Kodiak Oil & Gas (KOG) is engaged in oil and gas operations along the Williston Basin of North Dakota and the Green River Basin of Wyoming. The company has historically used a very conservative financial strategy. In a presentation in late March, the company outlined its goal to maintain a conservative balance sheet and, in so doing preserve its financial flexibility. Just as Kodiak tries to hedge its finances, it also tries to hedge its commodities, balancing its oil and gas operations.
Kodiak's share price was flat through the first quarter this year, returning less than 1%. It is down over 8% year to date. Right now, the stock is trading around $9 a share with a mean one-year target estimate of $11.36, putting its expected upside at roughly 26%. It does not offer a dividend.
Looking at the same quarter last year, Kodiak enjoyed a massive jump in revenue, increasing its numbers by 250.2% versus 25.4% for its industry. The company also enjoyed a massive net operating cash flow increase of 530.35% when compared to the same quarter last year, surpassing the industry's average of 3% significantly. Kodiak has a fairly low debt to equity ratio of 0.89, but as low as that figure is when compared to the market in general, it is higher than that of the company's peers. While the debt to equity ratio is somewhat mediocre, Kodiak's quick ratio of 1.50 is high and demonstrates the ability to cover it short-term capital needs easily.
Kodiak has enjoyed an increase in its return on equity over the same quarter last year, moving from -0.80% at the end of the fourth quarter 2010 to 0.46% at the end of the fourth quarter 2011. While its numbers in this area may trail its industry's average of 51.75%, as well as the market 14.77%, an increase in return on equity is positive and speaks to good management. Kodiak enjoys low pricing as well. Right now, the stock is priced at 8.12 times its forward earnings, compared to its peers' average of 11.41. The company is also priced as a discount to its peers as regards its price relative to its book value (2.97 versus 5.97).
Overall, I think Kodiak has run its course. Whatever upside is there, it pales in comparison to the other opportunities available as the market starts to improve. Remember that, at a market capitalization of $2.4 billion, Kodiak is roughly the size of CVR Energy (CVI), Cheniere Energy (LNG), Inergy (NRGY) and Rosetta Resources (ROSE). They may focus on different aspects of the oil and gas business, but as smaller companies in an industry dominated by big players like Chevron (CVX), Exxon Mobil (XOM), BP (BP) and other mega cap players, they all share a common characteristic - they have to be more strategic. After all, they have less to work with.
With this in mind, Kodiak's greater than industry average debt to equity ratio is troubling, especially since it is also greater than that of its similarly sized peers. Take CVR Energy for example. It has a debt to equity ratio of just 0.75, which is less than the industry average and considerably less than that of Kodiak. CVR Energy recently traded at $28 a share. It carries a mean one-year target estimate of $32, bringing its anticipated upside to just over 14%.
CVR Energy is also priced favorably. The company has roughly the same forward price to earnings ratio as Kodiak, at 8.44, but its price to book ratio is considerably lower at 2.16. Looking at where the stock is today compared to the same quarter last year, we can see a significant improvement in earnings per share. During the past fiscal year, the company was able to increase its earnings per share from 17 cents a share at the end of 2010 to $3.94 at the end of 2011. Analysts are predicting that CVR Energy will reach $4.15 earnings-per-share this year. The company's net income also increased significantly moving from to $2.29 million at the end of 2010 to $65.86 million at the end of 2011. All in all, CVR Energy looks to be a strong play.
Cheniere Energy is another story entirely. The company recently traded at $15 a share on a mean one-year target estimate of $19, representing an estimated 27% upside, but I am doubtful investors will see that sort of an increase. Cheniere Energy's revenues slid almost 4% last year. In turn, the company's earnings per share fell from -$2.02 at the end of 2010 to -$2.60 at the end of 2011. To top it off, Cheniere Energy is priced at a premium to its peers. I recommend selling this stock. Again, even if it does bounce back, there are other, more profitable deals to be made.
Now take Inergy. Here is a stock that is trading at $16 a share with a mean one-year target estimate of $20.13. At this rate, investors buying in today would receive almost 26% upside in just one year. Now, add to this an impressive $2.82 dividend (17.40% yield) and you are looking at over 43% gain in just 12 months. It may sound doubtful, but keep in mind that Inergy has been increasing its dividends since 2001, and has not missed a payout. With a forward price to earnings ratio of 23.55, the company is priced considerably higher than it peers, but it also has higher anticipated growth. Inergy's price to book ratio is fairly low at just 1.8 and its price to sales ratio is even lower at 0.96. This is a risky play, but for investors interested in this industry, the reward could well be worth the risk.
Unlike Inergy, Rosetta Resources pays no dividend, but it has strong upside. It recently traded for $47 a share on a mean one-year target estimate of $60.29, representing an estimated return of almost 28%. The company is also priced low at just 8.35 times its projected earnings. Its price to book ratio is high at 3.88, but it has strong quarterly revenue growth of 52.50% and the market expects even bigger things for the company going forward. Rosetta grew its bottom line from 37 cents a share in 2010 to $1.91 a share in 2011. Analysts are predicting that the company will finish 2012 with an earnings per share of $3.73. With numbers like this, I recommend Rosetta as a buy.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.