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A Stellar Energy Pick For 2013: Kodiak Oil & Gas Corp (KOG), Phillips 66 (PSX), EOG Resources, Inc. (EOG)

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Kodiak Oil & Gas Corp (NYSE:KOG) recently provided an interim update on completion and drilling activities. Below, I will examine Kodiak’s growth potential by looking at the specific growth drivers in this update.

Highlights

This Small Company Owns 155,000 Acres in the U.S.'s Largest Active Oil FieldCompletion operations in the Williston Basin continue with the efforts of two full-time, 24-hour-per-day crews.  During December 2012 and into the first ten days of January 2013, 11 gross (8.6 net) operated wells were completed. In 2013, based upon the completion work performed to date, Kodiak expects to achieve five to six gross well completions per month per crew.

Drilling operations are in progress with seven operated rigs, of which three drilling rigs are operating in the Polar project area in southern Williams County. There is one rig in each of the Smokey, Koala, and Grizzly project areas in McKenzie County, and one rig operating in Dunn County. Kodiak plans to release one of the drilling rigs during the first quarter of 2013 and continue to operate six rigs throughout the rest of 2013.

Kodiak’s program to test 12 wells within a drilling spacing unit (DSU) in the company’s Polar and Smokey operating areas continues on schedule. The Polar pilot project wells will be drilled from three four-well pads, with six wells targeting the Middle Bakken and six wells targeting the two upper intervals of the Three Forks formations. Drilling from the first four-well pad has commenced. Kodiak expects to mobilize two additional rigs onto the remaining pads later in the first quarter 2013. In Smokey block, two wells within the test DSU are now producing and a rig is presently drilling the second of three additional well bores into the same DSU. The company intends to drill the remaining seven wells following drilling of the Polar pilot program.

Since Kodiak’s last operations update in early December 2012, the company has finished completion operations on 11 gross (8.6 net) wells that are currently in flow-back operations. In December 2012, several producing wells were shut-in for reservoir pressure maintenance during the completion operations of the offsetting wells. Kodiak expects fourth quarter 2012 average daily oil and gas sales volumes of approximately 19,000 barrels of oil equivalent per day (BOE/d). In December, the peak daily oil and gas sales rate was around 26,000 BOE/d, and the peak production rate was roughly 29,000 BOE/d.

2013 Capital Expenditure Budget

Kodiak announced a $775 million 2013 capital expenditure budget allocated to the Williston Basin oil and gas assets. This compares to Kodiak’s final 2012 budget of $750 million and, of the 2013 budget, $600 million has been allocated to the drilling and completion of 75 gross (61 net) operated wells, $140 million to non-operated drilling and completion activities for 14 net wells, and $35 million for other expenditure. This is expected to be funded from existing working capital, cash flow generated from operations, and the commitment for its revolving credit facility of $450 million.

As a result of this expenditure, sales for 2013 are expected to average to average 29,000 to 31,000 BOE/d in volume, which would be a growth of more than 80% year-over-year. The projected exit rate for 2013 sales volumes is expected to range from 38,000 to 40,000 BOE/d. The budget reflects its continued commitment to the development of the Williston Basin leasehold acreage.

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