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The market rally on Thursday was quite impressive. It was different from earlier rallies as growth names saw investors picking up shares. As a growth investor I buy risk in hopes of better returns. By buying risk I don't mean I speculate, I mean good companies with high multiples I believe will grow into and beyond current market expectations. Being a native of North Dakota, I spend a great deal of time looking through companies operating in the North Dakota Bakken. This is why many of my articles are focused on the Williston Basin.

The recent buyout of Brigham (BEXP) was a pleasant surprise for many of its stockholders following articles on this company. I had written several bullish articles on Brigham, based on production growth. In my opinion, Brigham set the bar for other Bakken companies. It not only had the best average IP rates, but continued to outperform other very good companies like Whiting (NYSE:WLL) and EOG Resources (NYSE:EOG). I focused on these companies and compared results over time in The 3 Best Oil Fields In The Bakken And The Stocks That Are Capitalizing Parts 1, 2, and 3. The results proved that Brigham was getting more oil out of the ground well past 90-day IP rates. This should not be taken lightly as Whiting and EOG are excellent operators, and some would argue some of the best operators in the United States. With Brigham purchased, the heir apparent is Kodiak (NYSE:KOG). I highlighted the reasons in Brigham Buyout:Who's Next In The Bakken Part 1 and Part 2.

Much of Thursday's rally had to do with Europe and the EU's rescue fund. This fund will help to ebb fears of contagion to other banks, plus it adds liquidity. The rally was not surprising given this news, but I was surprised as investors piled into riskier names. The smart money seemed to be adding high growth small-cap names, and because of this I am too. Kodiak Oil and Gas is my favorite oil production company. Its most recent Koala wells in McKenzie County were very good. This was important as these wells delineated its Three Forks pay zone. Kodiak then did the same in Dunn County. These results increased expectations, even though it already has lofty targets for net production. Kodiak's production has grown:

  • First Quarter of 2010 Net Production: 1016 Boe/d
  • Fourth Quarter of 2010 Net Production: 1983 Boe/d
  • Average Net Production for 2011: 4500-5000 Boe/d
  • 2011 Net Production Exit Rate: 9000 Boe/d

Kodiak's exit rate is almost double the total net production of the third quarter of 2011. Kodiak expects to exit 2011 with five operated and two non-operated rigs. Its two non-operated rigs have working interest of 40%-50%, with XTO Energy (NYSE:XOM). A very important metric to consider with oil production companies is cash flow. This valuation is important to consider in companies like Kodiak with very large PE ratios. Kodiak many look expensive using standard stock valuations, but I believe it is inexpensive when future cash flow is considered.

Another name I like is Clayton Williams (NYSE:CWEI). This stock has pulled back from a high of $109.45 earlier this year to below $40. It currently sits around $77.01 after posting very good third quarter numbers. It reported quarterly revenue of $101.1 million and $6.13 in EPS. Street estimates had Clayton's revenue at a consensus $97.7 million and an EPS of $1.36. It did have a derivatives gain of $92.3 million for the quarter. Many will dismiss this quarter based on this gain. There are a couple of variables I believe to be important. Clayton's oil and gas production in the third quarter was 6% higher than the midpoint of previous estimates. The second variable is the cash from derivatives gain. Clayton's pullback began on fears it would not be able to fund operations, and may have to dilute shareholders to produce that cash. The third and last variable is the higher production from the Austin Chalk. These results may prove this play is better than previously thought. Clayton has 14 drilling rigs and has 452,000 total net acres in the Permian and Giddings area. With cash on hand to fund operations, this stock could still continue to move upward significantly from here.

Northern Oil and Gas (NYSEMKT:NOG) looks to be moving again. As a non-operator, Northern Oil and Gas is a different way to play the oil boom in the Williston Basin. This model was well liked earlier this year, before accusations of improprieties and worries about well depletion pulled it down from $33.98 to $13.25/share. Northern now sits at $24.91 and has now broken out above its 200-day moving average. It has 155,000 net acres (pdf) in the Williston Basin with a large portion in Mountrail County. Northern has seen significant production growth. In the second quarter of this year it had production growth of 132% year over year. It estimates the third quarter of this year will see production growth between 30% and 40% from last quarter. Northern's model also keeps well costs down. The average well cost is $6.5 million, which compares with Bakken well costs of approximately nine to ten million for the average Bakken operator.

SM Energy (NYSE:SM) has been an outperformer in the oil and gas space. It expects double digit production growth, while doing this within cash flow. SM Energy has acreage in several of the best plays in the United States. It has 196,000 net acres in the Eagle Ford, with the majority in the lucrative rich gas window. SM Energy has 204,000 net acres in the Bakken/Three Forks. It also has acreage in the Granite Wash, Permian and Niobrara. Of its 2011 $1.2 billion drilling cap ex, $795 million is going to the Eagle Ford. SM Energy has very good production growth. Estimates have 50% growth year over year in 2011. An additional 35% to 40% is expected in 2012. SM has had three very good quarters out of the last four. This is one of the few oil producers with this much growth, while still maintaining a conservative balance sheet.

These four stocks offer very good production growth. If the price of oil continues to increase through the end of 2011, these companies could significantly outperform the broader market. I would keep an eye on well costs for these companies. QEP Resources (NYSE:QEP) and Newfield (NYSE:NFX) both said their well costs in the Bakken had increased significantly.

Disclaimer: This is a list of oil and gas producers with high estimated production growth. It is not a buy recommendation.

Source: The Bakken Update: Should Risk Be Bought In This Market?