Energy Prospectus

Dan What do you think of this?

On June 2, 2013, Kodiak Oil & Gas Corp.'s (the "Company") and its wholly-owned subsidiary, Kodiak Oil & Gas (USA) Inc. (the "Subsidiary"), entered into a definitive purchase and sale agreement ( the "Acquisition Agreement") with Liberty Resources LLC (the "Seller") under which the Subsidiary has agreed to acquire (the "Acquisition") certain oil and gas leaseholds located in the State of North Dakota (the "Oil and Gas Properties"), and various other related rights, permits, contracts, equipment and other assets (together with the Oil and Gas Properties, the "Oil and Gas Assets"). The effective date for the Acquisition is March 1, 2013 (the "Effective Date"). The closing of the Acquisition is expected to take place on or about July 12, 2013, subject to the satisfaction of customary closing conditions. The Company also intends to acquire certain additional oil and gas interests held by the Seller that are not included under the Acquisition Agreement.

The aggregate purchase price for the Acquisition is $660 million. The purchase price is subject to potential adjustments including, but not limited to, adjustments for certain title and environmental defects, if any, as well as customary adjustments to reflect the operation of the Oil and Gas Assets following the Effective Date and prior to the closing date. In addition,
(i) properties may be withdrawn from the Acquisition, with appropriate adjustment to the purchase price as provided under the Acquisition Agreements, under various circumstances as set forth in the Acquisition Agreements, including, without limitation, due to certain title and environmental defects, if any, and the failure to procure certain requisite consents and (ii) the purchase price may be increased in the event either party discovers a title benefit associated with an Oil and Gas Asset during the examination period.

Net oil and gas production included in the pending acquisition is currently ~5,700 Boe/d and is expected to increase in the near future as completion operations are currently underway.

Kodiak expects to fund the acquisition from its revolving credit facility. The company stated in its press release that it is working with its banking syndicate to complete a redetermination of the borrowing base to reflect its year-to-date completion activities and pro forma for this proposed transaction. Kodiak "will also evaluate all available financing alternatives."

Upon closing, Kodiak expects to initially run a seven-rig operated program, with one of the rigs operating on the lands to be acquired. Based on the additional capital expenditures for the acquired properties net of cash flow from those assets, Kodiak anticipates investment and projected cash flow "to be more or less equal" for the remaining part of 2013.

While Kodiak's press release indicates that in the aftermath of the acquisition its capital spending will stay within operating cash flow for the remainder of 2013, the transaction substantially increases the company's leverage and will likely use up almost all availability under the company's revolver (assuming the borrowing base is increased). While borrowing under the revolver provides a "bridge," a permanent financing solution is clearly required. A 100% bond re-financing is conceivable, given the company's strong operating results and expected production growth, but unlikely: Kodiak may not be able to avoid issuing some equity this time, either in the form of a straight common stock offering or a convertible financing. Both would bring into the spotlight the full per-share impact of the transaction and may put some downward pressure, at least temporarily, on the stock price.

The acreage looks good (but not great). Three Forks may be very good in this area. Near other KOG acreage, so they should know the geology well.

Short-term impact on the share prices is likely to be negative as many investors won't like the increased leverage. KOG should be able to get an increase in their credit line and may issue new bonds. Hopefully, they won't need to issue more shares.

I am updating my forecast model and I will post it soon.