2010-11-03-2010-10-20-2010-10-20

To buy 19,016 acres in McKenzie County and 4,1117 acres in Williams and Divide counties targeting the Bakken/Three Forks Williston Basin.

Kodiak Oil & Gas Corp., Denver, (NYSE Amex: KOG) plans to acquire contiguous Bakken/Three Forks Williston Basin leasehold and producing properties from an undisclosed seller for $110 million.

Kodiak will pay $99 million in cash and issue 2.75 million shares at $4 each for an additional $11 million.

The assets include 19,016 gross mineral acres (11,742 net) in McKenzie County, North Dakota, midway between Kodiak's core Dunn County operating area and the company's Koala project area. Additionally, Kodiak will acquire 4,117 gross (2,752 net) mineral acres in northern Williams County and southern Divide County, just north of Brigham Exploration Co.'s Rough Rider area.

The McKenzie County acreage includes four producing well bores and associated equipment, three of which will be operated by Kodiak at closing. The four wells have current production of approximately 500 net barrels of oil equivalent per day.

Kodiak will operate the majority of the leasehold to be acquired. In McKenzie County, Kodiak will own an approximate 87% working interest (70% net revenue interest) and in the Williams and Divide lands will hold 100% working interest (82% net revenue interest).

Also included in the acquisition are certain surface facilities and equipment and pipeline infrastructure that ties into a regional natural gas pipeline controlled by a third party.

Pro forma, Kodiak's acreage position in the Williston Basin will be more than 72,000 net acres and, with nearly 60 net unrisked drilling locations from the acquisition, the company will have more than 200 net undrilled locations in the Bakken and Three Forks formations.

Conservative estimated ultimate recoveries are projected by Kodiak to be 500,000 barrels equivalent per well.

Kodiak plans to fund the cash portion of the deal through available cash balances and through borrowings under credit facilities. The company has received a commitment letter from its lender, Wells Fargo Bank NA, concerning an amendment to and expansion of Kodiak's existing credit facility, extending committed capacity under its $200-million senior secured revolving line of credit facility from $20 million to $50 million. In addition, Kodiak has received a commitment letter from Wells Fargo Energy Capital Inc. for a $75-million senior secured second-lien term loan facility with an initial commitment of $40 million.

Kodiak president and chief executive Lynn Peterson says, "While we continue to grow our production organically, acquiring de-risked, contiguous leasehold in the heart of the Bakken play is another way we can deliver meaningful upside to our shareholders. The ability to operate the lands and control the timing and size of our capital investment, while being able to develop the acreage within its primary term, were important considerations of the transaction."

Peterson add that the deal presents not only an opportunity establish additional reserves but also a "robust inventory" of future, development-drilling locations that can fuel low-risk growth for many years.

The deal is expected to close prior to year-end 2010. The effective date is expected to be Aug. 1.

KeyBanc Capital Markets Inc. vice president Mitchell Wurschmidt, in a Oct. 20 energy note, values the deal at $7,589 per acre.

Wurschmidt says, "As we have discussed in the past, we expect robust future growth from the company, as relates to production and reserve growth, as well as cash flow growth. We note that this transaction is slightly accretive to our 2011 cash flow estimates, assuming some activity on these properties as well."

KeyBanc expects an accelerated pace of completions in 2011, relative to 2010, and has reaffirmed its Buy rating and price target of $5 per share.

Raymond James Equity Research analyst John Freeman, lead analyst in a Oct. 20 industry note, also valued the deal a about $7,600 per acre, excluding production. He disagrees with Kodiak's optimistic estimate of 60 new drilling locations, saying the Three Forks formation has yet to be de-risked around this land, and instead places the estimate at only 34 Bakken locations.

Freeman says, "While the new land gives Kodiak some additional running room in the Bakken, the transaction is neutral to our NAV analysis and the stock is still one of the more expensive names in the group, particularly as smaller companies continue to get squeezed on margin by service costs.

Global Hunter Securities energy research director Michael Bodino says the $110-million price implies a deal value of $9,076 per acre. He places the total recovery potential of the assets to 30 million barrels equivalent, based on estimated recovery per well.