Case Study: Kodiak Oil & Gas

Williston Basin-focused Kodiak Oil & Gas Corp. was a small-cap company in a high-stakes game. In 2006, the Denver company had a market cap of $154 million and daily production of less than 200 barrels of oil equivalent (BOE). Today, the company is valued at $2.5 billion. The majority of that growth has come in the past year.

Fourth-quarter 2011 was a transformative period for Kodiak. The producer acquired nearly 65,000 net acres in two separate transactions for total consideration of $825 million in cash and stock. These acquisitions represented a 68% increase in net acreage and raised Kodiak’s daily production to more than 15,000 BOE in February 2012, an astonishing feat for a company whose 2010 production averaged less than 1,300 BOE per day.

This is a tribute to not only the immense potential of the Bakken shale play, but also the determination and skill of Kodiak’s management, led by chairman and chief executive officer Lynn Peterson, and bankers to arrange financing in uncertain market conditions.

Transformative deal. Kodiak’s most significant transaction was announced on November 14, 2011, and involved 50,000 net acres and 3,500 BOE per day of production for a purchase price of $540 million in cash and $50 million in stock. Funding this acquisition through a traditional credit facility was not feasible, as the company only had committed firstand second-lien credit of $325 million.

To be able to bid with confidence, the company needed “walking around” money.

A bridge loan was determined to be the best method to mitigate execution risk and allow greater flexibility in accessing the capital markets to fund the acquisition. Kodiak invited four banks, including KeyBanc Capital Markets (KBCM), to commit to a $650-million bridge loan, with proceeds to be used to fund the cash portion of the acquisition purchase price, refinance existing debt and provide additional capital for drilling.

This bridge loan was designed to effectively be a short-term safety net, which would enable the company to more confidently access the capital markets. The end result was successful placement of high-yield debt and issuance of common stock, without ever having to draw upon the bridge loan.

This financing strategy proved to be an attractive and particularly shrewd move in the eyes of investors. The senior note offering, Kodiak’s first, was immediately upsized to $650 million and priced at a competitive 8.125%. The equally successful equity offering was heavily oversubscribed and was upsized to 42 million shares with an additional over allotment of 6.3 million shares, ultimately raising gross proceeds of $374 million.

Kodiak, with a market cap of about $1 billion, had in excess of $1 billion available capital.

Following the acquisition, Kodiak was left with a healthy balance sheet and $300 million of pro-forma liquidity with which to proactively fund drilling expenditures in 2012.

KBCM acted as joint lead arranger for the bridge loan and joint bookrunner on both the equity and debt offerings. It first privately placed $40 million of equity in 2006 when the company was listed on the Toronto Venture Exchange. Since then, the bank has acted as bookrunner on eight subsequent capital market transactions as Kodiak transformed into a U.S.-listed major Bakken player.

In less than a year, Kodiak has supersized its Williston acreage by 70%, and is now characterized as a major player in the region.

The deal has been described as a highimpact one-two punch, having delivered an accretive transaction, and also having addressed Kodiak’s liquidity needs for future development of a much larger acreage position. Too often companies aggressively stretch to acquire assets, but then find themselves cash constrained and unable to fully exploit opportunities. By thoughtfully using a combination of both equity and debt, the company is well positioned to accommodate strategic
growth, including with its $225 million of senior debt availability as of February 28, 2012.

The transaction has been described as having increased critical mass and investor profile, thereby creating greater viability for Kodiak to be an attractive take-out candidate in the future. Given the stock price performance of Kodiak since announcement of the transaction, it is clear the market is increasingly recognizing the pure-play aspect of the company and its exposure to both the Bakken and Three Forks horizons.

—Sylvia Barnes, KeyBanc Capital
Markets, (713) 306-0383,
sbarnes@keybanccm.com