bakken shale formation that stretches beneath parts of Montana, North Dakota and Saskatchewan. Including $2.2 billion in debt, the total transaction is valued at about $6 billion.
“This is an exciting transaction,” John Paulson, the billionaire founder of Paulson & Co. hedge fund, said today in an e-mail. “It creates the top producer in the fast-growing oil-producing Bakken region of North Dakota.”
Paulson & Co. owns more stock in both companies than anyone else.
Investors boosted Kodiak and Whiting to their highest closing prices since the shares began trading in 1998 and 2003, respectively. Kodiak gained 4.8 percent to $14.91 and Whiting rose 7.7 percent to $84.58, leading the S&P Oil & Gas Exploration and Production index today.
Under the agreement, announced yesterday, Kodiak stockholders will receive 0.177 of a Whiting share for each Kodiak share they own. That’s the equivalent of $13.90 a share, based on the acquirer’s July 11 price, the Denver-based companies said in a statement. The per-share value represented about a 5.1 percent premium to Kodiak’s volume-weighted average over the prior 60 days, the companies said.
Whiting is buying a company that more than doubled production last year while its own output growth slowed as costs to bring new wells online surged.
In the coming years, Whiting will target average annual growth rates of 20 percent or more, Volker said.
“We can drill a lot more wells,” Mark Williams, Whiting senior vice president for exploration and development, said during the call. In addition to putting more rigs to work, Whiting plans to shave the cost of drilling a well on Kodiak land by $700,000 to $8.5 million, Volker said.
Competition for Bakken assets is fierce because the geologic formation beneath North Dakota and Montana is the most prolific U.S. shale region, on a barrels-per-well basis, according to data compiled by Bloomberg. Because most drilling rights on privately owned land in the area have already been snapped up by corporations, explorers can only expand through acquisitions.
The Bakken region of North Dakota and Montana has been a hotbed of U.S. oil exploration after innovations in sideways drilling and hydraulic fracturing, or fracking, enabled access to previously impenetrable rock layers.
New wells drilled in the Bakken pump an average of 510 barrels of oil a day, compared to 479 barrels for wells in the Eagle Ford shale in south Texas and almost four times as much as Permian Basin wells in west Texas and New Mexico, according to data compiled by Bloomberg.
The relatively high crude output means explorers may recoup their drilling costs and begin booking profits from Bakken wells faster than those in other formations.
Kodiak’s decision to sell now is “curious,” Tim Rezvan, a New York-based analyst for Stern Agee & Leache Inc., wrote today in a note to clients. A second-quarter earnings miss might explain the move, he wrote. The company hasn’t announced a date to release second-quarter results.
The Kodiak purchase will give Whiting drilling rights across 855,000 net acres, surpassing Exxon Mobil Corp. (XOM) as the second-biggest leaseholder in the area, according to data compiled by Bloomberg.
In North Dakota, home to some of the richest sections of the Bakken, daily crude output exceeded 1 million barrels in April for the first time in history, making the state a bigger oil supplier than Ecuador or Qatar, both members of the Organization of Petroleum Exporting Countries, or OPEC. In the U.S., Texas is the only state that pumps more crude than North Dakota, according to the Energy Department.
An enterprise value for Kodiak of $6 billion is about 8.8 times earnings before interest, taxes, depreciation and amortization last year. That compares with a median of 11.6 times Ebitda for U.S. oil and exploration deals since 2009 valued at more than $1 billion, according to data compiled by Bloomberg.
Whiting and Kodiak executives have known each other for years, but began to evaluate a deal in recent months, Peterson said in an interview yesterday. “We both reside here in Denver, our offices are across the street.”
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