As long as I can remember America has been plagued by its dependency on foreign oil to fuel our growing economy. This commodity has been responsible for more political upheaval, flat out war, and shifty political agreements with foreign governments (*cough* Iran, Iraq, most of the Middle East) than any other I've noticed. Just turn on the news now and you'll see Iran gallivanting about the Strait of Hormuz.
Every election year, our fellow citizens hear the same story about how the elected president is going to help alleviate our addiction to foreign oil. If you have only paid attention to the prices at your local gas station it would seem like America is devoid of any oil. That presumption is completely wrong. What I have here is one of the fastest growing and most profitable oil and gas exploration firms I've seen in a long time. Kodiak Oil and Gas (KOG) operates primarily in the Williston Basin of North Dakota and is guided by a man named Lynn Peterson who has been president and CEO since July 2002 and brings in excess of 25 years of experience to the table. Management here is top notch!
Traditionally, oil and gas exploration and production has been a very capital intensive process which tends to bring on significant debt. KOG breaks the traditional glass with its current ratio and debt to equity levels seen in the tables below.
Debt to Equity
Not only does KOG have an impressive balance sheet, it also sports some of the highest profit margins in the industry. The company attributes these high margins to its constant and vigilant watch of expenses, cost cutting, and strict capital expenditure budgets. KOG does not believe in frivolous spending and as a result of that policy has been able to maintain its margins.
Gross Profit Margin
KOG is operating 6 drilling rigs with a 24-hour completion crew which is going to help drive this company to produce around 25,000 BOE/d (Barrels of Oil Equivalents per day) for 2012, up from approximately 13,000 BOE/d for 2011. KOG recently acquired an additional drilling rig, bringing the total to 7. In Q4 of 2011 KOG is expected to be selling 7195 BOE/d from 1783 BOE/d in Q4 2010, representing a 300% increase in production in a single year. KOG is also doing an excellent job getting each BOE sold and is expecting 3922 BOE/d sold for fiscal 2011, up from 1290 BOE/d for fiscal 2010. This company has increased its revenue 730% from the end of fiscal 2007 through the 9 months ended in 2011. Earnings will be released on 02/28 with the conference call to follow the next day (02/29). I will be eagerly watching the progress on a few mechanical issues that they experienced last quarter at a couple of wells as well as more accurate projections for the remainder of 2012.
With the addition of the 7th rig, the 24-hour completion crew, and the resolution of the mechanical issues at several wells I find that KOG should be able to easily meet its production goal of 25,000 BOE/d. Using a very conservative 75% increase in BOE/d sales volume for fiscal 2012 we expect KOG to be able to sell approximately 6864 BOE/d. At a conservative selling price of around $70 per BOE we come to fiscal 2012 gross revenues of approximately $175.36M. Details are provided in the small tables below.
Total Yearly BOE Sales
Price Per Barrel
Total Yearly BOE Sales
Total Yearly BOE Sales*
Price Per Barrel
Price Per Barrel*
Using the average operating margin for the first 3 quarters of 2011 (30%) we expect 2012 gross operating revenues to be approximately $52M or about $.25 per share. Using a conservative P/E ratio of 45 we expect a fully realized price of approximately $11.25. I would be a holder of this company throughout 2012 and potentially into 2013 pending the firm's ability to execute on its current plans. Due to the volatility of this small firm I find it easier to buy a full position in pieces. I would secure 1/2 of the position when the price falls below $8.75 and scale into the full position as the price rises by purchasing the next ¼ above $9 and the last ¼ above $9.25.
Disclosure: I am long KOG.