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Kodiak Oil & Gas (NYSE:KOG) has extensive oil and gas holdings in North Dakota, where it focuses most of its operations. Furthermore, the company is rapidly expanding its operations through responsible capital expenditures, funded by private offerings and available cash flow, making it a growth-oriented company.

I think Kodiak makes an excellent buy for both 12-month and 3-year investors. The current price is, in my opinion, trading at a significant discount to Kodiak's real value, given its asset base and oil-centered outlook.

The Market

The recent quarter did not treat Kodiak well, as it reported an EPS of $0.09, falling short of the Street's consensus of $0.11. It also did not do particularly well revenue-wise, falling over $10 million short of projections. However, this should not be a particular surprise but, rather, it should be seen as part of a larger trend in the oil and gas sector. Giants of the likes of Exxon Mobil (NYSE:XOM) missed targets as well. I await second-quarter 2012 earnings for a more exact view of gas and oil subsector behavior.

Valuation

In the ballpark of its current price, $8.50, Kodiak is a competitively priced stock that stands to realize a large upside. I think a conservative estimate puts a 12-month target at around $11.50. Furthermore, Kodiak's forward P/E is around 13, making it a decent buy at this price. Additionally, a quick glance at Kodiak's 90-day, 180-day, and 12-month simple moving averages shows a steady trend of growth over both a short-term and long-term time arch. There is nothing restraining an increase in Kodiak's share price at the moment, assuming that management's reduced, though still substantial, production guidance holds.

That said, there are some risks associated with a short-term investment in Kodiak. Many on the Street consider Kodiak a volatile holding. Indeed, Kodiak has a beta of 3.35, meaning that it is about 335% more volatile than the market, rendering Kodiak a less-than-ideal investment for risk-averse investors. However, as I mentioned regarding its moving averages, I think that this fact could cloud the more basic consideration that Kodiak has real potential for long-term and short-term growth, despite its volatile technicals.

Upsized Operations

On May 14, Kodiak announced that it is upsizing its operations, aiming to raise funds for new projects and possibilities for growth. This includes capital expenditures for drilling efforts and maintenance and expansion of existing infrastructure. This private offering of senior notes, set to close on May 17, is expected to yield $150 million to fund Kodiak's existing capital expenditures. Kodiak currently focuses its operations in North Dakota, particularly on the Bakken Shale. This deal will enable Kodiak to expand its operations on this shale that is distributed in the Williston Basin, which covers parts of both North Dakota, and Montana. It maintains a total of 167,000 acres of oil- and gas-rich plays in the Williston Basin, representing a focused asset base for Kodiak.

In 2012, Kodiak is nearly doubling its total capital expenditures to $585 million from $260 million in 2011. These funds will go towards drilling 73 wells, an increase from last year's target of 25 net wells. In a lot of ways, Kodiak's rapid expansion will force it to complete some very substantial projects, generating growth quite effortlessly -assuming management executes its plan. At the beginning of 2012, Kodiak had six rigs operating in the Bakken Shale. In the second quarter 2012, a seventh rig will be added, and an eighth rig will be added in the third- or fourth-quarter 2012. By the second half of 2012, there will be eight rigs operating in the Bakken. Additionally, Kodiak is also participating in a two-rig joint program with Exxon Mobil that will generate additional growth. Taking all of these projects into consideration, Kodiak is quite likely to experience an increase in price as these projects help Kodiak sustain greater earnings on a regular basis.

Oil Oriented

Kodiak has done an excellent job orienting its operations to oil. Like many E&Ps, particularly Occidental Petroleum (NYSE:OXY), Kodiak seeks to weather the present slump in gas prices by increasing its overall exploration and production allocation to liquids. In fact, 89% of its 51.7 MMboe proven reserves is in liquid-based assets, mostly oil. With the current rig count, management expects its present inventory to be sustained for 8 to 10 years. Furthermore, Kodiak maintains operations over the majority of its acreage, therefore maintaining its ability to tweak fracking practices at its drilling sites.

Kodiak is reaping the benefits of an early entry into the Bakken Shale play. As management confidently assesses, this was due to the high level of expertise and foresight of its staff. The recent success of Kodiak has been exceptional. In 2012, present crude oil reserves have increased 255% over its 2010 crude oil reserves, while gas reserves have increased 185% over its 2010 natural gas reserves.

It is tempting to think that Kodiak should go the route of most large-scale E&Ps by diversifying its holdings away from the Williston Basin. I would note, though, that the "shrink-to-grow" strategy is an ideal strategy for growth-oriented organizations-Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP) have used this strategy in different ways to initially modest but (I believe) overall substantial benefits.

Conclusion

Kodiak Oil & Gas offers excellent potential for growth at a relatively low share price. It is difficult to find a stock at this price with such an earnings potential. If you are interested in longer-term growth, Chesapeake Energy (NYSE:CHK) is another excellent option because, as with Kodiak, it is significantly undervalued and has an excellent asset base. However, Kodiak seems better positioned than Chesapeake for a 12-month return on investment, particularly with the managerial chaos currently hindering Chesapeake's true potential for growth.

Source: Kodiak: This $8 Stock Has Huge Upside Potential Now