Kodiak Oil’s Big Deal Payout Is Still to Come: Real M&A

Kodiak Oil & Gas Corp. shareholders will get zero premium for agreeing to sell to Whiting Petroleum Corp. The real payout may be down the road.

The $4 billion stock swap values Kodiak shares at a discount to their average price in the 20 days leading up to yesterday’s deal announcement. It’s rare to see an acquisition without a premium, and the last “take-under” of a North American oil or gas producer was in 2008, according to data compiled by Bloomberg. Whiting and Kodiak say the benefit for shareholders comes from owning a stronger company that can accelerate drilling in the resource-rich Bakken shale formation.

With the tie-up making Whiting a dominant oil supplier in the Bakken, analysts from firms such as Wunderlich Securities Inc. say it could wind up getting bought. Whiting shares surged to a record yesterday, posting a larger gain than Kodiak. The $10 billion producer -- along with Bakken rivals Continental Resources Inc. and Oasis Petroleum Inc. -- must be at the top of the shopping lists for major energy companies such as Exxon Mobil Corp., KeyCorp said.

“The premium for Kodiak is, ‘Hey, this is going to be a good deal and a bigger, better combined company,’” Jason Wangler, a Houston-based analyst at Wunderlich, said in a phone interview. “That dovetails into saying it now becomes an even more attractive acquisition target because it’s a combination of the two instead of having to go buy both.”

Deal Discount

James Henderson, a spokesman for Denver-based Kodiak, said he couldn’t comment on speculation of future deals. Eric Hagen, a spokesman for Whiting, which is also based in Denver, didn’t respond to a request for comment.

Shareholders will receive 0.177 of a Whiting share for each Kodiak share in an offer valued at $13.90 apiece based on Whiting’s July 11 closing price. That’s a 2.3 percent discount to Kodiak’s average level in the prior 20 days. Whiting and Kodiak said yesterday that the offer is about 5 percent higher than Kodiak’s 60-day average price.

The average premium paid for North American oil or gas producers in deals larger than $1 billion is 26 percent, data compiled by Bloomberg show.

Both Whiting and Kodiak closed at record highs yesterday, rising 7.7 percent and 4.8 percent, respectively.

Today, Whiting shares fell 0.1 percent to $84.52 at 10:23 a.m. New York time. Kodiak climbed 0.3 percent to $14.95.

Not Pleased

Not all shareholders are pleased with the deal terms. Richard Hulf, co-manager of the Artemis Global Energy Fund, called the bid disappointing. He values Kodiak about $3 more than the offer, or about $17 a share. When choosing which Bakken stocks to invest in, the firm saw Kodiak’s acreage as superior to Whiting’s, he said. Artemis manages about 20 billion pounds ($34 billion) and owns Kodiak stock.

“Putting the two together doesn’t make it any better for us because we preferred the acreage that Kodiak had in what we regarded as the sweet spot of the play,” Hulf said in a phone interview from London. “We would like to see a higher bid.”

On the other hand, without Whiting’s financial heft, Kodiak couldn’t afford to accelerate drilling on some of its leases, Lynn Peterson, Kodiak’s co-founder, chairman and chief executive officer, said during a conference call yesterday. A slower pace of drilling means a longer wait time until oil profits flow.

“Kodiak investors don’t have the immediacy of a payoff through a takeout premium, but they have a longer-term investment that makes sense,” David Deckelbaum, a New York-based analyst at KeyBanc Capital Markets, a unit of KeyCorp, said in a phone interview. “This just creates a situation where the amalgamation is worth a lot more than the two entities apart.”

Bakken Acreage

It’s worth more to acquirers, too, Wangler of Wunderlich said. The Kodiak purchase will give Whiting drilling rights across 855,000 net acres in the Bakken, surpassing Exxon as the second-biggest leaseholder in the area, according to data compiled by Bloomberg. Whiting said the deal will also boost its production by 50 percent next year.

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. Most drilling rights on privately owned land in the area have already been snapped up by corporations, so explorers can expand only through acquisitions.

“The very large companies -- whether it’s the Exxons or Statoils of the world -- they’re going to have to have to be getting a very large scale to go through the process of buying somebody,” Wangler said.

Shopping List

Irving, Texas-based Exxon is the world’s biggest energy company by market value, which stood at $441 billion yesterday. Statoil ASA, a Norwegian producer that gets about 15 percent of its revenue from the U.S., was valued at $97 billion.

Alan Jeffers, a spokesman for Exxon, said the company doesn’t comment on speculation. Representatives for Statoil didn’t respond to a request for comment sent outside the company’s normal business hours.

Oklahoma City-based Continental Resources, Whiting and Houston-based Oasis have the most Bakken acres per 1,000 shares, according to data compiled by Bloomberg.

“You have larger incumbents out there, and if they want to do anything of size in that area, these three names have to be at the top of their shopping list,” Deckelbaum said.

That said, “there are a lot of independent oil and gas companies that are all growing very rapidly, and I think it’s much more natural for an acquirer to come in after the growth phase is complete,” he said. “We’re nowhere near that right now.”

Bigger Target

There has been speculation that this transaction, by making Whiting larger, was intended to prevent it from getting acquired, said James Sullivan, a New York-based analyst at Alembic Global Advisors. Whiting’s market value was $9.3 billion before announcing the deal. Whiting and Kodiak had a combined value of about $14 billion yesterday.

Even so, Sullivan doesn’t see the transaction as a deterrent to a future takeover of Whiting. It just means the list of buyers is shorter and likely limited to the so-called majors, the top-tier of international energy explorers, he said.

“I would think they’re still a candidate,” Sullivan said in a phone interview. “If you think somebody’s willing to buy a $9 billion company, why wouldn’t they be willing to buy a $15 billion company?”

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