Updated from 2:44 p.m. ET with closing stock market and oil market prices.
NEW YORK (TheStreet) -- Hedge fund Paulson & Co. has restated support for Whiting Petroleum's (WLL - Get Report) acquisition of Kodiak Oil & Gas (KOG in spite of sinking oil prices that have dragged the stock's price down over 25%.
The acquisition of Kodiak was proposed July 13. Since then, oil prices have tumbled to a four-year low, bringing many oil stocks down in the process. A barrel of West Texas Intermediate (WTI) has fallen from about $100 when Whiting's acquisition of Kodiak was announced to a four-year low of $81.84-a-barrel on Tuesday.
Paulson & Co. is "fully supportive of the transaction," the hedge fund said in an emailed statement to TheStreet Tuesday. Paulson is the largest shareholder in both Whiting Petroleum and Kodiak Oil and Gas, according data compiled by Bloomberg. The hedge fund holds a 7.94% stake in Whiting Petroleum worth over $550 million at current prices and it holds a 9.72% stake in Kodiak Oil and Gas worth over $260 million, the data show.
While oil markets have battered the share prices of both Whiting and Kodiak, investors have not priced in an expected change to the terms of the July 13 deal. Kodiak shareholders will receive 0.177 of a share of Whiting stock as part of the transaction. While that exchange initially valued at Kodak at $13.90 in mid-July, it now values the company at around $10 a share, roughly where shares closed on Tuesday.
On Monday evening, Whiting set the voting date for the merger for Dec. 3, with a record date of Oct. 14. The terms of the deal remain unchanged. The all-stock transaction initially valued Kodiak at $6 billion, when counting the company's debt. However, that value has fallen to a little under $5 billion as of Tuesday.
Paulson's support of the transaction may indicate that oil price volatility aside, the merger of Whiting and Kodiak remains on track. A Whiting spokesperson declined to comment.
A Push Further Into the Williston Basin
Kodiak will dramatically increase Whiting's drilling assets, bolstering the company's presence in the Williston Basin, and turning it to largest operator by production in the Bakken and Three Forks. The combined company would have produced 107,000 barrels of oil equivalent (BoE) per day in the first quarter of 2014 and hold 855,000 net acres in the area, filings show, in addition to 370 million BoE of proved reserves in the Williston Basin.
While the merger will expand Whiting's presence in the Williston Basin, it will also increase the company's drilling commitments and debt. Whiting will assume roughly $2.2 billion of Kodiak's net debt.
Ratings agencies have generally taken a positive view of the all-stock transaction. Immediately following the deal's announcement, Moody's put Whiting's Ba2 debt rating on review for an upgrade, citing the company's increased exposure to the Williston Basin and a larger base of production and drilling inventory.
That added scale may help Whiting improve its efficiency, Moody's said, however, the rating agency did note that Whiting will need to demonstrate strong production growth and cash flow as a result of its higher debt levels.
"[E]ven with the benefit of the all-stock transaction, Whiting will need to demonstrate strong growth in production and cash flow in order to maintain credit ratios indicative of a higher rating given Kodiak's heavy debt levels," Moody's said in a Sept. 29 credit opinion.
They foresee an upgrade to Whiting's debt ratings, so long as the company's debt-to-production ratio remains below $33,000 per BoE. Were that ratio to rise above $40,000 per BoE, Moody's said it would consider a review for a downgrade.
Paulson & Co. Sees Strong Deal, Further Consolidation
At the Delivering Alpha conference in July, Paulson said he believes that there is a strong strategic rationale for Whiting's combination with Kodiak Oil and Gas, especially as shale drillers improve their efficiency. Generally, oil investors believe drillers can extract oil from the Bakken, the Williston Basin and the Three Forks in an economic manner so long as WTI stays above $60 a barrel.
"It is a very exciting situation," Paulson said at the conference.
The hedge fund billionaire also said he believes the combined company could eventually be taken over by a larger oil company, particularly a foreign firm. "While Whiting is bigger, in a sense it becomes more attractive to other large oil companies that don't have a presence in the U.S.," Paulson said.
Whiting shares shed early gains on Tuesday, after oil prices plunged over 4% in late afternoon trading on continued concern that markets may become oversupplied. Whiting Petroleum closed down over 2.5% at $56.17, while Kodiak shares fell over 2% to $9.86.
-- Written by Antoine Gara in New York