In recent quarters, oily exploration and production companies have been among the Wall Street favorites, and many have openly capitalized on the pricing slump that has stymied natural gas activities. They have tapped the capital markets with record-setting frequency, and in 2011 Denver-based independent Kodiak Oil & Gas Corp. followed suit—with results that helped significantly transform the company. For its deals, the company wins Oil and Gas Investor's Excellence Award for Best Financing of 2011.

Lynn Peterson

Says Lynn Peterson, chief executive officer, "Not only is the balance sheet simple, the whole company is simple."

During fourth-quarter 2011, the company purchased approximately 65,000 net acres in the Bakken shale play through two transactions with private-equity firms and private independents for $825 million in cash and stock, a big move for a company Kodiak's size at the time. The deals increased the company's Williston Basin position by 68% to 157,000 net acres, vaulted production to 12,500 barrels of oil equivalent by March 2012, and officially positioned Kodiak as a major Bakken player.

To make these acquisitions possible, Kodiak closed a series of financings. First, it gained commitments from four banks—Credit Suisse Securities LLC, Wells Fargo Securities LLC, KeyBanc Capital Markets Inc. and RBC Capital Markets—for a $650-million bridge loan to mitigate the execution risk.With the bridge loan in place, the company confidently, simultaneously launched a high-yield debt offering and an equity offering. The proceeds funded the cash portion of the acquisitions, allowed the company to refinance existing debt and provided additional capital for drilling. With these offerings successfully closed, the bridge loan was ultimately not drawn upon.

The debt offering priced at par with an 8.125% coupon. The equity offering was oversubscribed and raised $355.7 million from 48.3 million shares of common stock. At $7.75 per share it priced at a 1.7% discount to last trade before offer of $7.88 per share, and a 0.8% premium to last trade before filing of $7.69 per share.

At year-end 2011, taking into consideration the acquisitions, the company had proved reserves of 52 million barrels of oil equivalent (89% liquids) and an inventory of 800 net drilling locations (1,100 gross).

"Our moves in 2011 were done to enlarge our footprint in the Williston Basin, which is one of the best oil plays in the Lower 48, if not North America," says Lynn Peterson, chief executive officer.

"We needed capital to make this happen. Being oily was very important during the last half of 2010, and in 2011 it became even more paramount. As we move through 2012, gas continues to struggle, but the appetite for oily plays is certainly present this year."

Kodiaks area map

Kodiak’s core areas include the Williston Basin, primarily in North Dakota, where it targets the highly prospective Bakken shale.

Focused on the Rocky Mountain region, Kodiak's core areas include the Williston Basin primarily in North Dakota, where it targets the highly prospective Bakken shale that sources the Middle Bakken and Three Forks formation with oil.

In its most recent geological assessment of the Bakken play, the U.S. Geological Survey estimated mean undiscovered volumes of 3.65 billion barrels of oil, 1.85 trillion cubic feet of associated/dissolved natural gas, and 148 million barrels of natural gas liquids. A new study is under way to update these figures, as they represented only the Middle Bakken, and the earlier study was done before the Three Forks became a primary target.

Kodiak's 2011 financings gave the company sufficient scale to secure a full-time, dedicated frac crew from Halliburton. This, in turn, lets Kodiak keep completions tight behind its drilling rigs as production pushes forward. Its drilling is focused on the heart of the play and in the deeper part of the basin, where ultimate recoveries are higher. The company's rig count is up from two in early 2011 to six rigs currently, and it took delivery of a seventh rig at press time.

kodiak_basinacreage

Wall Street's view of liquids-rich plays has been a definite plus for the company, and as natural gas prices were stepping down in the latter part of 2011, there was an affinity towards oily names. Kodiak provided investors with a pure-play, Bakken oil story that had plenty of upside, says Thomas Rajan, managing director, KeyBanc Capital Markets Inc.

"Keep in mind that another pure-play Bakken name, Brigham Exploration Co., was acquired by Statoil in October 2011. The commodity-price environment and investor sentiment created the right climate for Kodiak to leverage the capital markets and add to its growing reserve base."

In the borrowing base revolver and conforming second-lien markets, Art Krasny, managing director, Wells Fargo Securities, says his firm saw some signs of turbulence in the second part of 2011 due to softness in Europe, which affected some of the European banks. However, strong demand from U.S. and Canadian banks ultimately helped to offset these challenges.

"Similar to the bank market, bond and equity markets were choppy at times, but overall they performed well for oil and gas issuers," adds Chris Hewitt, a director at Wells Fargo Securities. "Kodiak's stock price strengthened as the year progressed and responded well to the company's growth momentum…Both high-yield and equity investors reacted favorably to Kodiak's accelerated drilling program and pure-play, Bakken-Three Forks story."

A simple strategy

Thomas Rajan, managing director, KeyBanc Capital Markets Inc.

Kodiak provided investors with a pure-play, Bakken oil story that had plenty of upside, says Thomas Rajan, managing director, KeyBanc Capital Markets Inc.

Up until the most recent one in November, all of Kodiak's financings in 2011 were pretty plain vanilla with equity and first- and second-lien secured debt.

"We've kept the balance sheet very simple, and the only debt we have on the books is the $650 million bonds," says James Henderson, Kodiak's chief financial officer. "The bond holders liked that equity was being used and the equity investors liked that we were able to add some debt to the portfolio. It was a big transaction for Kodiak that was executed successfully.

"Peterson adds, "Not only is the balance sheet simple, the whole company is simple. We are a basin-specific player, and that was recognized by Wall Street when we started the process for the financings. It was easy for the Street to get its arms around us, and the results coming out of the basin speak for themselves."

Rajan says the strong management team, its dedication to growth as a pure-play producer, and the relationship formed between KeyBanc and the company over the years, made the financings attractive. KeyBanc first developed a relationship with Kodiak by raising $40 million in private equity in March 2006. Since then it has been book-runner on eight subsequent capital raises.

"We believed in Lynn Peterson's strategy, and were well positioned to assist the company in communicating the growth story and providing financial solutions."

Peterson and Henderson had a vision for how the balance sheet would expand to support Kodiak's growth, and Wells Fargo had the ability to grow its commitments and execute at a pace that matched that growth, says Hewitt.

"We saw the growth potential associated with the company's position in the Williston Basin and were impressed by Kodiak's ability to identify and execute strategic acquisitions," Krasny says.

Hewitt adds, "The management team has really distinguished itself as it has expanded its drilling program and consolidated its acquisitions. Their focus on growth has been relentless, which made it a great story to bring to equity and high-yield debt investors."

kodiak_snapshot

A series of financings positioned Kodiak as a major Bakken player.

Upside focused

These days, it seems the sexy approach to financing growth and minimizing risk is to pair up with a partner in a joint venture. Kodiak didn't pursue this option, as it didn't see the need to sacrifice any of its Bakken upside for a partner.

"By utilizing equity and the bonds we kept all of that upside for ourselves and our shareholders," Peterson says. "Also, as we grow the company, having significant working interest and operational control of our lands is extremely important.

"The transactions also improved liquidity in the company's stock. Achieving a larger market cap—now around $2.5 billion with an enterprise value of $3.1 billion—has been monumental in opening new doors to other institutional holders, Peterson says.

kodiak_officers

Far left, “We saw the growth potential associated with the company’s position in the Williston Basin and were impressed by Kodiak’s ability to identify and execute strategic acquisitions,” says Art Krasny, managing director, Wells Fargo Securities. Center, Chris Hewitt, managing director at Wells Fargo Securities, says the Kodiak management team’s focus on growth has been “relentless.” Near right, James Henderson, Kodiak’s chief financial officer, says, “The bond holders liked that equity was being used and the equity investors liked that we were able to add some debt to the portfolio.”

For the quarter ended March 31, 2012, the company reported oil and gas sales of $79.9 million, a 499% increase and a company record. Kodiak also reported an overall 474% increase in quarter-over-quarter equivalent sales volumes of 963,000 barrels of oil equivalent as compared with 168,000 barrels equivalent during the same period in 2011.

During the first quarter, Kodiak drilled 14 and completed 12 gross operated wells, and as of March 31 the company had 14 gross operated wells waiting on completion. It invested $151 million in drilling and completion activities and infrastructure in the Williston Basin during the first quarter of 2012. As of May 3, the company's long-term debt was $680 million, consisting of $650 million in senior notes and $30 million in borrowings under its credit facility.

Though some analysts have expressed concern about Kodiak's well costs and a few missed production targets, others have been quick to dismiss these as growing pains, citing the Bakken's production outlook and the nearly $20 billion of E&P capital coming into the play in 2012.

Peterson says, "The play is a long-term project, one that could keep going for 20 or 30 years. Our well costs today are somewhat unimportant in the bigger scheme of things. As we get into a development mode in coming quarters and services and supply meet demand, we'll see these costs come down. Also, with the type of reserves we're chasing, even at current well costs we're seeing a very strong rate of return on our wells.

"The financial community has been very solid for Kodiak's growth plans. We took on a lot trying to make this happen and as a team we pushed through the tougher parts of it. In 2012, we've spent the first quarter integrating everything into the company. We're pretty excited about the next three quarters and anticipate our growth coming to the forefront."