America's power play

Whiting buys Kodiak for $3.8 billion, creates major shale player

A construction worker specializing in pipe-laying sandblasts a section of pipeline in North Dakota.
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Whiting Petroleum said on Sunday it would acquire Kodiak Oil & Gas for $3.8 billion in stock, to become the largest producer in North Dakota's Bakken shale oil formations, eclipsing Harold Hamm's Continental Resources.

By surpassing Continental, Whiting is signaling its desire to become the preeminent player in what is considered one of North America's most-prolific shale formations, where more than 1 million barrels of oil are extracted daily.

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"It's going to allow our production at the combined company to grow faster than Whiting standalone did before," Whiting Chief Executive James Volker said in an interview.

Whiting said the deal, valued at $6 billion when Kodiak's net debt of $2.2 billion is included, is expected to close in the fourth quarter. Kodiak shareholders will receive 0.177 share of Whiting stock for each share of Kodiak common stock they hold, representing a value of $13.90 per share based on the closing price of Whiting shares on July 11.

That would be a 5.1 percent premium to the volume weighted average price of Kodiak shares during the last 60 trading days.

Whiting's Volker added that the combined company will have greater access to capital which will accelerate development of oil production. The deal is expected to be accretive to the combined shareholders for cash flow, earnings per share and production per share for 2015 and beyond.

The companies' combined output from the Bakken/Three Forks formations in the first quarter was more than 107,000 barrels of oil equivalent per day, with 855,000 combined net acres and almost 3,500 net future drilling locations.

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To compete with Continental, which has gobbled up more that 1 million acres of land, Whiting had to acquire a smaller North Dakota rival. The CEOs said in a joint interview that the merger of the two Denver-based companies had been considered for years but came together in the past few months.

Kodiak's appeal stems from its long-standing policy of marketing itself to Wall Street as a "pure-play" bet on North Dakota's oil revolution, and CEO Lynn Peterson had made bold and expensive bets to increase production.

For example, Peterson actively touted Kodiak's use of expensive ceramic proppant during the hydraulic fracturing process to hold cracks open in shale rock and extract oil and natural gas. While pricey, ceramic proppant is considered by Peterson and some others in the industry the best way to increase production.

Whiting, however, does not widely use ceramic proppant, and it wasn't immediately clear if Whiting would cut costs at Kodiak once the company is absorbed. Whiting's management will lead the company while Kodiak's Peterson will join the board along with Kodiak executive James Catlin.

Whiting's financial advisor was JPMorgan, while Foley & Lardner and Stikeman Elliot provided legal counsel. Petrie Partners Securities advised Kodiak while Credit Suisse provided a fairness opinion. Dorsey & Whitney and Miller Thomson were Kodiak's legal advisers.

--By Reuters