Bakken-focused oil and gas junior Kodiak Oil & Gas reported fourth-quarter results on February 28 that missed Wall Street‘s estimates for both revenue and earnings.

But looking past the quarterly highlights reveals a company that has made impressive progress in increasing its reserves, production, and cash flow over the past year. In addition, major reductions in production and lease operating costs point to a management focused on financial discipline.

In the months ahead, Kodiak will be moving forward with two new pilot programs, the results of which will have massive implications for the company’s development strategy in the Williston Basin going forward.

Reduction in well costs
Over the course of 2012, one of the most distinguishable trends among oil and gas exploration and production companies was an overarching focus on reducing production costs. Kodiak was no exception.

Thanks to a meaningful reduction in spud-to-rig release days, which the company said were down to the low 20s for a typical well, and other improvements, Kodiak saw a 15%-20% reduction in well costs over the year. The company says its current well costs range from $9.7 million to $10.2 million, with drilling accounting for about a third of that cost, and completion accounting for the balance.

Different operators in the Williston Basin have reported drastically different well costs, due mainly to factors such as the location of their acreage, its depth, and bottom well pressures, as well as to variations in the completion procedures used.

For instance, Whiting Petroleum , which reported some exceptional well results in the fourth quarter, said its well costs are currently running in the range of $8-$8.5 million. And Continental Resources may have even lower well costs, saying in its most recent earnings conference call that an “impressive well pad” costs the company under $8 million per well.

However, given that the majority of Kodiak’s acreage is located in the deepest part of the Williston Basin and is characterized by lower pressure windows, its reported well costs appear quite reasonable. Over the remainder of this year, the company expects a further 5% decline in well costs through further efficiency gains.

Falling LOE and improving infrastructure
Commensurate with its priority of slashing costs, the company made major progress in reducing its lease operating expenses (LOE), which refer to the costs of operating and maintaining property and equipment on producing leasehold acreage. For the full year 2012, LOE came out to $31.7 million, or $6.04 per BOE, which represents a 30% decrease per BOE compared to the previous year.

The main drivers of the reduction in LOE were major improvements in water disposal costs, which are the largest component of LOE, and the improved availability of trucking and wastewater disposal facilities. Over the course of the year, Kodiak drilled four saltwater disposal injection wells, which — in addition to lowering LOE — reduced the company’s dependence on third-party providers of wastewater solutions.

In addition to improved water handling and disposal, Kodiak also reported major improvements in the region’s …read more
Source: FULL ARTICLE at DailyFinance