Kodiak Oil & Gas (KOG) has shown excellent growth in production and revenues, though growth in earnings has not been commensurate. This article will examine the company as a potential investment prospect based on the earnings for the first quarter of 2013 and the operational update.
First-quarter 2013 financials
Sales volume for the quarter at 21,700 barrels per day grew by 105% year over year and 19% over the preceding quarter. The company is expecting to produce an average of around 30,000 barrels per day during 2013 so we can safely assume that production will continue to grow over the rest of this year. In comparison to large producers such as Continental Resources (CLR) which now produces more than 106,000 barrels per day, Kodiak is one of the smaller producers in the Bakken but its triple digit production growth is extremely impressive. For the year 2013, it plans to spend $740 million on 75 net wells and this should be sufficient for the company to meet its production target.
The financial results for the quarter show oil and gas sales of $165.1 million compared to $79.9 million in the same quarter of the previous year and $130.8 million in the preceding quarter, increases of 107% and 26% respectively. Crude oil accounted for around 94% of revenues. Adjusted EBITDA was $124.4 million for the quarter as compared with $53.7 million in the prior year period, an increase of 131%. The company defines this measure as net income before taxes, interest and depreciation and amortization. Net cash generated by operations was $114.6 million compared to $69.1 million in the same quarter of the previous year. Net income was $19.4 million (EPS of $.07 per diluted share) compared with $1.7 million (EPS of $0.01 per diluted share) in the corresponding period of 2012.
Lease operating expenses for the quarter were $13.5 million ($6.90 per BOE), a decrease of 2% year over year but a 15% increase over the preceding quarter. The company continues to reduce its operating costs by cutting water disposal costs (the largest segment of lease operating expenses) by drilling three water disposal wells on several areas of production. Water gathering systems are also being built to reduce dependence on outside contractors and reduce requirements for trucking. During the quarter, Kodiak spent approximately $256 million on capital expenditures and is reaping the benefits of increased operational efficiencies. The spot to completion time has been reduced from 30 days in the beginning of 2012 to a current average of 20 days. Completed well costs have shown a downward trend from approximately $11 million at the end of 2012 to approximately $10.5 million during the first quarter and renegotiated arrangements with suppliers are expected to reduce costs even further.
Other promising oil stocks
Another company that has done well in the Bakken Shale is Continental Resources which has seen production grow just under 60% year over year. It is now the largest producer in that area but is diversifying into the South Central Oklahoma Oil Province, which includes three of the top oil-producing counties in Oklahoma. The area is rich in liquids and the company has around 200,000 acres, of which 20% is held by production. Continental Resources' management continues to be bullish in the Bakken and believes that there is potential for over 24 BBoe of recoverable resources. The company is now the largest producer in the Bakken and benefits from its drilling cost currently at just $8.3 million per well compared to smaller producers like Kodiak, which spends more than $10 million per well. Continental believes that it can triple both production and reserves by 2017. In my opinion; Continental Resources is an excellent tradeoff between risk and reward.
Statoil (STO) is a leading European energy company from Norway that offers an attractive dividend yield as well as the potential for capital appreciation. It is a 50% partner in a major oil and gas discovery in the Barents Sea last year, and this adds significantly to its already impressive reserves of 5.4 billion BOE. In addition, it operates a chain of over 2,000 gas stations. It has a strong balance sheet with cash and cash equivalents of $15 billion. Debt at around $20 billion is reasonable when you consider the cash holdings and the annual revenues of $120 billion. Analysts expect an EPS of $2.81 a share in 2013 and, in my opinion, the forward P/E ratio of less than nine times makes the stock relatively cheap. When you factor in the dividend yield of almost 4%, this looks like an attractive investment.
The bottom line
Kodiak has a business strategy which is straightforward, namely to drill for oil in the Bakken and for natural gas in the Green River Basin. However, despite the growth in production and revenues, earnings have not risen as much. In my opinion, earnings growth will catch up with revenue growth and, on this basis, I would recommend a Buy.