Kodiak Oil & Gas (KOG) is one of the most attractive trading opportunities on the market in this industry. Kodiak Oil & Gas shows high potential for growth due to recent acquisitions and its current operations on the horizon. The low stock price makes it an extremely undervalued asset to add to any portfolio right now. There are factors from its financials and recent news that suggest now is an ideal time to buy into this oil and gas exploration organization. Despite its lack of a dividend payout, this is one of the more favorable investments as opposed to competitors like Chesapeake (CHK) due to its growth potential.
Right now the stock price is trading around $8 with a beta of at least 2.5. It is trading above its 52-week range high, between more than $2 and higher than $7. The stock is also currently trading over its 50-day and 200-day moving averages of $6. The PEG ratio for the next five years is expected to be around 0.27, while the current PEG is slightly above 1. The price looking forward is expected to be slightly over 7 times earnings. Right now, its P/E ratio is better than the industry average. Return on equity and net margins have increased since last quarter, while operating margins and current ratios have decreased. The negative factors are due to recent acquisitions that should pay off immensely in the short term and long term. It's essential to notice that the PEG ratio is quite low looking forward, while net margins have managed to increase despite the recent acquisitions and recent low prices in the natural gas industry. It should also be noted that institutional ownership and gross margin both exceed 65%.
The low oil and natural gas price are partly responsible for the low stock prices for all competitors across the industry. Because Kodiak Oil & Gas focuses most of its investments on oil, it was able to avoid many of the financial woes its competitors experienced in the natural gas market. Kodiak has used its funds to increase its presence in the Bakken Shale formation in North Dakota and Montana by a 60% increase in acreage from June 2011 to January 2012. From February 2011 to May 2012, the Bakken oil has covered a $25 deficit to transition into a $1 premium over West Texas Intermediate crude oil. This change in pricing has increased cash flow for entities like Kodiak, with large investments in the Bakken formation.
These recent developments along with erratic market prices are part of the reason Kodiak has such a high beta compared to other trades on the market. Kodiak has over 70 wells in the Bakken area with 89% in oil, compared to Chesapeake with 7 wells and EOG Resources (EOG) with 43 wells. Kodiak will double its capital expenditure to over $550 million this year in order to get more drilling and infrastructure set up to begin making progress in the newly acquired region. Around $10 million is also going to be focused on additional acquisitions. Kodiak is also completing the Seaway Pipeline Project in order to improve flow rates and meet demand by 2013. Kodiak is carefully confusing its efforts toward improving its position and maximizing on the potential of this newly acquired region.
Harsh winter conditions and increasing expenses on the horizon compelled North Plains Energy and BTA Oil to sell their stakes in the region to Kodiak. The oil service fees are beginning to decrease in the industry and should continue to do so for the rest of the year. By investing in water disposable wells and mitigating this large cost along with increasing production rates, Kodiak will be able to avoid the losses the two previous organizations were wary of. The combination of lower oil service costs and more sophisticated technology and operations employed by Kodiak should create a more promising revenue opportunity for Kodiak in Bakken looking forward.
Kodiak increased revenues to $80 million from around $13 million in Q1 2011. Around 96% of this revenue was from its investment in oil. It is producing over 3,500 boe per day between its wells in Middle Bakken and the Three Forks formations and plans to add two more wells to the Middle Bakken in the near future. Kodiak has 74% net revenue interests in just these first wells built since the original acquisition. Eventually Kodiak will e focused on increasing to 1,400 mbbl per day by the end of 2013 and 1,800 mbbl per day by the end of 2014.
Right now, Kodiak is focused on getting the manpower and infrastructure in place to hold the area by production before the end of 2013. The lack of infrastructure is one of the reasons for rising operating costs and decreased revenue of late. Kodiak plans to have the wells in North Dakota connected with an oil pipeline before early 2013. The additional acquisitions in the Bakken region will allow for substantial growth in revenues and production throughout the rest of the year.
Kodiak is a favorable asset to have for investors looking for a substantial return on investment within the next 12 months to three years at least. Kodiak's current inventory in oil is set to last for another eight to 10 years, according to management. It is focused on expanding its operations and raising capital in order to increase production for this year throughout 2015. Two more rigs will be added to the Bakken Shale before the end of 2012 to bring the total to eight rigs. Kodiak is also part of a joint venture with Exxon Mobil (XOM) to increase growth even more.
Kodiak has increased oil and gas reserves from 2010 by 255% and 185%, respectively. It has increased its total acreage by 60% through acquisitions within the past year and has yet to capitalize on this new land. Kodiak is a favorable growth investment at an incredible discount when measured against competitors like ConocoPhillips (COP) and Chevron (CVX).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
