Which Is the Best Pure-Play Bakken Oil Stock?

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Includes: KOG, NOG, OAS, STO
by: Atticvs Research

There is a great deal of excitement about Bakken stocks, and rightly so given the high profit margins, large cash flows and multi-year growth potential on offer. But what really is the best value, reasonably-sized, pure-play Bakken driller?

For starters let’s take a look at four widely followed companies; Brigham (BEXP), Oasis (NYSE:OAS), Northern (NYSEMKT:NOG) and Kodiak (NYSE:KOG).

Company

Brigham

Oasis

Northern

Kodiak

Stock symbol

BEXP

OAS

NOG

KOG

Stock Price

$31.80

$29.54

$22.14

$6.79

Shares o/s, million

117.06

92.43

61.56

206.78

Market Cap, $million

$3,723

$2,730

$1,363

$1,404

Net Bakken acres

378,100

318,942

150,000

95,000

Market val / acre

$9.8

$8.6

$9.1

$14.8

Estimate 2012 EPS

$2.42

$1.94

$1.75

$0.65

Likely 2013 EPS

$3.50

$3.00

$2.50

$0.68

2012 p/e ratio

13.1

15.2

12.7

10.4

2013 p/e ratio

9.1

9.8

8.9

10.0

Recent earnings:

Act Vs Est

Q2 2010

+44%

-680%

0%

-50%

Q3 2010

+50%

-125%

-9%

-50%

Q4 2010

+33%

-85%

-13%

-100%

Q1 2011

+16%

0%

-50%

-50%

Click to enlarge

The Kodiak numbers in these tables include the 27.6 million shares issued in July 2011. The most recent figures published on sites such as Yahoo Finance cite EPS for 2012 of 75 cents. Adjusting this for the extra 27.6 million shares, 2012 EPS becomes 65 cents.

The likely EPS for Kodiak in 2013 of 68 cents is estimated based on pre-tax profits growth of about 40% over 2012, less approx 25% higher taxes in recognition of the fact that Kodiak’s tax losses expire in 2012.

For BEXP, OAS and NOG, the likely 2013 earnings are as outlined in prior articles: Three Leading Companies in the Bakken and Three Opportunities in the Bakken.

  • On a value per acre basis, the most expensive stock is Kodiak and the cheapest is Oasis. Whilst not all acreage is fungible, this comparison is essentially valid.
  • On a forward earnings basis, all four companies have similar valuations with 2013 p/e ratios around the 9-10 range.

However, the big factor that will drive valuations is the quality of earnings. On this front there is one stand-out performer: Brigham. BEXP has a history of comfortably beating estimates, even during difficult operating periods such as Q1 2011 when the entire Bakken area suffered as a result of unusually severe weather.

Taking this point further, investors should note that future earnings estimates for BEXP are being revised upwards whilst estimates for OAS, NOG and KOG are being lowered.

Are the 2013 EPS estimates of $3.50 used for Brigham reasonable? In reality this 2013 EPS number is very probably too conservative. Given that BEXP has a history of comfortably beating estimates, and that a recent analyst estimate for 2012 earnings (repeat 2012) came out at over $4.00 per share, it should not be a surprise if BEXP earnings for 2013 will ultimately be around $5.00 per share. Such an EPS figure for 2013 would make BEXP the cheapest stock in this grouping by a very big margin.

Overall, in terms of quality + valuation + upside potential, BEXP is the clear leader of this group. This is not to downplay OAS, NOG and KOG because these stocks do have good upside potential, albeit not as much as BEXP.

All four of these Bakken players will report Q2 earnings during the next several days. These earnings announcements represent an important benchmark. First, during Q2, 2011 North Dakota and Montana experienced severe flooding which negatively impacted drilling activities and this negative overhang will remain in place until the weather effect is properly quantified by the earnings reports. Second, in Q3 2011, Bakken oil companies are invariably planning to accelerate drilling activities and the Q2 earnings report represents an ideal platform for management to provide the street with concrete and exciting details.

Clearly, where companies use the Q2 earnings event as a good news platform, the underlying stock will do very well. And based on history, investors should indeed expect positive news from BEXP. This attractive picture is accentuated by BEXP’s valuation as mentioned above i.e. good news is not already priced-in.

Periods of market weakness invariably throw up buying opportunities and the current softness will also pass in due course. In the meantime it represents a welcome opportunity to buy BEXP on the cheap.

But buying the stock is only half the task - investors should also keep an eye on selling opportunities. Volatility will remain with us and, against this backdrop, investors should look to sell in periods of strength such as spring 2012 when new ‘next year’ estimates for 2013 will boost investor confidence and support a noticeably higher stock price for BEXP. A focused strategy like this will help lock in very aggressive gains.

Disclosure: I am long BEXP.