This energy company just announced a big acquisition, expected to be accretive in 2015.
Whiting Petroleum (WLL)
from BI Research
Whiting Petroleum (WLL) recently offered 0.177 shares of its stock for each share of Kodiak (KOG) in an all-stock, tax-free transaction valued at $6 billion including the assumption of Kodiak’s $2.2 billion of debt. Whiting shareholders will own 71% and Kodiak shareholders would own 29% of the combined company. The transaction would be accretive to almost every metric in 2015, including earnings per share, discretionary cash flow per share and production per share, and increasingly accretive thereafter. Whiting estimates nearly a billion dollars of cost savings, primarily over the next five years. The closing is expected in Q4 after a shareholder vote.
After listening to the conference call I decided Whiting was not only well worth holding, but a worthy recommendation in its own right. I like having a good investment in the Bakken and the growth potential that offers, so to be able to just change names and keep growing our investment and not have to take the tax gain, albeit long-term, is very appealing.
The combination now creates the #1 Bakken/ Three Forks producer in the Bakken.
With Whiting’s stronger financial position (even after taking on that debt), greater size and increased capability to fund more rapid growth, Kodiak’s highly regarded acreage could be developed more rapidly than Kodiak could do on its own—and to the benefit of Whiting’s growth rate, which the Company is now targeting at “20%+” vs. 10-15% average over the past 5 years.
By combining not only their respective assets (including pipelines), but knowledge, technology, best practices, plus synergies and the efficiencies of a larger company, this looks like an excellent marriage that will increase the growth rate of Whiting Petroleum.
The combined company will have 855,000 net acres and an inventory of 3,460 net drilling locations in the Williston Basin alone. The combined company expects to have 107,000 boepd from the Bakken plus 45,000 primarily from the Niobrara for a total of 152,000 average boepd in 2014 (88% liquids, 84% oil), and growing. As a combined company it expects to be 80% oil (and 88% liquids overall) with 12% gas.
Whiting has beaten estimates in 3 of the past 4 quarters by an average of 12% and matched on the 4th. Whiting is expected to have significant financial flexibility, with a ratio of debt to 2014E EBITDA of approximately 1.6X (vs. Kodiak’s lofty ~3X).
Since the acquisition is expected to close in Q4, analysts haven’t really touched 2014 EPS estimates which stand at $4.85. This represents growth of 18% vs. $4.11 reported in 2013. However, the consensus for 2015 has risen $.20, so far, to $5.26 and I suspect this will go considerably higher (>$5.50).
The BI Rank for WLL is a healthy 9.2, Zacks and Value Line both already ranked and still rank it 2, IBD gives it a very strong 98 composite rating and the industry itself is ranked 3rd out of 210. The shares are a Buy near current levels.
Tom Bishop, BI Research, www.biresearch.com, July 23, 2014