Monday, June 3, 2013

KOG Acquires Liberty Resources' Assets; $660 Million Cash; 42,000 Net Acres In Nice Area Of The Bakken


June 25, 2013: analysis of this deal by Mike Filloon at SeekingAlpha.

June 5, 2013: SeekingAlpha contributor likes the KOG deal. He argues that in the production buildout phase it's better to have "enough" acreage rather than "not enough" acreage.

June 4, 2013: KOG-Liberty Resources could make/break KOG's 2013 -- Mike Filloon. 
Kodiak 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.
June 4, 2013: valuation of Oasis based on the KOG-Liberty Resources deal
Another E & P concern in the region I hold is Oasis Petroleum (OAS). It moved up on the Kodiak acquisition news by around 2% to just under $38 a share, but this producer is significantly undervalued as well. I believe this stock will richly reward shareholders over the next few years as it continues to rapidly expand production.
June 3, 2013, 3:37 pm: SeekingAlpha on the KOG-LR deal:
The transaction appears to be reasonably valued, although by no means a "steal" taking into account the quality of acreage being acquired. I attribute approximately $250-$325 million M&A value to existing production and wells-in-progress included in the transaction (based on the very limited operating data disclosed and using certain decline curve assumptions). That implies approximately $335-$410 million paid for the undeveloped acreage and translates to valuation of ~$10,000-$12,500 per undeveloped acre, assuming that 80% of the acreage being acquired is undeveloped.
Conclusion of this particular writer:
Strategic rationale of the acquisition raises some concern, albeit not a major one. Given that Kodiak already has a decade plus-long inventory of drilling locations (which may prove to be even greater as Deeper Three Forks potential is unlocked), the acquisition effectively consumes the liquidity that could be used to accelerate the development of existing high-quality drilling inventory.
Some of the acquired acreage, if of inferior quality, may not be called upon for many years and would represent a "negative carry."
While the company's desire to grow its footprint is understandable, it is hard to expect that many "bargains" can be found in the Bakken's highly competitive and increasingly transparent M&A market. Having said that, it is important to note that Kodiak's management has done a formidable job in building out the company's asset base in what later proved to be the core of the play through acreage acquisition and delivering strong operating results. In the long run, this transaction may prove no different.
Overall, the transaction has neutral implications for the stock value. Some financing-related headwinds would not be a surprise.
Original Post From June 3, 2013

KOG buys Liberty Resources. Not mentioned in today's presentation at the RBC Capital Markets Conference (a pdf file).

Disclaimer: this is not an investment site. Do not make any investment decisions based on what you read here or what you think you read here.

First, KOG, from Yahoo!Finance which often lags.
  • operating cash flow (annual): $320 million.
  • total cash: $6 million
  • total debt: $1.2 billion; getting close to $2 billion?
  • market cap: $2.3 billion
The KOG-Liberty Resources deal:
  • $660 million cash / 42,000 net acres = $15,000/acre
  • 6,000 boepd production x $50 = $110 million. $660 million - $110 million = $550 million
  • $550 million / 42,000 net acres = $13,000/acre
  • plus a drilling rig
I've blogged numerous times: one of the problems KOG has -- a Bakken only company. The story continues.

NOTE: This was posted earlier as part of another post. To better follow this story, it was moved here as a stand-alone post.
Original Post

The press release is here:
Kodiak Oil & Gas Corp., an oil and gas exploration and production company with primary assets in the Williston Basin, today announced that it has entered into a definitive purchase and sale agreement with Liberty Resources, a Denver-based private oil and gas company, to acquire additional core Bakken and Three Forks producing properties and undeveloped leasehold in the Williston Basin of North Dakota.   
The purchase price for the asset package is $660 million in cash. The purchase price is subject to adjustment including, but not limited to, adjustments for certain title and environmental defects, if any, as well as customary adjustments to reflect the operation of the properties following the effective date and prior to the closing. Net oil and gas production included in the pending acquisition is currently approximately 5,700 barrels of oil equivalent per day (BOE/d), which was the average net production for May 2013.  Production is expected to increase before closing as completion operations are currently underway.  
Upon completion of the transaction, Kodiak would acquire approximately 42,000 net acres located in McKenzie and southern Williams Counties, N.D., bringing the Company's pro forma total lease holdings in the Williston Basin to approximately 196,000 net acres.  The acquired leasehold includes 35 controlled drilling spacing units, based upon 1,280-acre units, and is 90% held by production.  The southern Williams County lands, approximating 14,000 net acres, are adjacent to Kodiak's core Polar area.  An additional 25,000 net acres are located in McKenzie County to the west of the Company's Koala and Smokey areas.  Kodiak will also assume Liberty's contract for one drilling rig, which has 14 months remaining on its term.  
Meanwhile, from last week: Motley Fool on whether the Bakken is viable long term?
So far, billions of dollars have been spent on the region's development and it has yet to return any cash. In its latest quarter, Continental reported an operating cash flow deficit (operating cash flow less capital expenses) of $400 million. Kodiak showed a deficit of $160 million and Northern a cash-flow loss of $21 million.

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