Kodiak Oil & Gas (KOG: NYSE: US$9.04 | Buy, US$12.00
One of our favorite SMID-cap idea given asset productivity; diverging Bakken productivity levels along the Nesson anticline, capital intensity concerns persist
Results west of the Nesson continue to exhibit a productivity inflection point; east Nesson results show improvement: A common theme we highlighted as we entered 2012 was the initial well productivity roll-over west of the Nesson anticline and persistent capital intensity concerns across the Williston Basin.
Fforward six months and analyze the most recent results by operator and county, we believe the broad productivity uplift associated with higher intensity completions in Williams and McKenzie County has largely occurred and appears to have reached an inflection point. On the margin, the latest sample of 30-day production rates for the broader trend demonstrate a ~1% decrease on a rolling average basis.
While we continue to see some level of marginal degradation west of the Nesson anticline (5-10%), our latest review of the state data across east Nesson (Mountrail & Dunn Counties) points to sequential productivity accretion within these mature regions
There are a couple factors driving this decline in the counties west of the Nesson anticline. As we move from ’12 into ’13, the “first pass” drilling window for operators to hold their best leases by production should be starting to narrow.
With the maturation of this play, most Bakken producers have moved past the delineation phase of the core fairway and have now shifted their focus to cost-efficient execution and reserve recoverability.
Additionally, in the more extensively developed areas of East Nesson, we have seen operators such as CLR, EOG and HES drive appreciable well performance in both Mountrail and Dunn Counties with 15% and 30% improvements in the past six months respectively.
Notably, this analysis marks a sharp contrast from our H1/11 snapshot, which outlined the perceived step down in productivity within Mountrail County as operators transitioned to development of the Three Forks interval.
Well performance vs. elevated capital intensity levels:
KOG remains our favorite SMID-cap idea given asset productivity: With the complex Middle Bakken geology and varying depositional targets warranting extensive optimization studies, operators have generally shifted towards longer laterals and tested multiple proppant formulas and stimulation configurations.
As a result, consensus estimates for well costs/recoveries and economic returns remain inconsistent across the Williston Basin. It appears well costs have potentially reached a plateau with broader service availability given the deceleration of activity from several large operators.
In contrast, there does appear to be lingering stresses associated with certain services (work over-rigs/housing) and a tight labor market point, all of which point to elevated capital intensity levels in the coming months.
The most meaningful cost efficiencies, which ultimately should be derived from pad drilling and simultaneous completions, will not materialize until early ‘13.
Understanding the diverse geology and development nuances of this prolific trend, we believe it is more critical to assess the cost vs. productivity relationship on a per-unit and relative performance basis.
We continue to view Kodiak Oil & Gas (KOG) and Continental Resources (CLR) as two of the more proficient operators with exposure to the most productive parts of the Bakken trend. Both companies demonstrate appreciable upside to the peer group production (‘11 vintage 30 & 180-day) and exhibit a strong relationship in terms of cost vs. productivity metrics (EUR/Boe vs. $CWC/stage).