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Executive summary:

  • Kodiak Oil & Gas just announced impressive production & reserve growth.
  • Production growth should increase another ~45% in FY2014 as well.
  • On a price to earnings growth basis, the shares are extremely cheap.
  • A ~15% pullback from recent highs is an attractive entry point.

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Earlier in the day I penned an article on two large slow growing and high yielding energy concerns that look undervalued based on the underperformance of the energy sector and the recent rise in oil & natural gas prices.

For some of the same reasons as well as company specific news Bakken producer Kodiak Oil & Gas (NYSE:KOG) looks very attractive here as well. It is a growth play rather than a good addition to one's income portfolio. However, the company's and the stock's futures look extremely bright.

Company Overview:

Kodiak Oil & Gas is an independent energy company whose primary assets and production come from the Bakken shale formation. This region is rapidly growing and is providing almost 1 million barrels a day of oil production.

Recent News:

The company just provided Q4 production volumes. Average daily volume was 36.1K BOE/D (Barrels of Oil Equivalent/Day). This was up 98% year-over-year and 2% sequentially. For all of 2013, volume more than doubled over 2012's levels.

Proven reserves now stand at 167mm BOE. This is an 77% year-over-year increase.

In mid-December Kodiak announced it is allocating some $940mm in capex solely to oil and gas activities in the Williston Basin (part of the Bakken formation), with $890M toward the drilling and completion of ~100 net wells. This is slightly down from 2013's $1 billion level but the company believes this will increase production ~45% in 2014 to average daily volume of 42K to 44K BOE/D.

Valuation:

The stock is offering a nice entry point after declining some 15% from recent highs a few months. The pull back was mainly triggered by the general weakness in the energy sector over that time period as well as some concern - overblown in my opinion - that Bakken crude was more 'flammable' in the aftermath of some recent rail accidents in the region.

(click to enlarge)

In addition to Kodiak's substantial production increases, earnings are increasing at a nice clip. The company earned 47 cents a share in FY2012 and should have earned ~65 cents a share for FY2013 when it reports its last quarterly earnings of the fiscal year at the end of this month. Analysts have over 90 cents a share in profit pegged for FY2014 in the current earnings consensus.

Given these significant increases in earnings & revenues, the stock is too cheap at just over 12x this year's expected earnings; a ~20% discount to the overall market multiple. The shares also have one of the lowest five year projected PEGs (.30) of the E&P stocks I cover. Finally I continue to believe the company would make a logical acquisition target if M&A activity in the sector picks up. BUY

Source: Kodiak: Fast-Growing Bakken Producer Is Too Cheap