The Babies of the Bakken Are Set for a Rebound

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 |  Includes: GEOI, KOG, SM, SPY, SSN, WMB
by: David White

The overall market has been trending downward since early May. The ongoing Greek credit crisis has provided part of the fuel for the fall. The downgrade of the Q2 GDP outlook by both Goldman Sachs (to 2%) and the IMF (to 2.5%) last week has added still more fuel. However this last was probably not news to most market pundits. Rather the GDP dwonward estimate revisions are being chalked up to effects of the Japanese disaster. Many think this will not have a lasting effect. Many think as long as the EU can keep kicking the can down the road on its credit crisis, the markets can continue to perform. Some think we will soon see some positive news from Q2 earnings.

We are nearing a major support point at approximately $125 on the SPY. If we are lucky, we will see a bounce upward soon. Small development stage companies tend to get hit hard by downturns. A number of the smaller leaseholders (approximately 50,000 to 100,000 net acres) in the Bakken have been hit hard. The inclement weather in the Bakken states has negatively affected development schedules. This has pushed the stock prices of the "Babies of the Bakken" down further. The recent fall in oil prices has added to the down move. The stocks of these "Babies of the Bakken" are set up for a rebound as oil prices and the overall market are likely to stabilize and/or move upward soon.

The following table contains some of the financial information of a few of the "Babies of the Bakken": Kodiak Oil & Gas Co. (NYSE:KOG), SM Energy Co. (NYSE:SM), Samson Oil & Gas Limited (NYSEMKT:SSN), GeoResources Inc. (NASDAQ:GEOI), and Williams Companies Inc. (NYSE:WMB). The data are from Yahoo Finance and TDameritrade.

Stock

KOG

SM

SSN

GEOI

WMB

Price

$5.55

$62.93

$2.57

$20.65

$28.31

Recent High

$7.70

$78.55

$4.75

$32.94

$33.47

1 yr. Analysts Target Price

$8.05

$76.75

N/A

$32.38

$35.88

PE

--

77.88

4.76

18.50

N/A

FPE

6.85

18.08

N/A

9.30

16.27

Avg. Analysts’ Opinion

2.2

2.1

N/A

1.5

1.9

Price/Book

3.37

3.3

2.79

1.59

2.2

Price/Cash Flow

62,152.35

9.63

4.38

11.07

14.42

EPS Growth Estimate for This Year

966.70%

51.80%

N/A

24.10%

72.70%

EPS Growth Estimate for Next Year

153.10%

67.30%

N/A

54.20%

14.80%

5 yr. EPS Growth Estimate per annum

20.00%

24.50%

N/A

15.00%

21.63%

Market Cap

$994,43M

$4.00B

$213.91M

$525.73M

$16.65B

Enterprise Value

$958.28M

$4.44

$154.28M

$483.60M

$25.38B

Beta

3.58

1.40

1.49

1.13

1.26

Short Interest as a % of Float

12.74%

5.14%

1.07%

15.41%

2.68%

Cash per Share (mrq)

$0.43

$3.01

$0.84

$1.66

$0.65

Total Debt/Total Capital (mrq)

11.94%

34.12%

11.72%

0%

50.64%

Quick Ratio (mrq)

2.95

--

--

--

0.91

Interest Coverage (mrq)

--

0.7

145.58

4.73

4.9

Return on Equity (ttm)

-5.79%

4.45%

119.08%

9.14%

-7.45%

EPS Growth (mrq)

-598.03%

-114.88%

450.68%

-15.75%

265.15%

EPS Growth (ttm)

-8,101.39%

-54.91%

245.15%

28.44%

-344.00%

Revenue Growth (mrq)

134.87%

-12.44%

61.13%

7.76%

-0.62%

Revenue Growth (ttm)

100.23%

5.53%

86.05%

17.28%

7.40%

Annual Dividend Rate

--

$0.10

--

--

$0.80

Gross Profit Margin (ttm)

78.90%

78.46%

30.08%

74.18%

27.68%

Operating Profit Margin (ttm)

-3.17%

10.60%

916.07%

32.83%

0.55%

Net Profit Margin (ttm)

-32.60%

4.98%

811.54%

21.61%

-3.88%

Click to enlarge

The above data indicate a few things. First Williams Companies Inc. is a much bigger company in terms of market cap. This means its relatively small Bakken lease holdings are not likely to have a large effect on its overall performance. As such WMB does not really qualify as a Baby of the Bakken rebound candidate. The SM Energy Co. data show negative revenue growth for the last year and the most recent quarter. A fast grower should have revenue growth even if it does not always show EPS growth. If it shows no revenue growth, it is either a badly run company, or it is too early in the development stages to be anything but a speculative investment.

The remaining three companies (KOG, SSN, and GEOI) seem from the financial fundamentals to be possible stocks for a rebound play. KOG has some cash flow problems, but it does appear to be able to pay its bills. It has a negative net profit margin, but this does seem to be improving. This is not uncommon in a development stage company. Estimates for growth in the next two years (and longer term) are excellent. It is likely to be a good rebound play. SSN has a low stock price ($2.57). This means most institutions will not buy it as it is under their $5 lower limit. It has an institutional ownership of just 0.56%. It has little short interest. These things are probably negatives for a rebound play. Still it does look like an enticing value. It is worth looking into more. KOG and GEOI both have high short interest (12.74% and 15.41% respectively). Plus they both have substantial institutional ownership (62.59% and 70.39% respectively). This makes them ideal candidates for a short squeeze rally. If the overall market starts to rally, these two stocks seem likely to be squeezed upward. KOG with a Beta 0 3.58 seems especially likely to move up quickly. Let’s look at the technical 1 year charts of these three. 

The 1 year chart of KOG:

Click to enlarge
(Click to enlarge)

The 1 year chart of SSN:

Click to enlarge
(Click to enlarge)

The 1 year chart of GEOI:

Click to enlarge
(Click to enlarge)

All three of the above charts show that the stock has broken down considerably after showing previous strength. The Slow Stochastic of all three charts show the stock is oversold. Each seems to be a good rebound candidate technically. As mentioned above KOG and GEOI are the two most likely to be manipulated upward in short squeezes. This can be an advantage in a short term investment. Longer term all three of these companies have the makings of a good investment. Buying at or near a low is usually a good strategy. If you are trying to catch the bottom for a short term investment (2 weeks to several months), you will want to try to pick the bottom. You might average in with a 50% share of your eventual holding. If you are trying for a longer term investment, you might try averaging in with a 25% investment. It is very hard at the moment to determine exactly where the EU credit crisis will take the market, even in the short term. However, these stocks do look good, and almost all analysts agree that oil is headed steadily upward over the next five years or so.

I should mention that Pete Najarian of OptionMonster.com recently noted strong interest in July call options in BEXP. This is not a "Baby of the Bakken" due to its relatively larger leaseholdings. However, you may wish to look into this too. It could rebound nicely. 

Good Luck Trading.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in KOG, SSN over the next 72 hours.