KOG Update – October 2010

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KOG Bites Off More Bakken
  • Bought: 14,494 net Williston Basin acres in 2 new areas.  This is core Bakken acreage, not is moose pasture.
    • Location:
      • Smokey (Bear): McKensie County, ND – 11,742 net acres – located between their acreage on the reservation and their newer Koala Project area and just to the west of the southern tip of the Nesson anticline.  This area includes 4 producing wells with net production of 500 bopd. This is in an area NFX is currently active in (what they call Aquarium / Watford) and where they've drilled some 2,500 BOEpd IP wells.
      • Polar (Bear): Northern Divide County and southern Divide County – 2,752 net acres – Aptly named, this new area is just north of BEXP's Rough Rider area.  CLR has 3 rigs running here and NFX is active just to the west. 
      • The acquired acres and wells come from a private firm, almost certainly Peak based on the position. 
    • Paid:  Total value of $110 mm or $7,600 per acre, paid in two pieces:
      • $99 mm in cash
      • and another $11 mm in stock in the form of 2.75 mm shares issued at $4. 
  • The Simple Math:
    • KOG now has 72,000 net Williston acres; 35,000 in the FBIR and the rest in its less developed areas.
    • Using KOG's assumptions for 3 Bakken and 2 Three Forks Sanish completions per 2 section unit, this puts KOG's potential locations at about 280. 
    • To be conservative put the Bakken well EUR's at 600,000 and the TFS wells EURs at 400,000 BOE.
    • That comes to a grand total of 146 mm BOE in potential reserves, almost all of it oil

    • Assume only 3/4 of it works for one reason or another; that comes down to 110 mm BOE.
    • Compare that to their booked proved reserves at YE2009 of 4.5 mm BOE and you have what's known asconsiderable upside.

    • Put $15 per barrel as an in the ground acquisition prices and you have $1.645 B in value

    • Compare that to the company's closing TEV last night (pro forma this deal) of approximately $625 mm and you have a bargain.  We won't get there all at once unless they get bought but over time, this figure, which equates to a share price of $10.70 represents an upper bound based up the EURs and risking used. In generally, I expect the EURs to climb as they come up the completions learning curve. 

    • Note that some players like WLL and BEXP have concluded that the well count per unit may be a lot higher than 5 and you would have even more value.   
  • Balance Sheet Impact: For once KOG is taking on a little debt which isn't always a bad thing, in fact, it's sound financial structuring and in this case both overdue and easily managed. Given management's past aversion to it, I think it goes to management's increasing confidence regarding their performance in the play. After considering the impact of the recent deal and the newly issued equity, KOG's net debt to equity is still low, about 11%, with net debt of about $20 mm. 

Here's all of the above in a convenient pocket sized table…

Nutshell: It's not a bad price to pay for acreage in the heart of the play especially in light of the four existing wells helping to prove up part of the larger piece and the proximity of the acreage to BEXP's and AES's prolific efforts in northern Divide County as well as CLR's even closer and recent activity ramp. It gives KOG more running room and probably casts them more strongly in the lights of those shopping on Wall Street for Bakken barrels.  I continue to own KOG in the ZLT and my last addition was at $2.94 in mid September following their last secondary. 

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