A&D DEAL OF THE YEAR
STOCKING UP ON THE BAKKEN Whiting’s $6 billion merger with Kodiak has held up in a depressed oil market.
ARTICLE BY CAROLINE EVANS
“Whiting is a stronger company in the wake of the Kodiak Oil & Gas acquisition and is set to prosper at current prices,” said Jim Volker, CEO of Whiting Petroleum.
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hat a difference a downturn makes. In July 2014, Whiting Petroleum Corp. announced plans to acquire Kodiak Oil & Gas Corp. in an all-stock merger valued at $6 billion, including $2.2 billion of Kodiak’s debt. The transaction closed in December, garnered 307,000 additional gross acres (171,000 net) for Whiting, making it the largest Bakken producer, with 855,000 total net acres. This represents 3,460 net future drilling locations and 107,000 barrels of oil equivalent per day (boe/d) in first-quarter 2014. In a time of $100-plus-perbarrel oil, the deal was a wildcatter’s dream, adding 167 MMboe, 83% oil, to Whiting’s proved reserves. In recognition of Whiting’s foresight in creatively constructing an all-stock transaction that continues to create value for the company, even in a depressed market, the company has earned Oil and Gas Investor’s Deal of the Year Excellence Award. The all-stock structure could presage more such deals to come, analysts have said. That way, both buyer and seller will share in any hoped-for oil price gains. But indeed, things have changed a lot since July. The oil price has plunged more than 50%, and Whiting has cut its capex by half, also announcing it will divest some properties. Whiting CEO Jim Volker has recently had to confront published reports that bigger fish like Statoil or ExxonMobil might sweep in and buy the combined company. He told Oil and Gas Investor in March that the purported sale “is a rumor and Whiting doesn’t comment on rumors.” Perhaps the greatest test of a good deal is not whether it can make value for a company in a lucrative oil market, but whether it can create value even in a downturn. And Whiting’s position still appears strong, all things considered. At press time, several analysts issued Buy recommendations on WLL, after it issued $3 billion in debt and equity. “We remain positive on WLL shares given the high-graded asset base and improved longer-term production growth profile with the Kodiak acquisition, more than 10 years of inventory in the Bakken and Niobrara, and still
trading at a discounted multiple of 6.4x 2015E EBITDAX vs. peers at 6.8x,” KeyBanc Capital Markets said in a Feb. 25 report. “Further, with lower spending and relatively in-line production in 2015, shares now appear 0.8x less expensive on 2015E EBITDAX multiples, displaying greater capital efficiency than expected.” The following day, Whiting presented its fourth-quarter 2014 results and its 2015 guidance. “Whiting is a stronger company in the wake of the Kodiak Oil & Gas acquisition and is set to prosper at current prices,” Volker said, adding the company had completed its first set of wells on Kodiak properties. In the Moccasin Creek area of Dunn County, Whiting’s first three-well pad achieved an average IP rate of more than 3,470 boe/d. “That’s a great start to the assimilation of the Kodiak acreage,” he said. The deal
The $6 billion value was based on the closing price of Whiting stock July 11 and Kodiak’s net debt of $2.2 billion as of March 31, 2014. Kodiak’s market capitalization was $3.79 billion on July 7. The deal closed December 8. The deal enhanced Whiting’s position in the basin’s sweet spot. David Tameron, Wells Fargo Securities analyst, said in May 2014 that “Kodiak has some of the best acreage in the Bakken,” but at the time it wasn’t clear what the right number of wells per drilling spacing unit should be. Whiting and Kodiak’s oil-weighted platform is expected to drive production, smooth out operations through complementary acreage positions and combine technological expertise, the companies said. As one powerhouse, they could also accelerate drilling through access to more capital. Volker said at the time of the announcement: “The addition of Kodiak’s complementary acreage position and substantial inventory of high-return drilling locations will provide the opportunity to drive significant value growth for both Whiting and Kodiak shareholders through acceleration in drilling and an increase in operational efficiencies.” The companies also participate in Whiting’s