Kodiak has seen a significant reduction in its well costs over the past year and, though the budget is based on around $10 million per-well for drilling and completions costs, lower costs are expected to be achieved throughout 2013 and this is supported by the trend in the second half of 2012 The majority of acreage is held by production, allowing the company to focus on efficient and less expensive drilling. Adding to the cost benefit is the infrastructure already in place.
Peers Operating In The Bakken
Some of the other energy players in the Bakken include Phillips 66 (NYSE:PSX) and EOG Resources, Inc. (NYSE:EOG) .
Phillips 66 recently made a five-year commitment to ship North Dakotan crude oil by rail to its New Jersey refinery thus betting in the region of $1 billion that North American crude will continue to remain cheap. The company has been looking at ways to increase profitability and reduce costs. Analysts have been wondering whether the company would try to sell its two California refineries and exit the state because of higher operating costs.
CEO Garland said the company is focused on improving profitability by tapping into cheaper crudes already run by refineries elsewhere in the country and reducing costs. According to Garland, the company is looking at “any and all options” for its California refineries. The company has faced many challenges in the state, namely regulatory requirements and high costs.
Meanwhile, EOG averaged 13 days per well in the third quarter of 2012 but investors should keep in mind that the Bakken Shale play is only one part of the acreage held by EOG. EOG is one of the top producers in the Bakken. EOG has an oil-rich portfolio; therefore it has been able to grow oil production faster than most of its peers. EOG saw amazing production gains from its Eagle Ford and Bakken acreage over the past five years. Oil brought in nearly 90% of EOG’s 2012 revenue.
Continental Resources, Inc. (CLR) is already averaging costs of $9.2 million per well, while, at the higher end, QEP Resources Inc (QEP) is grappling with costs in the region of $11 million per well. All of these companies are constantly using different methods to contain costs. Some of the more commonly used methods include alternating between long and short laterals, changing the number of fracturing stages and using “down-spacing,” which reduces the spacing between the wells.
Conclusion
Kodiak experienced revenue growth of 287% in 2012, but earnings growth was nowhere near this figure. Kodiak’s management team pointed out there were significant expenses that had a negative impact on earnings. The Williston Basin is an expensive place to drill for oil, and unrealized losses due to hedges marked to market also played a role.
Kodiak is among the smaller players here, but could be an interesting investment prospect if it achieves its projected 2013 growth and sales. At current oil prices, Kodiak’s Williston basin acreage is profitable, and an important positive to factor in is that Kodiak has no natural gas exposure. Based on the increased production forecast, and consequently, better earnings figures, I recommend buying Kodiak.
The article A Stellar Energy Pick For 2013 originally appeared on Fool.com and is written by Jordo Bivona.
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