Seeking Alpha
Long only, deep value, growth at reasonable price
Profile| Send Message|
( followers)  

Summary

  • Solid reserve base will ensure future growth.
  • Capital expenditures will ensure the growth in production.
  • The fundamentals of the stock are extremely attractive.

Kodiak Oil and Gas Corporation (NYSE:KOG) is one of the fastest growing companies in the energy sector with triple digit growth rate in revenues along with an impressive growth rate in the earnings. Over the course of the last year, the stock gained over 20% while year-to-date it is up over 8%. For any oil and gas company, its useful reserves are one of the greatest factors while determining its future growth. Kodiak's ability to grow its reserves has played an important part in supporting the rise in the stock price. The company recorded over 100% growth in sales during the last year and adequately added to its proved reserves ensuring the long-term growth.

Strong Reserves Position

As of the details provided in the annual statement of 2013, the company has total proved and developed oil reserves of 63,934.1 (MBbls). In addition, the company has 74,322.9 MBbls of proved but undeveloped reserves. Furthermore, KOG has 78,822.7 MMcf of proved and developed natural gas reserves and 95,162.4 MMcf of proved but undeveloped reserves. During the last year, the company sold 10,646 MBOE (thousand barrels of oil equivalent) in total - the company more than doubled its sales in both oil and gas segments during the last year. Oil and gas sales during the last year were 3.3 million (BOE), compared to 1.7 million a year ago.

KOG has a distinct advantage - the company has an oil heavy reserves portfolio. At the moment, the company has 83% of its reserves in the shape of oil and 17% in the shape of natural gas. I believe oil prices will remain strong, which should allow the company to experience less volatility in commodity prices. Furthermore, the natural gas market has also shown substantial recovery and the sales from the natural gas segment should also continue to show impressive growth. Another advantage for KOG is that 99.9% of its proved reserves are in the continental United States - in a time when we are seeing companies such as ConocoPhillips (NYSE:COP) move investments to the Americas due to the stable geopolitical situation. KOG's already strong position in the region shows how well the company is positioned.

Further Development of Assets

The company is expanding its presence in the polar area, which accounted for a lesser percentage of the production mix previously. As reported in the earnings announcement, the company has developed four wells, which are capable of generating 334.3 MBOE a year. This should further enhance the oil reserves of the company - the figure is oil and gas combined. The capital expenditure for the last year was $1.7 billion, including the $672 million spent on acquisitions. The capital expenditure excluding acquisitions was close to $1 billion. Kodiak is planning to spend about $940 million in capital expenditures over the next twelve months - $890 million of the capex budget will be spent on drilling activities and $50 million will be spent on the development of infrastructure and leasehold acquisitions. So, the drilling budget is almost identical to last year, which should allow the company to continue to grow its production. As a result, I am expecting another year with substantial growth in sales and earnings.

Fundamentals Growing Exceptionally Well

Let's now take a look at the fundamentals of the company. During the last year, operating income for the company grew by more than 160% along with a growth rate of over 100% in sales. At the same time, cash flows from operations have also more than doubled for the company. However, the upward movement in the stock price has been just 20% during the same time period. I believe the market has not yet realized the growth potential present in the stock and it is still trading at a substantial discount. As a result, I believe we might see an even better upward movement over the next year. In addition, the stock is trading at a discount based on P/E ratio - KOG's P/E ratio of 23.1 is below the industry average of 32.5, and a forward P/E ratio of about 15 makes it even more attractive. KOG's operating and net margins at 38.7% and 15.6%, respectively, are way ahead of the industry averages of 18.8% and 7.9%.

Conclusion

Kodiak has performed exceptionally well over the last twelve months. However, I believe we will see even better performance over the next few months. The capital spending will allow the company to grow its production and the adequate reserve replacement will go a long way in ensuring the long-term growth of the company. Furthermore, the growth in the fundamentals of the company and the relative valuation show that the stock is cheap. In my opinion, KOG is a compelling buy.

Source: Is Kodiak A Good Investment?