Kodiak Oil & Gas Continues to Keep Improving

Kodiak Oil & Gas , the Denver-based exploration and production company, had a pretty solid year. Adjusted EBITDA for the nine-month period ended September 30, 2013, surged 223% year over year to $469.6 million, while third-quarter oil and gas production also jumped 223% year over year to an average of 35,400 BOE per day.

With the company having recently announced its 2014 capital program, let's take a closer look at its progress so far and how it plans to keep improving its operations.

Kodiak's progress so far
Kodiak's assets are located almost exclusively in North Dakota's Williston Basin, where the company commands roughly 192,000 net acres. As of June 30, 2013, it had proved reserves totaling 144 MBoe, of which 86% was crude oil. Since 2010, Kodiak has grown production at a staggering compound annual growth rate of 182% and expects to deliver 45% year-over-year growth in sales volumes this year.

In addition to delivering eye-popping production growth, the company has also made major progress in reducing costs and making its Bakken operations more efficient. For instance, the number of days it takes the company to drill and complete a well have fallen from the mid-30s in 2008 to under 20 days currently, with some of its quickest third-quarter wells having been drilled in under 15 days.

As a result, Kodiak is now able to drill 13 to 14 wells in a year, compared to 8 to 9 when it first began drilling in the Williston. Similarly, well costs have declined from an average of $12 million in 2012 to under $10 million as of the third quarter. Next year, the company expects well costs to average roughly $8.9 million.

While that's not nearly as cheap as fellow Bakken drillers Continental Resources and Oasis Petroleum , which are both forecasting well costs of $7.5 million next year, Kodiak's relatively higher well costs are partly due to its use of expensive ceramic proppants during fracking, which have resulted in meaningful improvements in initial production rates and estimated ultimate recoveries (EURs).

How Kodiak plans to keep improving
These improvements are largely the result of Kodiak's innovative techniques. For instance, the company's use of zipper fracs -- a hydraulic fracturing technique that allows adjacent wells to be fractured in sequence and maximizes the area of exposed reservoir -- was crucial in helping reduce the time taken to complete a well. Similarly, its use of cemented liners -- a completion technique that entails cementing the liner throughout the horizontal wellbore -- has resulted in improved wellbore stability and well serviceability.

To further improve drilling efficiencies and maximize recovery, Kodiak is currently studying two downspacing pilot programs in order to identify optimal spacing between wells. Results from the 12-well program continue to meet the company's expectations, with 12 Polar area wells posting a 120-day average production rate of 618 BOE/d and 12 Smokey area wells yielding 60-day average production of 627 BOE/d.

The fact that these results are in line with production figures for previously drilled wells in the Polar and Smokey areas is encouraging because it suggests that the increased well density has not resulted in lower production, confirming results from other operators' pilot programs. For instance, Whiting Petroleum's density pilot programs in its Hidden Bench, Pronghorn, and Sanish areas also showed how companies can materially boost recovery efficiency despite drilling in higher densities.

What to expect in 2014
In 2014, Kodiak plans to spend roughly 95% of its $940 million capital budget to drill and complete approximately 100 net wells, with the remaining $50 million to be used for infrastructure spending and for minor acreage acquisitions. Importantly, the company expects to be able to fund the vast majority of its 2014 capital budget through its operating cash flow, which greatly improves its risk profile.

In addition to quarterly performance results, investors may want to keep a close eye on the results of its downspacing pilot program since they will not only be instrumental in guiding the company's future development plans in the Williston Basin, but could result in major cost savings going forward.