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Summary

  • The recent shortfall in production was due to uncontrollable elements and the long-term production growth prospects remain intact.
  • The company is on track to achieve increased production levels along with a decrease in costs.
  • The efficiency in the extraction will allow the company to bring down costs and enhance profitability.

The rough winter in the U.S. affected almost every company in the energy sector. Increased drilling days, geological barriers and the resulting increased costs are some of the reasons that created shortfall in the estimated throughput of the affected companies. The profitability of these companies has been affected due to these conditions. Kodiak Oil & Gas (NYSE:KOG) is one of the companies negatively impacted by these conditions - the company missed its operational guidelines due to the weather in North Dakota. KOG reported its first-quarter results last month followed by a decline in the stock price due to missed estimates. However, the company holds strong long-term growth prospects which will compensate for its missed guidelines in the first quarter. Kodiak has also reported increased ongoing throughput in the second quarter which has already revived investors' confidence and the stock reached its 20-weeks high since the start of the year.

Reasons for Guidance Shortfall

The worse-than-ever winter proved to be devastating for the whole industry. Similarly, Kodiak also fell short in its projected well counts in the first quarter which also forced the company to reduce its full-year production guidance. However, in order to gauge the future operational performance of the company, we have to look at the long-term performance rather than focusing on a single quarter.

Another player in the sector, Continental Resources (NYSE:CLR), was not affected by the weather, instead the company reported better-than-expected results in the first quarter. The reason behind better-than-expected performance is the geographically diversified asset base of Continental Resources. Moreover, another reason for the Kodiak's missed guidance is its scheduled drilling on its less valuable acreage during the quarter. The company completed last year with the intention to drill some of its short-term leases in the Wildrose area in Northern Williams County and planned to drill five wells early this year. By completing those five low-value acreage wells, Kodiak has planned to return to its core areas which will increase its production substantially. However, the harsh weather played its part and the company did not manage to reach the core wells drilling until March and the production results from core areas largely accumulated in the second quarter. These are the prime reasons Kodiak's production slip almost 6% compared to the last quarter.

Growth is in the Long-Run

Kodiak is looking forward to achieve a 35-40% growth in the current year. However, the company has reduced its yearly production guideline from 42,000-44,000 barrels a day production to 39,000-42,000 barrels a day. However, Kodiak is currently working on 7 drilling rigs with 38,000-40,000 barrels a day of production.

(click to enlarge)

Source: Investor Presentation, June 2014.

Moreover, the company has allocated $940 million as capital expenditures, down 8% compared to the last year, with $890 million allocated towards drilling completion costs, $40 million for infrastructure and approximately $10 million allocated for small leasehold acquisitions in order to achieve 35-40% growth rate. Further, Kodiak anticipates drilling and completing around 100 wells in the current year, of which 19 wells were completed in the first quarter. So the next three quarters should be yielding around 27 wells each in order to meet the guidance.

Source: Investor Presentation, June 2014.

Kodiak has also planned to decrease its well costs in the current year, which is currently somewhere between $8.5-9 million. This prospective decrease in the well costs will be due to the increased efficiency which has immensely driven down the drillings days on each well.

Source: Investor Presentation, June 2014.

Kodiak has already issued the pilot testing results from the Polar Pilot 1.0 project, which holds a strong growth opportunity for the company. The twelve wells in the first Polar pilot project, 6 of them were placed in the Middle Bakken and 6 in Three Forks region, have yielded around 100,000 BOE of production which is a strong operational growth driver for the company. Further, the Polar Pilot 2.0 which consists of a total of 4 wells, 2 of them were placed in Middle Bakken and 2 in Three Forks formations, has not yielded any results from pads 2 and 3 of the four pad downspacing test. Moreover, Kodiak along with Meadowlark Midstream Co., a wholly-owned subsidiary of Summit Midstream Partners (NYSE:SMLP) has expanded the Polar System region to connect to over 60 possible pad sites that Kodiak will develop in its Polar fields over the next few years. This will enable Kodiak to increase its production throughput in the long run.

Source: Investor Presentation, June 2014

Conclusion

Kodiak has been growing its production at an impressive rate, and the shortfall in the first quarter has been mainly due to the uncontrollable factors. The long-term growth prospects of the company are intact and it is on track to increase its production levels along with decreased production costs. We maintain that Kodiak is a solid long-term investment.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Is Kodiak A Solid Long-Term Investment?