Deal of the year - Whiting by Whiting

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.

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

Whiting, Kodiak Compared To Oil-Weighted Peers Enterprise Value $34.7

$33.5 $19.8

$17.8

$11.7

$9.9

$8.7

$7.9

$7.3

$6.0

PF Whiting 1

XEC

Whiting

DNR

NFX

OAS

Kodiak

$2.1

$1.9

$1.7

$1.4

$1.0

$0.9

$0.7

Kodiak

$13.5

PXD

CLR

CXO

LQA EBITDAX $2.8

$2.4

$3.1

CLR

PF Whiting

PXD

Whiting

CXO

XEC

DNR

NFX

OAS

606

576

503

468

439

431

377

219

167

PF Whiting 88% 80% oil

NFX 52%

CXO 61%

DNR 83%

Whiting 89% 79% oil

XEC 48%

SD 46%

OAS 87%

Kodiak 83% 83% oil

129

112

SD 53%

DNR 95%

OAS 89%

Kodiak 88% 88% oil

Reserves MMboe

1,084

% liquids

CLR 68%

798

PXD 62%

Mboepd2

2014E Production

% liquids

188

PXD 68%

171

CLR 70%

152

141

PF Whiting 88% 84% oil

XEC 53%

NFX 56%

CXO 60%

111

Whiting 88% 83% oil

¹ Combined Whiting & Kodiak enterprise values based on transacion value as of July 11, 2014 2 Based on mid-point of Whiting and Kodiak public guidance, and Bloomberg Consensus estimates for peers Source: Company filings, equity research, Bloomberg, FactSet as of July 11, 2014

Whiting and Kodiak’s oilweighted platform is expected to drive production, smooth out operations through complementary acreage positions and combine technological expertise.

175,000 gross (123,000 net) acre, oil-rich Redtail-Niobrara prospect in the northeast DenverJulesburg Basin. “We expect the combined entity to have…total 2014 production of 152,000 boe/d and proved reserves of 606 million boe, 80% oil, providing a leading platform for future oildriven growth,” Volker said. Lynn A. Peterson, Kodiak’s chairman, president and CEO, said at the time that shareholders have an opportunity to own a company with significant upside potential. “In particular, we have been very impressed by Whiting’s operating capabilities and technical expertise.” Whiting’s senior management team leads the combined company. Peterson joined the board of directors of the combined company. Whiting secured underwritten financing to increase its borrowing base to $4.5 billion with commitments totaling $3.5 billion. A few weeks after the transaction closed, Whiting upped its borrowing base by $1 billion out of caution that some of Kodiak’s bonds might need repayment. Kodiak’s unsecured bond debt totaled $1.55 billion at the time of the deal. Aftermath, and outlook

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Precious few have been spared the plunge in oil prices, and Whiting is no exception. Its 2015 guidance for the combined companies is $2 billion, down by half, year-over-year, pro forma the Kodiak acquisition. This was below consensus, but in line with some analysts’ estimates. Still, the company expects to grow production 6%. In addition, the company announced plans to divest some assets, seemingly putting the kibosh on rumors that the entire company was up for sale. According to a report by Oppen-

heimer, the divestitures could include Whiting’s North Ward Estes enhanced oil recovery project in West Texas. Volker was tight-lipped during the fourthquarter call, and said the company planned to sell lower value properties. “As you know, we’re getting back the properties from First Trust that we sold,” he said. “That’s a couple thousand barrels a day. And we have another similar group of properties that are not key to our rapid growth plans and are not as high a rate of return obviously in terms of any future development. So, we’re looking at those as well.” He added that the company was optimistic the sell-off would be accomplished within the year. Analysts remain upbeat regarding the company’s new position vs. its peers. Tudor, Pickering, Holt & Co. said Whiting can still achieve attractive returns in its core Williston Basin acreage and “decent” returns in the Niobrara in a lower price environment. “WLL has core drilling opportunities to ‘hide out’ for the next few years if crude stays weak in a ‘lower for longer’ scenario,” the investment banking firm said in a March 10 research note. ppenheimer cited Whiting’s technical prowess in the Bakken as beneficial, as it uses enhanced completion techniques to maintain or improve estimated ultimate recoveries (EURs) while trimming well costs. The company expects those costs to fall 15% in the Bakken and 10% at Redtail in 2015. Additionally, Whiting will defer development on its more marginal acreage and “some higher density” well spacing on core fields. “These projects will be deferred until oil prices recover to $70/bbl, although they could become more economic at $60/bbl as well costs come down,” Oppenheimer said. Furthermore, the Kodiak acquisition, though largely oil-bearing, is still beneficial to Whiting. In February, Morgan Stanley said Whiting’s lower growth profile and shallower drilling inventory relative to oil-weighted peers made it attractive. Oppenheimer agreed. Despite a drop in earnings per share of 50% year over year, “Whiting is trading at an attractive valuation, in our view,” Oppenheimer said. “We believe Whiting is well positioned to benefit from the recent acquisition of Kodiak Oil & Gas, even in a $50/bbl world. Despite our estimates for cashflow deficits at current oil prices, WLL still has the balance sheet capacity and operational expertise to create value through drilling of the KOG acreage, the application of enhanced completion techniques, and additional downspacing opportunities in the Bakken/Three Forks, as well as the growing Redtail [Niobrara] opportunity. We also see significant upside if oil prices were to recover.” 䡺

This article includes reporting by Darren Barbee.