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Despite being a rather volatile play with a high beta of 2.36, we feel that Kodiak Oil & Gas Corp. (KOG) makes for a good long-term investment. It has a very high estimated EPS growth rate of 50% for the next 3-5 years, and management is focused on reducing costs while improving efficiency. Oil production has increased over 300% from 3953 BOE per day in the 3rd quarter of 2011 to almost 16,000 BOE per day in the 3rd quarter of 2012. We are going to examine this stock from a fundamental and technical perspective, but before we do that we always put a prospective company through a simple selection process to make sure it fulfils some basis requirements.

The selection process:

  1. Net income, cash flow per share and sales should be trending upwards for the past three years.
  2. A quarterly revenue growth rate in excess of 150%
  3. Annual EPS before NRI should be trending upwards for the past five years
  4. An interest coverage ratio of 3.00 or better
  5. A five year sales growth rate of 90%
  6. A projected EPS growth rate for the next 3-5 years in excess of 30%

The company easily fulfilled or exceeded the above listed requirements.

Reasons to be bullish on Kodiak Oil & Gas:

  • Short percentage of float increased from 4.3% in June 2012 to 10.9% in October and currently stands at 11.3%. This makes it a very good candidate for a short squeeze.
  • Quarterly revenue growth rate of 279%.
  • Zacks has a 3-5 estimated EPS growth rate of 50%.
  • A strong five-year sales growth rate of 93%.
  • A profit margin of 19.39%.
  • Net income, cash flow per share and sales has improved significantly over the past 3 years and this trend is likely to be maintained going forward.
  • Annual EPS before NRI has been trending upwards and has improved significantly in the last two years.
  • Sales versus one quarter ago improved by 279%.
  • A decent interest coverage ratio of 3.6.
  • Analysts have a projected sales growth rate of 194% for the current quarter and 268% for the 2012. For 2013, they have a projected sales growth rate of 87%.
  • Oil production has spiked significantly from 3953 BOE per day in 3rd quarter of 2011 to almost 16,000 BOE per day in the 3rd quarter of 2012. This represents an increase of 25% over 2nd quarter figures of 12,700 BOE per day. It also represents an increase of over 300% over the 3rd quarter figures in 2011.
  • The percentage of shares held by Insiders increased from 4.7% in June 2011 to 10.32%, an increase of over 100% in roughly 4 months
  • The company continues to reduce cost while at the same time improving efficiency. For example, the average drilling days from spud to rig release were reduced to 20-25 days as compared to the average of 35 days a year ago. Management expects to drill more wells with 7 rigs in 2013 than they did with 8 rigs in 2012.

Charts and tables of value

The relationship between the price of a stock and the consensus EPS dictates that when the stock is trading above the consensus EPS line, the stock tends to perform significantly better. Based on this relationship, Kodiak is projected to perform well over the next 6-12 months.

Fastgraphs has a very strong estimated earnings growth rate of 97.5% and five year total estimated return of 113% as indicated in the chart above.

The graph above illustrates the historical and future growth rates for Kodak Oil & Gas and several other players in the industry.

The Technical Picture

The stock is consolidating in line with the overall market and lately it has run into resistance every time it has attempted to trade past the $9.90-$10.00 ranges. It also appears to have a completed a double top formation on the 18th of October. As long as it does not close below $9.00 on a weekly basis the short-term outlook will remain bullish. A weekly close below $9.00 could lead to a test of the $7.50-$8.00 ranges. As the markets are still in a corrective phase we would suggest waiting until the stock pulls back to the $8.00 ranges before committing new funds to this play. If you feel that you have to get in now, then consider dividing your money into several lots and only deploy one lot now. You can deploy the second lot if the stock pulls back to the $7.50-$8.00 ranges.

Another option would be to sell in the money puts right now. The odds of having the shares put to your account are higher when you are dealing with in the money puts as opposed to out of the money puts.

How does Kodiak Oil & Gas hold up against the competition?

It will be compared with three competitors using several key metrics such as P/E, quarterly revenue growth, operating margins, PEG, etc. It trounces the competition in terms of quarterly revenue growth rates and operating margins. It also has a very strong estimated 3-5 year EPS growth rate of 50%.

KOG

(DBLE)

(GSX)

(MRO)

Industry

Quarterly revenue growth

5.00

-0.41

-0.26

0.03

0.25

Revenue

186.59M

45.00M

17.25M

14.83B

132.19M

Gross Margin

0.78

0.55

0.32

0.56

0.57

EBITDA

89.30M

39.62M

982.49K

7.01B

21.21M

Operating Margin

0.19

0.45

-0.15

0.29

0.10

Net Income

12.85M

8.44M

-10.77M

1.67B

N/A

EPS

0.06

0.75

-0.07

3.32

N/A

P/E

162.98

6.23

N/A

9.11

10.04

PEG (5 yr expected):

0.27

-4.35

N/A

1.19

0.47

P/S

7.27

1.75

1.76

1.41

3.43

M= Million B= Billion

Conclusion

With an estimated 3-5 year EPS growth rate of 50%, and a team that is focused on reducing expenses while improving efficiency, the long-term prospects of this company are bright. Consider waiting for the stock to pull back to the stated ranges before committing new funds to this play. Alternatively, you can divide your money into several lots and deploy one lot now and one lot if and when the stock pulls back to the $7.50-$8.00 ranges. One final strategy would be to sell in the money puts as it increases the odds of having the shares put to your account. If the shares are not put to your account, you at least get paid for your efforts. For example, if you sell the Jan 2013, 10 puts at $1.10 or better, your final price if the shares were assigned to your account would be $8.90. On the other hand, if the shares were not put to your account, you would walk away with a very nice gain of 11% in roughly two months.

EPS and historical growth rate charts obtained from zacks.com.

Disclaimer

It is imperative that you do your due diligence and then determine if the above play meets with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

Source: Kodiak: Estimated EPS Growth Rate Makes This A Great Long-Term Play