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Being called one of the "3 Stooges of the Oil and Gas Industry" doesn't inspire confidence. But that's how Motley Fool columnist Robert Zimmerman referred to Kodiak Oil and Gas (KOG) during a piece written in January.

On the other hand, out of 10 analysts covering the stock, three have a buy recommendation, three believe the stock will outperform, two are asking to accumulate, and only one analyst is neutral. Kodiak does not have a single analyst rating the stock as a sell.

Yet despite the ratings on the stock, analysts' outlooks, and Kodiak being called a "great growth play," there are still some who are unsure about the company. So, let's take a look at the details...

First the basics. Of the many players in the oil and gas industry, Kodiak may have the simplest structure. It is primarily focused on drilling for oil in the much-publicized Bakken shale formation, the same one that has made the state of North Dakota a sudden hot spot for job growth. Kodiak also drills for natural gas in the Green River Basin.

Kodiak is currently operating seven drilling rigs. For 2013, the company will allocate most of its capital budget, $600 million of a total $750 million budget, to drilling and completing operated wells. The remainder of its capital budget will go toward non-operated drilling and completion activities ($140 million) and other items such as acquisitions, water disposal wells, and well connections ($35 million).

The stock price has been relatively flat. A year ago it traded at just over $10 a share, and has bottomed out in the last year at $7.08. It currently trades at just over $9, giving it a price to earnings ratio of 18.94.

Why Some Are Down on Kodiak

One of the first concerns analysts see is the company's balance sheet. At the end of December 2012, it had burned through its entire cash pile, while its long-term debt has increased from $40 million in 2010 to more than $1 billion at the end of last year. Its debt-to-equity ratio is 1.06.

A second concern is reports indicating the Bakken Shale is becoming depleted. Drillers are having to build wells at a faster clip just to replace the lost production of existing wells. Total oil output from North Dakota's portion of the Bakken shale formation slipped in November for the first time in 20 months, about 2.2% after producers began pulling rigs out of the state. Having to drill more for the same amount of oil obviously increases the cost of production.

There is also the issue of takeaway capacity. Pipelines cannot handle all the oil coming out of North Dakota, forcing producers to use rail. This can force producers to sell oil for $20-$25/barrel less than competitors who use pipelines.

But what's giving investors the most pause is the lack of earnings. A company that books record revenues should, in theory, see significant earnings growth. That hasn't been the case with Kodiak.

In the first quarter of 2012, Kodiak's revenues hit a record $79.9 million but earnings only totaled a penny a share. The next quarter saw revenues come in at $85.8 million and earnings at $0.35 per share. Then in the third quarter, the company collected revenues of $128 million, but only managed another penny in earnings per share.

According to the company's statement, the lack of earnings growth may, just like the balance sheet, be a reflection of a company still growing in the capital-intensive industry. The company indicated that it incurred higher expenses simply by doubling its workforce a year's time to keep up with the growing demand. There were also losses related to hedging activities.

Why Others Are High on Kodiak

Kodiak announced in early January that it had opened 11 wells since the beginning of December 2012 and that it would add 10 to 12 wells per month for 2013.

Kodiak projects average oil and gas sales volumes of 29,000 to 31,000 barrels per day, based upon the activities contemplated under its $775 million 2013 capital expenditure budget. This production level would represent over 80% sales volumes growth over 2012, the company said.

News improved when Kodiak released its fourth-quarter financials in February. Though the company missed quarterly revenue and earnings targets, some point to positive signs from that report.

For the fourth quarter, Kodiak's revenue from oil and gas sales soared 138% to $130.9 million, up from $55 million in the year-earlier period. Its daily sales volume more than doubled from 7,200 barrels in the fourth quarter of 2011 to 18,200 barrels in the most recent quarter. For the full year, total oil and gas sales came in at $408.7 million, which is three and half times more than last year's $120 million.

For the fourth quarter, Kodiak reported net income of $33.3 million, or $0.12 per diluted share, up from a net loss of $33.8 million, or $0.15 per diluted share, in the fourth quarter of the previous year.

Kodiak reported significant growth in total crude oil reserves, from 39.8 million barrels to 94.8 barrels, a 138% increase.

According to Kodiak's estimates, the company has drilled and converted roughly a tenth of its potential drilling locations to proved, developed producing reserves. This is important since it should provide the company with plenty of drilling opportunities over the next several years.

The company continues to see improvement in cutting costs, having reduced well costs by 15%-20% over the year and lease operating expenses by 40%, thanks to increased availability of trucking and third-party disposal facilities, reduced downtime and improvements in overall operating performance.

Kodiak sports a five-year average annual revenue growth rate of 109% and a net profit margin of 19.4%. The company's small size gives it ample room to grow.

The expected financial results for the next quarter are earnings per share of $0.14 on $175.1 million in revenue. For the full year, the company is expected to earn $0.68 a share on revenue of $839.2 million.

So perhaps it's a stooge today, but it could turn into a musketeer of the energy industry sometime down the road.

Additional Disclosure: Catalyst Investments is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. This information is not investment advice or a recommendation or solicitation to buy or sell any securities. Catalyst Investments does not purport to tell or suggest which investment securities readers should buy or sell. Readers should conduct their own research and due diligence and obtain professional advice before making investment decision. Catalyst Investments or anyone associated with Catalyst Investments will not be liable for any loss or damage caused by information obtained in our materials. Readers are solely responsible for their own investment decisions. Investing involves risk, including the loss of principal.

Source: Kodiak Oil & Gas: A Great Growth Stock