All Hail Whiting Petroleum, the New King of the Bakken

NEW YORK (TheStreet) --  Whiting Petroleum (WLL) plans to buy peer Kodiak Oil & Gas (KOG), which will make it the king of the prolific Bakken Shale formation.

The acquisition will boost Whiting's production and reserves, which is why the company believes the deal will have a positive impact on cash flow, earnings and production per share starting next year.

The deal shows Whiting's resolve to play a central role in the rise of the Bakken formation as North America's leading shale field in terms of barrels-per-well.

Investors showed their delight, pushing Whiting's shares over 7% higher to $84, up 36% for the year to date.

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Kodiak Oil and Gas, like Whiting, is a Rocky Mountain-focused exploration and production company. The deal is valued at $6 billion.

The combined company will be the biggest producer and leaseholder at the Bakken formation, surpassing Continental Resources (CLR) and Exxon Mobil (XOM), respectively. The new company will have 855,000 net acres, daily production of more than 107,000 barrels of oil equivalents and a massive inventory of more than 3,400 net future drilling locations.

In the previous quarterly results, Continental Resources produced more than 152,000 barrels of oil equivalents per day, of which 64%, or nearly 97,400 barrels of oil equivalents, came from Bakken.

Whiting CEO James Volker said the new company will have an enterprise value of $17.8 billion and an oil-weighted reserve base of more than 600 million barrels of oil equivalents. The transaction is expected to close in the final quarter of this year. Whiting and Kodiak's shareholders will own 71% and 29% of the new company, respectively.

Kodiak's reserves have been growing at an average rate of 147% per year since 2009 to 167.3 million barrels of oil equivalents by the end of 2013. Meanwhile, its sales have grown from just 601 barrels in 2009 to 29,200 barrels of oil equivalents per day by the end of last year.

For the current year, Kodiak expects sales of between 39,000 and 42,000 barrels of oil equivalents per day, implying growth of between 34% and 44%.

Whiting's growth has been less modest. Since 2009, the company's reserves have grown by an average of 12% per year to 438.5 million barrels of oil equivalents by the end of last year. In the same period, Whiting's output has grown from 55,530 barrels in 2009 to more than 94,000 barrels of oil equivalents per day in 2013.

Last year, the Whiting's production growth slowed down due to increasing drilling and completion costs. For this year, Whiting expects between 17% and 19% increase in output.

The new company, on the other hand, expects to produce 152,000 barrels of oil equivalents per day for this year. This shows a 42% increase from what the combined production of the two companies in the first quarter of 2014.

Although the Bakken's production from older wells is declining, the region has not peaked. According to the latest report from the U.S. Energy Information Administration, Bakken's oil production is projected to increase by 20,000 barrels per day from June to 1.09 million barrels per day in July. The output is expected to continue increasing to 1.6 million barrels per day by 2016, according to Platts.

Although Bakken is not as big as the Eagle Ford shale or the Permian Basin in terms of oil production, new wells from Bakken from a single rig are expected to produce at the rate of 510 barrels per day in July. That is considerably higher than 479 barrels per day for Eagle Ford and 134 barrels per day for Permian Basin.

Besides Continental and Exxon Mobil, there are several other oil and gas companies operating at Bakken including EOG Resources (EOG), Hess Corp (HES), Oasis Petroleum (OAS) and Marathon Oil (MRO).

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates WHITING PETROLEUM CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate WHITING PETROLEUM CORP (WLL) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its robust revenue growth, expanding profit margins, increase in net income, good cash flow from operations and solid stock price performance. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • The revenue growth came in higher than the industry average of 3.2%. Since the same quarter one year prior, revenues rose by 18.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The gross profit margin for WHITING PETROLEUM CORP is currently very high, coming in at 76.02%. It has increased from the same quarter the previous year. Along with this, the net profit margin of 14.96% is above that of the industry average.
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Oil, Gas & Consumable Fuels industry. The net income increased by 26.4% when compared to the same quarter one year prior, rising from $86.26 million to $109.07 million.
  • Net operating cash flow has slightly increased to $323.90 million or 8.83% when compared to the same quarter last year. Despite an increase in cash flow, WHITING PETROLEUM CORP's average is still marginally south of the industry average growth rate of 17.51%.
  • Powered by its strong earnings growth of 26.38% and other important driving factors, this stock has surged by 64.59% over the past year, outperforming the rise in the S&P 500 Index during the same period. Looking ahead, the stock's sharp rise over the last year has already helped drive it to a level which is relatively expensive compared to the rest of its industry. We feel, however, that other strengths this company displays justify these higher price levels.

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