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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2011

Commission File No. 001-32920

(Exact name of registrant as specified in its charter)

1625 Broadway, Suite 250

Denver, Colorado 80202

(Address of principal executive offices, including zip code)

(303) 592-8075

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

209,328,439 shares, no par value, of the Registrant’s common stock were issued and outstanding as of August 3, 2011.

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KODIAK OIL & GAS CORP.

INDEX

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PART 1—FINANCIAL INFORMATION

ITEM 1.  FINANCIAL STATEMENTS

KODIAK OIL & GAS CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE

CONSOLIDATED FINANCIAL STATEMENTS

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KODIAK OIL & GAS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share data)

(Unaudited)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE

CONSOLIDATED FINANCIAL STATEMENTS

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KODIAK OIL & GAS CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE

CONSOLIDATED FINANCIAL STATEMENTS

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KODIAK OIL & GAS CORP.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1—Organization

Description of Operations

Kodiak Oil & Gas Corp. and its subsidiary (“Kodiak” or the “Company”) is a public company listed for trading on the NYSE Amex LLC as of June 30, 2011 and whose corporate headquarters are located in Denver, Colorado, USA. The Company is an independent energy company engaged in the exploration, exploitation, development, acquisition and production of crude oil and natural gas entirely in the Rocky Mountain region of the United States. The Company made an application and received authorization from NYSE Regulation, Inc. to transfer the listing of its common stock from the NYSE Amex to NYSE. The Company expects its common stock to begin trading on the NYSE on or about August 4, 2011, under its current symbol “KOG”.

The Company was incorporated (continued) in the Yukon Territory on September 28, 2001.

Note 2—Basis of Presentation and Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Kodiak Oil & Gas (USA) Inc. All significant inter-company balances and transactions have been eliminated in consolidation. The Company’s business is transacted in US dollars and, accordingly, the financial statements are expressed in US dollars. The financial statements included herein were prepared from the records of the Company in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Regulation S-X and S-K.  In the opinion of management all adjustments, consisting of normal recurring accruals that are considered necessary for a fair presentation of the interim financial information, have been included. However, operating results for the periods presented are not necessarily indicative of the results that may be expected for a full year.  Kodiak’s 2010 Annual Report on Form 10-K includes certain definitions and a summary of significant accounting policies and should be read in conjunction with this Form 10-Q.  Except as disclosed herein, there have been no material changes to the information disclosed in the notes to the consolidated financial statements included in Kodiak’s 2010 Annual Report on Form 10-K.

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of oil and gas reserves, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant areas requiring the use of assumptions, judgments and estimates include (1) oil and gas reserves; (2) cash flow estimates used in ceiling test of oil and natural gas properties; (3) depreciation, depletion and amortization; (4) asset retirement obligations; (5) assigning fair value and allocating purchase price in connection with business combinations; (6) accrued revenue and related receivables; (7) valuation of commodity derivative instruments; (8) accrued liabilities; (9) valuation of share-based payments and (10) income taxes. Although management believes these estimates are reasonable, actual results could differ from these estimates. We evaluate our estimates on an on-going basis and base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Although actual results may differ from these estimates under different assumptions or conditions, we believe that our estimates are reasonable.

Reclassifications

The Company has condensed certain line items within the current period financial statements, and certain prior period balances were reclassified to conform to the current year presentation accordingly.  Such reclassifications had no impact on net income, working capital or equity previously reported.

Income Taxes

The Company computes its quarterly taxes under the effective tax rate method based on applying an anticipated annual effective rate to its year-to-date income or loss.  The Company has not generated taxable income to date, which led the Company to provide a valuation allowance against its net deferred tax assets at December 31, 2010 and June 30, 2011 since it could not conclude that it is more likely than not that the net deferred tax assets will be fully realized on future tax returns. Due to the valuation allowance, no income tax expense or benefit was recorded for the three and six months ended June 30, 2011and 2010.

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The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. As of June 30, 2011, the Company made no provision for interest or penalties related to uncertain tax positions. The Company files income tax returns in Canada and U.S. federal jurisdiction and various states. There are currently no Canadian or U.S. federal or state income tax examinations underway for these jurisdictions. Furthermore, the Company is no longer subject to U.S. federal income tax examinations by the Internal Revenue Service, state or local tax authorities for tax years ended on or before December 31, 2006 or Canadian tax examinations by the Canadian Revenue Agency for tax years ended on or before December 31, 2003.

Recently Issued Accounting Standards

In May 2011, the FASB issued Accounting Standards Update No. 2011-04—Fair Value Measurement—Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which is effective for interim and annual periods beginning after December 15, 2011. The ASU is not expected to have a significant impact on the Company’s financial statements, other than additional disclosures.

Note 3—Acquisitions and Divestitures

June 30, 2011 Acquisition

On June 30, 2011, (“Effective Closing Date”) the Company acquired a private, unafilliated oil and gas company’s (“Seller”) interests in approximately 25,000 net acres of Bakken/Three Fork leaseholds and related producing properties located in the Williston Basin of North Dakota (the “2011 Acquired Properties”)  for a combination of cash and stock.  The Seller received 2.5 million shares of Kodiak’s common stock valued at approximately $14.0 million and cash consideration of $71.5 million in exchange for the 2011 Acquired Properties. The effective date for the acquisition of the 2011 Acquired Properties was April 1, 2011, with purchase price adjustments calculated at the closing date June 30, 2011.  The acquisition provided strategic additions to the Company’s core positions in Koala, Smokey and Grizzly Project areas.  The 2011 Acquired Properties contributed no revenue to Kodiak for the three or six months ended June 30, 2011.   Transaction costs related to the acquisition were approximately $265,000, and are recorded in the statement of operations within the general and administrative expenses line item.  Costs of $75,000 for  issuing and registering with the SEC for the resale of 2.5 million shares of common stock were charged to the contributed surplus account.

The acquisition is accounted for using the acquisition method under ASC 805, Business Combinations, which requires the acquired assets and liabilities to be recorded at fair values as of the acquisition date of June 30, 2011.   The following table summarizes the purchase price and preliminary estimated values of assets acquired and liabilities assumed and is subject to revision as the Company continues to evaluate the fair value of the acquisition (in thousands, except share data):

*      The fair value of the consideration attributed to the Common Stock under ASC 805 was based on the Company’s closing stock price on the measurement date of June 30, 2011.  (2,500,000 x $5.77)

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The following unaudited pro forma financial information represents the combined results for the Company and the 2011 Acquired Properties for the three and six months ended June 30, 2011 as if the acquisition had occurred on January 1, 2011.  The 2011 Acquired Properties commencement of production was January 20, 2011, therefore pro forma financial information was only included for the three and six months ended June 30, 2011.   The pro forma information includes the effects of adjustments for depletion, depreciation, amortization and accretion expense of $200,000 and $530,000, and interest expense of $550,000 and $1.1 million, for the three and six months ended June 30, 2011, respectively.  The pro forma results do not include any cost savings or other synergies that may result from the acquisition or any estimated costs that have been or will be incurred by the Company to integrate the properties acquired. The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of the period, nor are they necessarily indicative of future results.

November 30, 2010 Acquisition

On November 30, 2010, (“Effective Closing Date”) the Company acquired a private, unafilliated oil and gas company’s interests in approximately 14,500 net acres of Bakken/Three Fork leaseholds and related producing properties located in the Williston Basin of North Dakota (the “2010 Acquired Properties”).  The effective date for the acquisition of the 2010 Acquired Properties was August 1, 2010, with purchase price adjustments calculated at the closing date November 30, 2010.  The acquisition provided contiguous leaseholds with approved drilling permits near the Company’s existing acreage position.

The acquisition is accounted for using the acquisition method under ASC 805, which requires the acquired assets and liabilities to be recorded at fair values as of the acquisition date of November 30, 2010.  The transaction’s final settlement was completed in April 2011 resulting in no material changes.  As a result there were no changes from our initial evaluation of the fair values of the net assets acquired in the acquisition or purchase price.

The following table summarizes the purchase price and final fair value of assets acquired and liabilities assumed (in thousands):

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The following unaudited pro forma financial information represents the combined results for the Company and the 2010 Acquired Properties for the three and six months ended June 30, 2010 as if the acquisition had occurred on January 1, 2010.  The pro forma information includes the effects of adjustments for depletion, depreciation, amortization and accretion expense of $591,000 and $618,000, amortization of financing costs of $72,000 and $144,000, and interest expense of $1.5 million and $3.0 million, for the three and six months ended June 30, 2010, respectively.  The pro forma results do not include any cost savings or other synergies that may result from the acquisition or any estimated costs that have been or will be incurred by the Company to integrate the properties acquired.  The pro forma results are not necessarily indicative of what actually would have occurred if the acquisition had been completed as of the beginning of the period, nor are they necessarily indicative of future results.

Divestitures

In April 2011, the Company completed two separate sales of its interest in operated and non-operated wells, related surface equipment, and 3,046 undeveloped net acres all located in Wyoming for total cash consideration of $2.1 million.  Kodiak was relieved of all reclamation liabilities associated with the producing properties.  As a result of the divestiture, the Company’s asset retirement obligation decreased by $610,000.  Additionally, Kodiak retained an overriding royalty interest in certain leases conveyed.   No gain or loss was recognized on the sale and the proceeds reduced the full cost pool.

Note 4—Earnings Per Share

Basic net income (loss) per share is computed by dividing net income (loss) attributable to the common stockholders by the weighted average number of common shares outstanding during the reporting period.  Diluted net income per common share includes shares of restricted stock  units, and the potential dilution that could occur upon exercise of options to acquire common stock computed using the treasury stock method, which assumes that the increase in the number of shares is reduced by the number of shares which could have been repurchased by the Company with the proceeds from the exercise of the options (which were assumed to have been made at the average market price of the common shares during the reporting period).  Additionally, subsequent to June 30, 2011, the Company completed an equity offering in which it issued an additional 27.6 million shares that are not included in the basic and diluted earnings per share calculation for the three and six months ended June 30, 2011.  Please refer to Note 11- Subsequent Events for additional discussion.

In accordance with ASC 260-10-45, Share-Based Payment Arrangements and Participating Securities and the Two-Class Method, the Company’s unvested restricted stock shares are deemed participating securities, since these shares would be entitled to participate in dividends declared on common shares.  During periods of net income, the calculation of earnings per share for common stock exclude income attributable to the restricted stock shares from the numerator and exclude the dilutive impact of those shares from the denominator. During periods of net loss, no effect is given to the participating securities because they do not share in the losses of the Company.

The performance based restricted stock units and unexercised stock options are not participating securities, since these shares are not entitled to participate in dividends declared on common shares.  The number of potentially dilutive shares attributable to the performance based restricted stock units is based on the number of shares, if any, which would be issuable at the end of the respective reporting period, assuming that date was the end of the performance measurement period.  Please refer to Note 5 — Share-Based Payments under the heading Restricted Stock Units and Performance Awards for additional discussion.

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The table below sets forth the computations of basic and diluted net income (loss) per share for the three and six months ended June 30, 2011 and June 30, 2010 (in thousands, except per share data):

The following options and unvested restricted shares, which could be potentially dilutive in future periods, were not included in the computation of diluted net income per share because the effect would have been anti-dilutive for the periods indicated:

Note 5—Share-Based Payments

The Company has granted options to directors, officers, and employees of the Company under the 2007 Stock Incentive Plan (the “Plan”), amended on June 3, 2010 and further amended June 15, 2011. The Plan authorized the Company to issue stock options, stock appreciation rights (SARs), restricted stock and restricted stock units, performance awards, stock or property, stock awards and other share-based awards to any employee, consultant, independent contractor, director or officer of the Company.  The maximum number of shares of common stock available for issuance under the Plan is equal to 24,500,000, subject to adjustment as provided in the Plan.  Additionally, the June 15, 2011 amendment eliminates a provision of the Plan that limited the number of shares available for granting restricted stock and restricted stock units to 2,000,000, thereby making all of the authorized and remaining shares under the amended Plan available for granting restricted stock and restricted stock units.

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Stock Options

Total compensation expense related to the stock options of $652,000 and $2.0 million was recognized during the three and six months ended June 30, 2011, respectively, as compared to $852,000 and $1.4 million for the three and six months ended June 30, 2010, respectively.   As of June 30, 2011, there was $5.6 million of total unrecognized compensation cost related to stock options, which is expected to be amortized over a weighted-average period of 2.39 years.

Compensation expense related to stock options is calculated using the Black Scholes-Merton valuation model. Expected volatilities are based on the historical volatility of Kodiak’s common stock over a period consistent with that of the expected terms of the options. The expected terms of the options are estimated based on factors such as vesting periods, contractual expiration dates, historical trends in the Company’s common stock price and historical exercise behavior. The risk-free rates for periods within the contractual life of the options are based on the yields of U.S. Treasury instruments with terms comparable to the estimated option terms.  The following assumptions were used for the Black-Scholes-Merton model to calculate the share-based compensation expense for the period presented:

A summary of the stock options outstanding as of January 1, 2011 and June 30, 2011 is as follows:

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At June 30, 2011, stock options outstanding were as follows:

The aggregate intrinsic value of both outstanding and vested options as of June 30, 2011 was $15.3 million based on the Company’s June 30, 2011 closing common stock price of $5.77 per share. The total grant date fair value of the shares vested during 2011 was $3.5 million.

Restricted Stock Units and Performance Awards

Total compensation expense related to restricted stock units (“RSU’s) and performance awards (“PA’s) of $295,000 and $532,000 was recognized during the three and six months ended June 30, 2011, respectively, as compared to $14,000 and $288,000 for the three and six months ended June 30, 2010, respectively.   As of June 30, 2011, there was $1.5 million of total unrecognized compensation cost related to the RSU’s, which is expected to be amortized over a weighted-average period of 1.99 years.

During 2011, the Company granted tandem grants of 105,000 performance based RSU’s and 52,500 PA’s to employees pursuant to the Company’s 2007 Plan.  Subject to the satisfaction of certain performance-based conditions, the RSU’s and PA’s vest one-quarter per year over a four year service date and the Company began recognizing compensation expense related to these grants beginning in 2011 over the vesting period. Additionally, the Company awarded tandem grants of 22,500 shares of restricted stock and 11,250 PA’s to its Board of Directors pursuant to the Company’s 2007 Plan. These restricted stock shares and PA’s vest after a one year service date and the Company will recognize compensation expense related to these grants beginning in 2011 over the vesting period. The Company recognizes compensation cost for performance based grants on a tranche level and service-based grants on a straight-line basis over the requisite service period for the entire award. The fair value of restricted stock and RSU grants is based on the stock price on the grant date and the Company assumes no annual forfeiture rate.

The PA’s are payable in cash, except the Company may, in its discretion, determine to pay out the PA’s on the vesting date through the issuance of shares of the Company’s common stock.  Consequently, as the PA’s will likely be settled in cash, a liability was recorded in the amount of $238,000 at June 30, 2011. The liability for the PA’s is remeasured at each quarter.

As of June 30, 2011, there were 280,000 unvested RSU’s and 22,500 unvested restricted stock shares with a combined weighted average grant date fair value of $6.59 per share.  The total fair value vested during 2011 was $623,000.   A summary of the RSU’s and restricted stock shares outstanding as of January 1, 2011 and June 30, 2011 is as follows:

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Note 6—Credit Facility

First Lien Credit Agreement

On April 13, 2011, Kodiak Oil & Gas (USA) Inc. (the “Borrower”), a wholly owned subsidiary of Kodiak Oil & Gas Corp., entered into the Second Amendment (the “Second Amendment”) to the Credit Agreement between the Borrower and Wells Fargo Bank, N.A. (“Wells Fargo”), dated May 24, 2010, as amended by the First Amendment to Credit Agreement, dated November 30, 2010 (the “First Lien Credit Agreement”).

The Second Amendment amends the First Lien Credit Agreement to, among other things, (i) increase the borrowing base from $50,000,000 to $75,000,000; (ii) decrease the borrowing base increase fee from 1.0% to 0.5%; (iii) reduce the commitment fee from a flat fee of 0.50% to a sliding scale of .375% to 0.50%, depending on borrowing base usage; and (iv) decrease the interest rate through a reduction in the applicable margin applied to the alternate base or adjusted LIBO interest rates (each as defined in the First Lien Credit Agreement) payable on outstanding borrowings. The applicable margin was reduced on the alternate base rate from a sliding scale of 1.25% to 2.25% to a sliding scale of 0.75% to 1.75%, depending on borrowing base usage. The applicable margin was reduced on the adjusted LIBO rate from a sliding scale of 2.25% to 3.25% to 1.75% to 2.75%, depending on borrowing base usage.  Redetermination of the borrowing base under the First Lien Credit Agreement occurs semi-annually, on April 1 and October 1.  Additionally, the Company may elect a redetermination of the borrowing base one time during any six month period.  The First Lien Credit Agreement has a maturity date of May 24, 2014.

Interest on the revolving loans is payable at one of the following two variable rates: the Alternate Base Rate for ABR Loans or the Adjusted LIBO Rate for Eurodollar loans, as selected by the Company, plus an additional percentage that can vary on a daily basis and is based on the daily unused portion of the facility. This additional percentage is referred to as the “Applicable Margin” and varies depending on the type of loan. The grid below shows the Applicable Margin options depending on the applicable Borrowing Base Utilization Percentage:

Borrowing Base Utilization Grid

The First Lien Credit Agreement contains representations, warranties, covenants, conditions and defaults customary for transactions of this type, including but not limited to: (a) covenants to comply with a current ratio of consolidated current assets (including unused borrowing capacity) to consolidated current liabilities not less than 1.0:1.0 and a ratio of total debt to EBITDAX (as defined in the First Lien Credit Agreement) of 4.0 to 1.0 for the four fiscal quarters ending on the last day of any fiscal quarter ending on or before December 31, 2010 and to 3.75 to 1.0 for the four fiscal quarters ending on the last day of each fiscal quarter thereafter; (b) limitations on liens and incurrence of debt covenants; (c) limitations on dividends, distributions, redemptions and restricted payments covenants; (d) limitations on investments, loans and advances covenants; (e) requires the Company to maintain a ratio of EBITDAX to Interest Expense (each as defined in the First Lien Credit Agreement) of at least 3.0 to 1.0 for the four fiscal quarters ending on the last day of any fiscal quarter and (f) limitations on the sale of property, mergers, consolidations and other similar transactions covenants. As of June 30, 2011, the Company was in compliance with all covenants under the First Lien Credit Agreement.

On June 29, 2011, to pay the cash consideration in respect to the 2011 Acquired Properties, fund capital expenditures, and fund acquisition related costs, the Company drew approximately $75 million under its First Lien Credit Agreement.  Therefore, as of June 30, 2011, the entire $75 million commitment was outstanding.  Borrowings under the First Lien Credit Agreement accrue interest at approximately 3% and are collateralized by the Company’s oil and gas producing properties.

In July 2011, the Company elected a redetermination of its borrowing base under the First Lien Credit Agreement increasing its borrowing base to $110 million from the previously available $75 million.  Subsequent to June 30, 2011, the Company paid down all borrowings under the First Lien Credit Agreement using $60 million in proceeds from its July 2011 public common stock offering and $15 million borrowed under the Second Lien Credit Agreement (discussed below). Accordingly, as of the date hereof, the Company has repaid all outstanding borrowings under the First Lien Credit Agreement leaving no outstanding balance.

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Second Lien Credit Agreement

On November 30, 2010, Kodiak Oil & Gas (USA) Inc. entered into a Second Lien Term Loan Credit Agreement with an initial commitment of $40 million (the “Second Lien Credit Agreement”) with Wells Fargo Energy Capital, Inc. and any other lender party thereto from time to time (collectively, the “Lenders”). At June 30, 2011, the entire $40 million commitment was outstanding.

Interest on the loans under the Second Lien Credit Agreement accrues based on one of the following two fluctuating reference rates in a manner prescribed under the applicable loan documents: (1) the LIBO rate (which is primarily based on the London interbank market rate), subject to a floor of 2.5% and (2) the alternate base rate (which is primarily based on Wells Fargo’s “prime” rate). Loans that accrue at the LIBO rate, subject to the 2.5% floor, are subject to an additional margin of 8%. Loans that accrue at the alternate base rate are subject to an additional margin of 7%. The $40 million outstanding as of June 30, 2011 under the Second Lien Credit Agreement accrues interest at 10.5%.

The Second Lien Credit Agreement contains representations, warranties, covenants, conditions and defaults customary for transactions of this type, including but not limited to restrictions or requirements with respect to additional debt, liens, investments, hedging activities, acquisitions, dividends, mergers, sales of assets, transactions with affiliates and capital expenditures. In addition, the Second Lien Credit Agreement includes financial covenants substantially similar to those under the Credit Agreement, as amended by the First Amendment, and an additional covenant addressing limitations on Subsidiary’s ratio of total net cash flow of our proved reserves discounted at 10% to Total Debt (each as defined in the Second Lien Credit Agreement). As of June 30, 2011, the Company was in compliance with all covenants under the Credit Agreement.  The Second Lien Credit Agreement is collateralized by the Company’s oil and gas producing properties.

On July 15, 2011, Kodiak Oil & Gas (USA) Inc. entered into Amendment No. 1 to Second Lien Credit Agreement (the “Second Lien Amendment”) with Wells Fargo Energy Capital, Inc.  The Second Lien Amendment amends the Second Lien Credit Agreement to, among other things, allow the Company to prepay the original outstanding balance of $40 million prior to November 30, 2011 (the Second Lien Credit Agreement only permitted pre-payment after November 30, 2011), provided that such prepayment is accompanied by a premium equal to approximately 2.0% of the principal prepayment.  In addition, pursuant to the Second Lien Amendment, the Company increased its borrowings under the Second Lien Credit Agreement by $15 million such that the Subsidiary currently has $55 million in borrowings outstanding thereunder.  Under the terms of the Second Lien Amendment, the Subsidiary may prepay the $15 million in additional borrowings at any time without any prepayment penalty; provided that such prepayment on the $15 million in additional borrowings is made after the initial $40 million in borrowings has been prepaid.  The Subsidiary used the $15 million borrowed against the Second Lien Credit Agreement, as amended by the Second Lien Amendment, to reduce the Subsidiary’s balance under its First Lien Credit Agreement.

Deferred Financing Costs

As of June 30, 2011, the Company recorded deferred financing costs of $1.8 million related to the closing of its First Lien Credit Agreement and Second Lien Credit Agreement and respective amendments.  Deferred financing costs include origination, legal and engineering fees incurred in connection with the Company’s credit facilities, which are being amortized over the four-year term of the credit facilities.  The Company recorded amortization expense for the three and six months ended June 30, 2011 of $200,000 and $387,000, respectively, as compared to $13,000 and $30,000 for both the three and six months ended June 30, 2010, respectively.

Interest Incurred Under the First and Second Lien Credit Agreement

Total interest expense incurred during the three and six months ended June 30, 2011 was approximately $1.1 million and $2.2 million, respectively, as compared to $15,000 for both the three and six months ended June 30, 2010.  The Company capitalized interest costs of $1.1 million and $2.2 million for the three and six months ended June 30, 2011. The Company did not capitalize any interest for the three and six months ended June 30, 2010.

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Note 7—Asset Retirement Obligations

The Company follows accounting for asset retirement obligations in accordance with ASC 410, Asset Retirement and Environmental Obligations, which requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it was incurred if a reasonable estimate of fair value could be made. The Company’s asset retirement obligations primarily represent the estimated present value of the amounts expected to be incurred to plug, abandon and remediate producing and shut-in wells at the end of their productive lives in accordance with applicable state and federal laws. The Company determines the estimated fair value of its asset retirement obligations by calculating the present value of estimated cash flows related to plugging and abandonment liabilities. The significant inputs used to calculate such liabilities include estimates of costs to be incurred; the Company’s credit adjusted discount rates, inflation rates and estimated dates of abandonment. The asset retirement liability is accreted to its present value each period and the capitalized asset retirement cost is depreciated over the estimated life of the producing property.

Note 8— Commodity Derivative Instruments

Through its wholly-owned subsidiary Kodiak Oil & Gas (USA) Inc., the Company has entered into commodity derivative instruments, as described below. The Company has utilized swaps or “no premium” collars to reduce the effect of price changes on a portion of our future oil production.  The objective of the Company’s use of derivative financial instruments is to achieve more predictable cash flows in an environment of volatile oil and gas prices and to manage its exposure to commodity price risk. While the use of these derivative instruments limits the downside risk of adverse price movements, such use may also limit the Company’s ability to benefit from favorable price movements. The Company may, from time to time, add incremental derivatives to hedge additional production, restructure existing derivative contracts or enter into new transactions to modify the terms of current contracts in order to realize the current value of the Company’s existing positions.   The Company does not enter into derivative contracts for speculative purposes.

The use of derivatives involves the risk that the counterparties to such instruments will be unable to meet the financial terms of such contracts. The Company’s derivative contracts are currently with one counterparty and the Company is a guarantor of Kodiak Oil & Gas (USA) Inc. The Company has netting arrangements with the counterparty that provide for the offset of payables against receivables from separate derivative arrangements with the counterparty in the event of contract termination. The derivative contracts may be terminated by a non-defaulting party in the event of default by one of the parties to the agreement.

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The Company’s commodity derivative contracts as of June 30, 2011 are summarized below: