KOG » Topics » Liquidity and Capital Resources

This excerpt taken from the KOG 8-K filed Aug 7, 2009.

Liquidity and Capital Resources

 

During the first six months of 2009, Kodiak invested approximately $11.5 million in developing its oil and gas properties on the FBIR.  Kodiak initially anticipated total net capital expenditures of up to $15.3 million in 2009, compared to approximately $11.0 million incurred in 2008.

 

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Kodiak originally estimated that, of the $15.3 million total projected expenditures, $4.0 million would be allocated to the Vermillion Basin and the remaining $11.3 million would be allocated to the Williston Basin.  However, due to the previously discussed amended Vermillion Basin agreement, it is now anticipated that actual 2009 expenditures in the Vermillion Basin will be minimal.  Accordingly, the capital expenditures initially contemplated for the Vermillion Basin will be reallocated to the Williston Basin. The Company continues to evaluate and monitor its capital expenditures in relation to commodity prices and Kodiak’s 2009 expenditures are expected to increase from the previously announced $15.3 million budget in 2009.

 

The Company believes it has the financial capacity to continue drilling and completion operations on the FBIR into the first part of 2010, based upon its June 30, 2009 working capital position, the transactions that have improved working capital subsequent to the end of the second quarter, the current costs of drilling and completing wells, combined with expected growth in cash flow from operations based upon current commodity prices.  Kodiak ended the second quarter of 2009 with cash and cash equivalents of approximately $3.8 million and total working capital of $10.3 million.  As of June 30, 2009, Kodiak had prepaid $7.5 million towards the cost of tubular goods, including $6.0 million of tubular goods that are inventoried in third-party yards and $1.5 million of deposits for tubular goods that will be delivered later this year.

 

Commenting on liquidity and capital resources Mr. Peterson said, “We have successfully closed key transactions subsequent to the end of the second quarter to continue to improve our working capital position.  Through the amended Vermillion Basin agreement and the acreage sell-down in the Twin Buttes area, we have improved our working capital position by approximately $3 million.  Furthermore, we have promoted partners into the project that will help reduce our capital requirements.  We are also pleased with the agreement we have reached with the drilling contractor in an effort to satisfy our obligation via an arrangement that is quantifiable to our investors, which we believe will remove the perceived rig liability overhang.  We can now focus on further improving our capital resources and work to secure additional drilling permits on the FBIR in the ideal event that we are capable of taking delivery of the second rig before August 2010.”

 

This excerpt taken from the KOG 8-K filed May 8, 2009.

Liquidity and Capital Resources

 

During the first three months of 2009, Kodiak incurred capital expenditures of approximately $4.4 million. The Company’s previously announced estimated capital expenditure budget allocates up to $15.3 million for the full-year 2009.  The 2009 estimated capital expenditure budget does not include any potential costs or fees associated with the second drill rig that the Company has contracted and is now attempting to terminate or defer its obligation to a later date.  Kodiak continues to evaluate and monitor its capital expenditures in relation to commodity prices.  The Company anticipates that its expenditures could be less than $15.3 million if current economic conditions continue throughout 2009.   It was originally estimated that, of the $15.3 million total projected expenditures, $4.0 million would be allocated to the Vermillion Basin of Wyoming and Colorado and the remaining $11.3 million would be allocated to the Williston Basin of North Dakota.  However, the Company has revised its projections, and it now anticipates that actual expenditures during 2009 in the Vermillion Basin will be less than $4.0 million, in which case, the Company anticipates that it will re-allocate such difference to the Williston Basin.

 

On May 6, 2009, the Company entered into agreements to issue 10.0 million shares of its common stock to certain institutional investors and insiders, including management, in a non-brokered registered direct offering (“Proposed Financing”).  If the Proposed Financing closes as expected on or about May 11, 2009, the Company anticipates that the resulting gross proceeds of approximately $7.5 million, together with its projected 2009 cash flows from operations and its prepaid tubular goods and surface equipment, would be sufficient to support Kodiak’s planned capital expenditure program through December 2009.  If the Proposed Financing were not to close, it will be necessary for the Company to complete an alternate arrangement in order to fund the Company’s 2009 capital expenditures.

 

This excerpt taken from the KOG 10-Q filed May 8, 2009.

Liquidity and Capital Resources

        On May 6, 2009, the Company entered into agreements to issue 10.0 million shares of our common stock to certain institutional investors and insiders, including management, in a non-brokered registered direct offering ("Proposed Financing") (see Note 8). If the Proposed Financing closes as expected on or about May 11, 2009, we anticipate that our resulting net proceeds of approximately $7.45 million, together with our projected 2009 cash flows from operations and our prepaid tubular goods and surface equipment, would be sufficient to support our planned capital expenditure program through December 2009. If the Proposed Financing were not to close, or if we realize lower than expected cash flows from operations, either due to lower than anticipated production or lower commodity prices, it will be necessary for the Company to complete an alternate arrangement in order to fund the Company's 2009 capital expenditures. Specifically, the Company would need to complete one or a combination of the following alternatives, whichever option(s) is (are) in the best interests of the Company and its shareholders:

    Issuance of equity

    Issuance of debt

    Capital sharing arrangements with oil and gas industry partners

    Sell-down of interest in existing properties

    Termination of one or more of our two drilling rig contracts, which would result in penalties unless another entity or entities were to agree to assume our obligations thereunder, the contractual amount of which exceeds the Company's current cash and cash equivalents at March 31, 2009

        The Company's ability to fund its operations in future periods will depend upon its future operating performance, and more broadly, on the availability of equity and debt financing or the Company's ability to sell interests in its existing acreage. The Company's ability to succeed in any of

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KODIAK OIL & GAS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2—Basis of Presentation and Significant Accounting Policies (Continued)


these capital-raising activities will be affected by prevailing economic conditions in its industry and financial, business and other factors, some of which are beyond the Company's control. The Company cannot be certain that additional funding will be available on acceptable terms, or at all, particularly in light of the current widespread economic downturn. If we are unable to raise additional capital when required or on acceptable terms, the Company may have to significantly delay, scale back or discontinue its drilling or exploration program, seek to enter into additional joint venture arrangements with third parties, or seek to sell one or more of its properties.

These excerpts taken from the KOG 10-K filed Mar 12, 2009.

Liquidity and Capital Resources

        Our primary cash requirements are for exploration, development and acquisition of oil and gas properties. We have historically financed our operations, property acquisitions and capital investments from the proceeds of private offerings of our equity securities and, more recently to a limited extent, from cash generated from operations. We do not currently generate sustaining cash flow from our oil and gas operations, although our future depends on our ability to generate oil and natural gas operating cash flow. As of December 31, 2008, we had working capital of $15.4 million as compared to $10.2 million at December 31, 2007, and no outstanding long-term debt.

        The following table summarizes our sources and uses of cash for each of the three years ended December 31, 2008, 2007 and 2006.

 
  For the years ended ended December 31,  
 
  2008   2007   2006  

Capital Resources and Liquidity

                   

Cash and cash equivalents at end of the period

  $ 7,581,265   $ 13,015,318   $ 58,469,263  

Net cash provided by (used in) operating activities

    (2,174,519 )   2,073,412     3,141,149  

Net cash used in investing activities

    (20,911,023 )   (47,909,507 )   (35,551,258 )

Net cash provided by financing activities

    17,651,489     382,150     83,593,824  

Net cash flow

    (5,434,053 )   (45,453,945 )   51,183,715  

        The decrease in cash provided by operations from 2007 to 2008 is primarily from our workover activities on three wells which decreased our sales volumes and increased our operating expense. During 2008, we charged $1,709,667 of workover expense to lease operating expense, resulting in decreased cash flow. These decreases in cash provided by operations were partially offset by record high prices for crude oil and natural gas through the first half of 2008. The decrease in cash provided by operations from 2006 to 2007 is primarily from changes in accounts payable decreasing cash by

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$1,655,119 due to settlement of outstanding payables in 2007 and a $2,753,788 or 60% increase in general and administrative cost due to the addition of employees in 2007. These decreases in cash provided by operations were partially offset by a $3,658,240 or 88% increase in oil and gas revenues from 2006 to 2007. The oil and gas revenue decrease in 2008 from 2007 was primarily due to a decrease in oil sales volume. The oil and gas revenue increases in 2007 and 2006 were primarily due to drilling activity.

        Our investing activities during the three years ended December 31, 2008 related primarily to the addition of oil and gas leases and oil and gas drilling activities. We recorded $11,056,436 in development and exploration costs in 2008, $40,830,743 in 2007 and $29,664,142 in 2006. The remaining investing activity during 2008, 2007 and 2006 consisted primarily of equipment additions and changes in our restricted investments.

        Our financing activities during 2008 were comprised mainly of a public offering of 6,820,000 shares of common stock for gross proceeds of approximately $18.8 million. The Company paid approximately $1.3 million in commissions and expenses. Our financing activities during 2007 were comprised mainly of proceeds from the exercise of common stock options. Our financing activities during 2006 included the private placement of 19,514,268 shares of our common stock for gross proceeds of approximately $39,444,438 in March 2006 and the private placement of 12,075,000 shares of our common stock for gross proceeds of approximately $50,111,250 in December 2006.

        As we operate the majority of our acreage, specifically the Eastern Bakken acreage, we have the ability to adjust our drilling schedule to reflect the changing commodity price environment. Should we sell off some of our acreage and give up the right to operate, we will become subject to obligations imposed by others, without the ability to control our drilling schedule. Since we have not drawn against our Credit Facility at December 31, 2008, our primary obligations are our office lease and our two drilling rig contracts. During the second quarter of 2008, we entered into two-year contracts for the use of two new-build drilling rigs. The first rig was placed into operation in November 2008 and entails a two-year drilling commitment or specific termination fees if drilling activity is cancelled. Agreement terms require utilization of the rig and payment of day rates or the payment of standby rates if the rig is not utilized. The estimated termination fee for the first rig is approximately $5.3 million as of December 31, 2008. The termination fee on the first rig will continue to decrease as long as the rig remains active. Delivery of the second rig has been placed on hold with the drilling contractor. In the event we do not to take delivery of the rig, the termination fee could be up to $5.6 million and terms are still being negotiated. Subsequent to the end of the fourth quarter 2008, we were able to negotiate with the drilling contractor an approximate 20% reduction in rig day rates for the rig that is currently operating. We cannot offer any assurance that we will be able to negotiate a satisfactory resolution to this issue. Both we and the rig owner are attempting to find another company that will take over our obligations, although there can be no assurance that we will be able to do so.

        All of our leases on the FBIR have a minimum of nearly three and a half years remaining; therefore we do not have to drill wells in order to preserve our lease position. We continue to monitor our overhead costs and are attempting to adjust and stay in line with the decline in commodity prices.

        In September 2008 we executed a $20 million Credit Facility with Bank of the West, NA. The borrowing base, reflecting the maximum amount that may be outstanding under the Credit Facility at any time, is $3 million as of December 31, 2008. The borrowing base will be re-determined on May 1, 2009 and thereafter semi-annually each May 1 and November 1. If oil and natural gas prices significantly decline for an extended period of time, our lender could reestablish the borrowing base by evaluating our reserves at substantially lower oil and natural gas prices. Such determination could result in a negative revision to our proved reserve value and reduce our borrowing base. Currently the facility is undrawn, and we have no long-term debt.

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        If we borrow funds, we will be obligated to make periodic interest or other debt service payments and may be subject to additional restrictive covenants. The ability to borrow funds is dependent on a number of variables, including our proved reserves, and assumptions regarding the price at which oil and natural gas can be sold. Should we seek to raise additional capital through the issuance and sale of equity securities, the sales, if successfully completed, may be at prices below the market price of our stock, and our shareholders may suffer significant dilution.

        In order to fund our 2009 and later years' capital expenditures, we will complete one or a combination of the following options, whichever option(s) is (are) most favorable:

    Issuance of public equity

    Issuance of public debt

    Capital sharing arrangements with oil and gas industry partners

    Sell-down of interest in existing properties

    Terminate drilling rig contracts and pay a penalty to drilling contractor under the terms of the contract if we are not able to find another company to take over the drilling contractor obligations

        Our ability to fund our operations in future periods will depend upon our future operating performance, and more broadly, on the availability of equity and debt financing, additional joint ventures or selling interests in our existing acreage. Our ability to succeed in any of these capital-raising activities will be affected by prevailing economic conditions in our industry and financial, business and other factors, some of which are beyond our control. We cannot be certain that additional funding will be available on acceptable terms, or at all, particularly in light of the current widespread economic downturn.

        We had working capital of $15.4 million inclusive of cash and cash equivalents of $7.6 million as of December 31, 2008. Our working capital included $6.5 million of prepaid tubular goods for the first six wells of our 2009 drilling program, which have been reported as prepaid expenses as we have not taken physical delivery of the goods as of December 31, 2008. These costs will be applied to our share of the drilling costs for the first six wells, or will be recovered from our drilling partners. Based on our original 2009 drilling and exploration program, the Company anticipated that our 2009 capital expenditures in the Williston Basin would be approximately $11.3 million. While we cannot fully assess our capital expenditures or the timing of expenditures in the Vermillion Basin as we do not operate the properties, we anticipate that two of the wells that were horizontally drilled during 2008 could be completed during 2009. These costs cannot be determined at this time due to the uncertainty of commodity prices and expenditures. We estimated that our share of the completion costs would not exceed $4.0 million.

Liquidity and Capital Resources

        Our primary cash requirements are for exploration, development and acquisition of oil and gas properties. We have historically financed our operations, property acquisitions and capital investments from the proceeds of private offerings of our equity securities and, more recently to a limited extent, from cash generated from operations. We do not currently generate sustaining cash flow from our oil and gas operations, although our future depends on our ability to generate oil and natural gas operating cash flow. As of December 31, 2008, we had working capital of $15.4 million as compared to $10.2 million at December 31, 2007, and no outstanding long-term debt.

        The following table summarizes our sources and uses of cash for each of the three years ended December 31, 2008, 2007 and 2006.

 
  For the years ended ended December 31,  
 
  2008   2007   2006  

Capital Resources and Liquidity

                   

Cash and cash equivalents at end of the period

  $ 7,581,265   $ 13,015,318   $ 58,469,263  

Net cash provided by (used in) operating activities

    (2,174,519 )   2,073,412     3,141,149  

Net cash used in investing activities

    (20,911,023 )   (47,909,507 )   (35,551,258 )

Net cash provided by financing activities

    17,651,489     382,150     83,593,824  

Net cash flow

    (5,434,053 )   (45,453,945 )   51,183,715  

        The decrease in cash provided by operations from 2007 to 2008 is primarily from our workover activities on three wells which decreased our sales volumes and increased our operating expense. During 2008, we charged $1,709,667 of workover expense to lease operating expense, resulting in decreased cash flow. These decreases in cash provided by operations were partially offset by record high prices for crude oil and natural gas through the first half of 2008. The decrease in cash provided by operations from 2006 to 2007 is primarily from changes in accounts payable decreasing cash by

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$1,655,119 due to settlement of outstanding payables in 2007 and a $2,753,788 or 60% increase in general and administrative cost due to the addition of employees in 2007. These decreases in cash provided by operations were partially offset by a $3,658,240 or 88% increase in oil and gas revenues from 2006 to 2007. The oil and gas revenue decrease in 2008 from 2007 was primarily due to a decrease in oil sales volume. The oil and gas revenue increases in 2007 and 2006 were primarily due to drilling activity.

        Our investing activities during the three years ended December 31, 2008 related primarily to the addition of oil and gas leases and oil and gas drilling activities. We recorded $11,056,436 in development and exploration costs in 2008, $40,830,743 in 2007 and $29,664,142 in 2006. The remaining investing activity during 2008, 2007 and 2006 consisted primarily of equipment additions and changes in our restricted investments.

        Our financing activities during 2008 were comprised mainly of a public offering of 6,820,000 shares of common stock for gross proceeds of approximately $18.8 million. The Company paid approximately $1.3 million in commissions and expenses. Our financing activities during 2007 were comprised mainly of proceeds from the exercise of common stock options. Our financing activities during 2006 included the private placement of 19,514,268 shares of our common stock for gross proceeds of approximately $39,444,438 in March 2006 and the private placement of 12,075,000 shares of our common stock for gross proceeds of approximately $50,111,250 in December 2006.

        As we operate the majority of our acreage, specifically the Eastern Bakken acreage, we have the ability to adjust our drilling schedule to reflect the changing commodity price environment. Should we sell off some of our acreage and give up the right to operate, we will become subject to obligations imposed by others, without the ability to control our drilling schedule. Since we have not drawn against our Credit Facility at December 31, 2008, our primary obligations are our office lease and our two drilling rig contracts. During the second quarter of 2008, we entered into two-year contracts for the use of two new-build drilling rigs. The first rig was placed into operation in November 2008 and entails a two-year drilling commitment or specific termination fees if drilling activity is cancelled. Agreement terms require utilization of the rig and payment of day rates or the payment of standby rates if the rig is not utilized. The estimated termination fee for the first rig is approximately $5.3 million as of December 31, 2008. The termination fee on the first rig will continue to decrease as long as the rig remains active. Delivery of the second rig has been placed on hold with the drilling contractor. In the event we do not to take delivery of the rig, the termination fee could be up to $5.6 million and terms are still being negotiated. Subsequent to the end of the fourth quarter 2008, we were able to negotiate with the drilling contractor an approximate 20% reduction in rig day rates for the rig that is currently operating. We cannot offer any assurance that we will be able to negotiate a satisfactory resolution to this issue. Both we and the rig owner are attempting to find another company that will take over our obligations, although there can be no assurance that we will be able to do so.

        All of our leases on the FBIR have a minimum of nearly three and a half years remaining; therefore we do not have to drill wells in order to preserve our lease position. We continue to monitor our overhead costs and are attempting to adjust and stay in line with the decline in commodity prices.

        In September 2008 we executed a $20 million Credit Facility with Bank of the West, NA. The borrowing base, reflecting the maximum amount that may be outstanding under the Credit Facility at any time, is $3 million as of December 31, 2008. The borrowing base will be re-determined on May 1, 2009 and thereafter semi-annually each May 1 and November 1. If oil and natural gas prices significantly decline for an extended period of time, our lender could reestablish the borrowing base by evaluating our reserves at substantially lower oil and natural gas prices. Such determination could result in a negative revision to our proved reserve value and reduce our borrowing base. Currently the facility is undrawn, and we have no long-term debt.

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        If we borrow funds, we will be obligated to make periodic interest or other debt service payments and may be subject to additional restrictive covenants. The ability to borrow funds is dependent on a number of variables, including our proved reserves, and assumptions regarding the price at which oil and natural gas can be sold. Should we seek to raise additional capital through the issuance and sale of equity securities, the sales, if successfully completed, may be at prices below the market price of our stock, and our shareholders may suffer significant dilution.

        In order to fund our 2009 and later years' capital expenditures, we will complete one or a combination of the following options, whichever option(s) is (are) most favorable:

    Issuance of public equity

    Issuance of public debt

    Capital sharing arrangements with oil and gas industry partners

    Sell-down of interest in existing properties

    Terminate drilling rig contracts and pay a penalty to drilling contractor under the terms of the contract if we are not able to find another company to take over the drilling contractor obligations

        Our ability to fund our operations in future periods will depend upon our future operating performance, and more broadly, on the availability of equity and debt financing, additional joint ventures or selling interests in our existing acreage. Our ability to succeed in any of these capital-raising activities will be affected by prevailing economic conditions in our industry and financial, business and other factors, some of which are beyond our control. We cannot be certain that additional funding will be available on acceptable terms, or at all, particularly in light of the current widespread economic downturn.

        We had working capital of $15.4 million inclusive of cash and cash equivalents of $7.6 million as of December 31, 2008. Our working capital included $6.5 million of prepaid tubular goods for the first six wells of our 2009 drilling program, which have been reported as prepaid expenses as we have not taken physical delivery of the goods as of December 31, 2008. These costs will be applied to our share of the drilling costs for the first six wells, or will be recovered from our drilling partners. Based on our original 2009 drilling and exploration program, the Company anticipated that our 2009 capital expenditures in the Williston Basin would be approximately $11.3 million. While we cannot fully assess our capital expenditures or the timing of expenditures in the Vermillion Basin as we do not operate the properties, we anticipate that two of the wells that were horizontally drilled during 2008 could be completed during 2009. These costs cannot be determined at this time due to the uncertainty of commodity prices and expenditures. We estimated that our share of the completion costs would not exceed $4.0 million.

Liquidity and Capital Resources

        Our primary cash requirements are for exploration, development and acquisition of oil and gas properties. We have historically financed our operations, property acquisitions and capital investments from the proceeds of private offerings of our equity securities and, more recently to a limited extent, from cash generated from operations. We do not currently generate sustaining cash flow from our oil and gas operations, although our future depends on our ability to generate oil and natural gas operating cash flow. As of December 31, 2008, we had working capital of $15.4 million as compared to $10.2 million at December 31, 2007, and no outstanding long-term debt.

        The following table summarizes our sources and uses of cash for each of the three years ended December 31, 2008, 2007 and 2006.

 
  For the years ended ended December 31,  
 
  2008   2007   2006  

Capital Resources and Liquidity

                   

Cash and cash equivalents at end of the period

  $ 7,581,265   $ 13,015,318   $ 58,469,263  

Net cash provided by (used in) operating activities

    (2,174,519 )   2,073,412     3,141,149  

Net cash used in investing activities

    (20,911,023 )   (47,909,507 )   (35,551,258 )

Net cash provided by financing activities

    17,651,489     382,150     83,593,824  

Net cash flow

    (5,434,053 )   (45,453,945 )   51,183,715  

        The decrease in cash provided by operations from 2007 to 2008 is primarily from our workover activities on three wells which decreased our sales volumes and increased our operating expense. During 2008, we charged $1,709,667 of workover expense to lease operating expense, resulting in decreased cash flow. These decreases in cash provided by operations were partially offset by record high prices for crude oil and natural gas through the first half of 2008. The decrease in cash provided by operations from 2006 to 2007 is primarily from changes in accounts payable decreasing cash by

43


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$1,655,119 due to settlement of outstanding payables in 2007 and a $2,753,788 or 60% increase in general and administrative cost due to the addition of employees in 2007. These decreases in cash provided by operations were partially offset by a $3,658,240 or 88% increase in oil and gas revenues from 2006 to 2007. The oil and gas revenue decrease in 2008 from 2007 was primarily due to a decrease in oil sales volume. The oil and gas revenue increases in 2007 and 2006 were primarily due to drilling activity.

        Our investing activities during the three years ended December 31, 2008 related primarily to the addition of oil and gas leases and oil and gas drilling activities. We recorded $11,056,436 in development and exploration costs in 2008, $40,830,743 in 2007 and $29,664,142 in 2006. The remaining investing activity during 2008, 2007 and 2006 consisted primarily of equipment additions and changes in our restricted investments.

        Our financing activities during 2008 were comprised mainly of a public offering of 6,820,000 shares of common stock for gross proceeds of approximately $18.8 million. The Company paid approximately $1.3 million in commissions and expenses. Our financing activities during 2007 were comprised mainly of proceeds from the exercise of common stock options. Our financing activities during 2006 included the private placement of 19,514,268 shares of our common stock for gross proceeds of approximately $39,444,438 in March 2006 and the private placement of 12,075,000 shares of our common stock for gross proceeds of approximately $50,111,250 in December 2006.

        As we operate the majority of our acreage, specifically the Eastern Bakken acreage, we have the ability to adjust our drilling schedule to reflect the changing commodity price environment. Should we sell off some of our acreage and give up the right to operate, we will become subject to obligations imposed by others, without the ability to control our drilling schedule. Since we have not drawn against our Credit Facility at December 31, 2008, our primary obligations are our office lease and our two drilling rig contracts. During the second quarter of 2008, we entered into two-year contracts for the use of two new-build drilling rigs. The first rig was placed into operation in November 2008 and entails a two-year drilling commitment or specific termination fees if drilling activity is cancelled. Agreement terms require utilization of the rig and payment of day rates or the payment of standby rates if the rig is not utilized. The estimated termination fee for the first rig is approximately $5.3 million as of December 31, 2008. The termination fee on the first rig will continue to decrease as long as the rig remains active. Delivery of the second rig has been placed on hold with the drilling contractor. In the event we do not to take delivery of the rig, the termination fee could be up to $5.6 million and terms are still being negotiated. Subsequent to the end of the fourth quarter 2008, we were able to negotiate with the drilling contractor an approximate 20% reduction in rig day rates for the rig that is currently operating. We cannot offer any assurance that we will be able to negotiate a satisfactory resolution to this issue. Both we and the rig owner are attempting to find another company that will take over our obligations, although there can be no assurance that we will be able to do so.

        All of our leases on the FBIR have a minimum of nearly three and a half years remaining; therefore we do not have to drill wells in order to preserve our lease position. We continue to monitor our overhead costs and are attempting to adjust and stay in line with the decline in commodity prices.

        In September 2008 we executed a $20 million Credit Facility with Bank of the West, NA. The borrowing base, reflecting the maximum amount that may be outstanding under the Credit Facility at any time, is $3 million as of December 31, 2008. The borrowing base will be re-determined on May 1, 2009 and thereafter semi-annually each May 1 and November 1. If oil and natural gas prices significantly decline for an extended period of time, our lender could reestablish the borrowing base by evaluating our reserves at substantially lower oil and natural gas prices. Such determination could result in a negative revision to our proved reserve value and reduce our borrowing base. Currently the facility is undrawn, and we have no long-term debt.

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        If we borrow funds, we will be obligated to make periodic interest or other debt service payments and may be subject to additional restrictive covenants. The ability to borrow funds is dependent on a number of variables, including our proved reserves, and assumptions regarding the price at which oil and natural gas can be sold. Should we seek to raise additional capital through the issuance and sale of equity securities, the sales, if successfully completed, may be at prices below the market price of our stock, and our shareholders may suffer significant dilution.

        In order to fund our 2009 and later years' capital expenditures, we will complete one or a combination of the following options, whichever option(s) is (are) most favorable:

    Issuance of public equity

    Issuance of public debt

    Capital sharing arrangements with oil and gas industry partners

    Sell-down of interest in existing properties

    Terminate drilling rig contracts and pay a penalty to drilling contractor under the terms of the contract if we are not able to find another company to take over the drilling contractor obligations

        Our ability to fund our operations in future periods will depend upon our future operating performance, and more broadly, on the availability of equity and debt financing, additional joint ventures or selling interests in our existing acreage. Our ability to succeed in any of these capital-raising activities will be affected by prevailing economic conditions in our industry and financial, business and other factors, some of which are beyond our control. We cannot be certain that additional funding will be available on acceptable terms, or at all, particularly in light of the current widespread economic downturn.

        We had working capital of $15.4 million inclusive of cash and cash equivalents of $7.6 million as of December 31, 2008. Our working capital included $6.5 million of prepaid tubular goods for the first six wells of our 2009 drilling program, which have been reported as prepaid expenses as we have not taken physical delivery of the goods as of December 31, 2008. These costs will be applied to our share of the drilling costs for the first six wells, or will be recovered from our drilling partners. Based on our original 2009 drilling and exploration program, the Company anticipated that our 2009 capital expenditures in the Williston Basin would be approximately $11.3 million. While we cannot fully assess our capital expenditures or the timing of expenditures in the Vermillion Basin as we do not operate the properties, we anticipate that two of the wells that were horizontally drilled during 2008 could be completed during 2009. These costs cannot be determined at this time due to the uncertainty of commodity prices and expenditures. We estimated that our share of the completion costs would not exceed $4.0 million.

Liquidity and Capital Resources

        In order to fund the Company's 2009 and later years' capital expenditures, the Company will complete one or a combination of the following options, whichever option(s) is (are) most favorable:

    Issuance of public equity

    Issuance of public debt

    Capital sharing arrangements with oil and gas industry partners

    Sell-down of interest in existing properties

    Terminate drilling rig contracts and pay a penalty to drilling contractor under the terms of the contract if we are not able to find another company to take over the drilling contractor obligations

        The Company's ability to fund its operations in future periods will depend upon its future operating performance, and more broadly, on the availability of equity and debt financing or selling interests in its existing acreage. The Company's ability to succeed in any of these capital-raising activities will be affected by prevailing economic conditions in its industry and financial, business and other factors, some of which are beyond the Company's control. The Company cannot be certain that additional funding will be available on acceptable terms, or at all, particularly in light of the current

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KODIAK OIL & GAS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2—Basis of Presentation and Significant Accounting Policies (Continued)

widespread economic downturn. If we are unable to raise additional capital when required or on acceptable terms, the Company may have to significantly delay, scale back or discontinue its drilling or exploration program, seek to enter into additional joint venture arrangements with third parties, or seek to sell one or more of its properties, on terms or conditions that may not be as favorable as otherwise may be obtained.

Liquidity and Capital Resources

        In order to fund the Company's 2009 and later years' capital expenditures, the Company will complete one or a combination of the following options, whichever option(s) is (are) most favorable:

    Issuance of public equity

    Issuance of public debt

    Capital sharing arrangements with oil and gas industry partners

    Sell-down of interest in existing properties

    Terminate drilling rig contracts and pay a penalty to drilling contractor under the terms of the contract if we are not able to find another company to take over the drilling contractor obligations

        The Company's ability to fund its operations in future periods will depend upon its future operating performance, and more broadly, on the availability of equity and debt financing or selling interests in its existing acreage. The Company's ability to succeed in any of these capital-raising activities will be affected by prevailing economic conditions in its industry and financial, business and other factors, some of which are beyond the Company's control. The Company cannot be certain that additional funding will be available on acceptable terms, or at all, particularly in light of the current

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KODIAK OIL & GAS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2—Basis of Presentation and Significant Accounting Policies (Continued)

widespread economic downturn. If we are unable to raise additional capital when required or on acceptable terms, the Company may have to significantly delay, scale back or discontinue its drilling or exploration program, seek to enter into additional joint venture arrangements with third parties, or seek to sell one or more of its properties, on terms or conditions that may not be as favorable as otherwise may be obtained.

Liquidity and Capital Resources

        In order to fund the Company's 2009 and later years' capital expenditures, the Company will complete one or a combination of the following options, whichever option(s) is (are) most favorable:

    Issuance of public equity

    Issuance of public debt

    Capital sharing arrangements with oil and gas industry partners

    Sell-down of interest in existing properties

    Terminate drilling rig contracts and pay a penalty to drilling contractor under the terms of the contract if we are not able to find another company to take over the drilling contractor obligations

        The Company's ability to fund its operations in future periods will depend upon its future operating performance, and more broadly, on the availability of equity and debt financing or selling interests in its existing acreage. The Company's ability to succeed in any of these capital-raising activities will be affected by prevailing economic conditions in its industry and financial, business and other factors, some of which are beyond the Company's control. The Company cannot be certain that additional funding will be available on acceptable terms, or at all, particularly in light of the current

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KODIAK OIL & GAS CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Note 2—Basis of Presentation and Significant Accounting Policies (Continued)

widespread economic downturn. If we are unable to raise additional capital when required or on acceptable terms, the Company may have to significantly delay, scale back or discontinue its drilling or exploration program, seek to enter into additional joint venture arrangements with third parties, or seek to sell one or more of its properties, on terms or conditions that may not be as favorable as otherwise may be obtained.

Liquidity and Capital Resources



        In order to fund the Company's 2009 and later years' capital expenditures, the Company will complete one or a combination of the
following options, whichever option(s) is (are) most favorable:





    Issuance of public equity


    Issuance of public debt


    Capital sharing arrangements with oil and gas industry partners


    Sell-down of interest in existing properties


    Terminate drilling rig contracts and pay a penalty to drilling contractor under the terms of the contract if we are not
    able to find another company to take over the drilling contractor obligations



        The
Company's ability to fund its operations in future periods will depend upon its future operating performance, and more broadly, on the availability of equity and debt financing or
selling interests in its existing acreage. The Company's ability to succeed in any of these capital-raising activities will be affected by prevailing economic conditions in its industry and financial,
business and other factors, some of which are beyond the Company's control. The Company cannot be certain that additional funding will be available on acceptable terms, or at all, particularly in
light of the current



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HREF="#bg18601a_main_toc">Table of Contents





KODIAK OIL & GAS CORP.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 2—Basis of Presentation and Significant Accounting Policies (Continued)



widespread
economic downturn. If we are unable to raise additional capital when required or on acceptable terms, the Company may have to significantly delay, scale back or discontinue its drilling or
exploration program, seek to enter into additional joint venture arrangements with third parties, or seek to sell one or more of its properties, on terms or conditions that may not be as favorable as
otherwise may be obtained.



Liquidity and Capital Resources



        In order to fund the Company's 2009 and later years' capital expenditures, the Company will complete one or a combination of the
following options, whichever option(s) is (are) most favorable:





    Issuance of public equity


    Issuance of public debt


    Capital sharing arrangements with oil and gas industry partners


    Sell-down of interest in existing properties


    Terminate drilling rig contracts and pay a penalty to drilling contractor under the terms of the contract if we are not
    able to find another company to take over the drilling contractor obligations



        The
Company's ability to fund its operations in future periods will depend upon its future operating performance, and more broadly, on the availability of equity and debt financing or
selling interests in its existing acreage. The Company's ability to succeed in any of these capital-raising activities will be affected by prevailing economic conditions in its industry and financial,
business and other factors, some of which are beyond the Company's control. The Company cannot be certain that additional funding will be available on acceptable terms, or at all, particularly in
light of the current



59









HREF="#bg18601a_main_toc">Table of Contents





KODIAK OIL & GAS CORP.



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)



Note 2—Basis of Presentation and Significant Accounting Policies (Continued)



widespread
economic downturn. If we are unable to raise additional capital when required or on acceptable terms, the Company may have to significantly delay, scale back or discontinue its drilling or
exploration program, seek to enter into additional joint venture arrangements with third parties, or seek to sell one or more of its properties, on terms or conditions that may not be as favorable as
otherwise may be obtained.



This excerpt taken from the KOG 10-Q filed Nov 6, 2008.

Liquidity and Capital Resources

 
  For the three months ended September 30,   For the nine months ended September 30,  
 
  2008   2007   2008   2007  

Capital Resources and Liquidity

                         

Cash and cash equivalents at end of the period

  $ 11,191,928   $ 19,364,686   $ 11,191,928   $ 19,364,686  

Net cash provided by (used in) operating activities

    2,056,788     (180,329 )   (3,113,204 )   616,667  

Net cash used in investing activities

    (2,777,107 )   (11,550,887 )   (9,501,756 )   (40,103,394 )

Net cash provided by financing activities

    10,712,820     147,150     10,791,570     382,150  

Net cash flow

    9,992,501     (11,584,066 )   (1,823,390 )   (39,104,577 )

        Kodiak ended the third quarter of 2008 with cash and cash equivalents of $11.2 million down from $13.0 million at year-end 2007. Total working capital was $18.7 million at September 30, 2008, as compared to $10.2 million at December 31, 2007. As of September 30, 2008, we had prepaid $6.9 million towards the cost of tubular goods. Cash flow used in operating activities for the first nine months of 2008 was $3.1 million which was largely the result of a $1.7 million workover expenditure. Cash used as capital expenditures for our oil and gas activities totaled $11.9 million for the first nine months of 2008 and was offset by $2.4 million in proceeds from sales of oil and gas properties. We have acquired or made deposits on projected tubular goods requirements for part of our drilling program. Net cash provided by financing activities for the first nine months of 2008 was $10.8 million which includes our common stock offering in August 2008 of $17.5 million (net of issuance costs) less $6.9 million prepaid on tubular goods for seven wells.

        Kodiak's results of operations and financial condition are significantly affected by the success of our exploration and land leasing activity, the resulting production and reserves, oil and natural gas commodity prices, and the costs related to operating our properties. In the first nine months of 2008, our oil and gas revenue decreased by 1% from $5.6 million during the first nine months of 2007 to $5.5 million. This decrease is largely the result of the decrease in our crude oil production as a result of oil producing wells that were shut in for completion, repair and workover procedures partially offset by increased prices received for both our crude oil and natural gas production. Total costs and expenses decreased to $28.2 million in the first nine months of 2008 from $43.8 million in the first nine months of 2007 largely due to an asset impairment in 2007 of $34.0 million related to the full cost ceiling test in 2007 versus a $15.5 million asset impairment charge in 2008 also related to the full cost ceiling test

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as of September 30, 2008. The increase in general and administrative expenses included an increase in the non-cash charge for stock based compensation from $1.7 million during the first nine months of 2007 to the $2.7 first nine months of 2008. This increase is due to additional options and restricted stock issued since implementing the 2007 Plan, and a change in the forfeiture rate assumed for future vested options.

        Due to our oil and natural gas exploration program, we have experienced, and expect to continue to experience, substantial working capital requirements. As a result of our agreement with Devon, we have maintained a significant level of activity in the Vermillion Basin, without requiring capital expenditures. Based on our current exploration program and depending on the success in this play, we anticipate additional capital requirements after the second quarter of 2009. At this time we cannot assess our 2009 requirements in the area until we evaluate the results of the current drilling activity discussed above. By reducing the immediate capital requirements of our Vermillion Basin exploration and other areas in Wyoming and Montana, we intend to allocate our existing capital to the Bakken oil play on the FBIR in North Dakota. Over the past two years we have entered into exploration agreements with three separate joint venture partners in this play. Two of the agreements have been previously announced and primarily involved the sharing of lease acquisition with drilling and completion dollars being incurred in proportion to each parties respective working interest. The third exploration agreement which was recently announced involves a third party oil and gas company that will pay a disproportionate share of drilling and completion costs to earn a proportionate 40% working interest in certain lands where Kodiak had acquired a 100% working interest and were not subject to any previous agreements. This agreement requires the third party to pay 80% of the costs to drill and complete the first well to earn a 40% working interest in the "promoted well". The costs for the next well drilled on acreage involving this joint venture would be drilled in proportion to each parties working interest "non-promoted". This program will alternate between a "promoted" well and a "non-promoted" well through the seventh well drilled on lands within the exploration agreement, at which time all future wells will be drilled in proportion to each party's working interest. In no event shall such "promoted" interest exceed $8.5 million to the third party. The first two wells that we drill on the FBIR will be subject to this agreement. Through these agreements we have been able to spread our working interest over a larger geographic area while still maintaining significant working interests ranging from 50% to 70% working interest in the lands.

        In the first nine months of 2008, we incurred capital expenditures of approximately $9.5 million, net of proceeds from property divestitures and our agreement with Devon. As of September 30, 2008, our working capital was $18.7 million and we had no long-term debt. On September 11, 2008, the Company secured a line of credit with a bank which provides a borrowing base as of September 30, 2008 of $5.0 million. We project our capital expenditures in the Bakken oil play to be approximately $35 to $40 million through 2009. The price that we receive for our products cannot be predicted and the results of our exploration efforts are also not predictable. However, using current prices and projections we anticipate funding these expenditures through our existing working capital, anticipated production, and our unused line of credit. In the event that the economic parameters of the play area do not justify continued drilling we will adjust our drilling schedule.

        We believe that we may need to obtain additional sources of capital to fund further growth and development, the amount and timing of which will depend on the success and timing of our exploration activities. We anticipate that we would seek to obtain additional funding either by means of debt or equity financings or by entering into additional joint venture agreements, the availability of which there can be no assurance.

        Our ability to fund our operations in future periods will depend upon our future operating performance, and more broadly, on the availability of equity and debt financing, which will be affected by prevailing economic conditions in our industry and financial, business and other factors, some of which are beyond our control. We cannot be certain that additional funding will be available on

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acceptable terms, or at all. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue our drilling or exploration program, seek to enter into additional joint venture arrangements with third parties, or seek to sell one or more of our properties. A significant delay in obtaining additional financing would have a material adverse effect on our business.

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