Bakken Producers Ready To Warm Up

 |  Includes: CLR, KOG
by: Bret Jensen


After suffering through a brutal winter, a warm spring has descended on the Bakken region in North Dakota.

This means increased drilling activity and better operating results for the exploration and production companies in the area.

Profiled below are two Bakken based E&P concerns that should benefit from this warmer weather and whose stocks are attractive on a long term basis.

RBC Capital Markets has an interesting overview of weather's impact on the energy production coming out of the Bakken. While the country was suffering through one of the worst winters in the past couple of decades; North Dakota was experiencing Siberian like conditions throughout the winter months.

Obviously this had major impacts to drilling activity especially well completion in the region. This frigid weather also affected operating results of Bakken E&P concerns in the first quarter of the year.

However, the region is experiencing a warm spring and drilling activity is starting to accelerate. After only 70 new wells were completed in the region in February, 200 wells were completed in March. Look for this upward trend to continue throughout spring. March saw record production levels for the first time since November and the Bakken should cross the 1mm barrels per day of oil level sometime in mid-year.

This warmer weather and increased drilling activity is just one more reason to buy some of the more attractive plays in the space. Here are two that look undervalued here on a long term perspective at current levels.

Kodiak & Gas (NYSE:KOG) is a midsized (~$3.5B market capitalization) I continue to own and like. It has one of the lowest five year projected PEGs (.37) within my growth portfolio. Kodiak has attractive acreage within the Bakken and it roughly doubled production in 2013 year-over-year. Proven reserves also posted gains of more than 75% for the year. Growth should slow down in the next couple of years, but the company still has approximately a dozen years of inventory to drill.

According to the current consensus, earnings should increase by a third this year over 2013's levels with another 25% penciled in for FY2015. Kodiak is going for a very reasonable 12.5x 2015 consensus earnings per share and ~6x operating cash flow for this fast growing production play.

It is hard to talk about E&P concerns in the Bakken without mentioning Continental Resources (NYSE:CLR). It is one of the pioneers using fracking technology and is the biggest leaseholder in the Bakken. Although not as cheap based on long term earnings prospects as Kodiak, Continental still sports a five year projected PEG of under 1 (.81).

Consensus earnings estimates for both FY2014 & FY2015 have started to move up again over the last two months. Revenues should be up over 25% year-over-year and earnings should post better than a 30% increase over 2013's levels. The shares are selling at just under 20x forward earnings. This is a ~15% premium over the overall market multiple but reasonable in light of Continental's more favorable growth prospects than the average S&P 500 stock.

Disclosure: I am long KOG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.