Perhaps not as well known as Exxon Mobil (XOM) or BP (BP), or even Double Eagle Petroleum (DBLE), Kodiak Oil & Gas (KOG) can compete, and along with its competitive spirit it brings rewards to investors. I believe this to be a company to buy now and watch the positive results such an investment can bring.
Kodiak focuses on developing and producing oil and natural gas primarily in the Williston Basin in the U.S. Rocky Mountains. The company's success has been catching the eyes of investors and the trend continues with more and more successful exploration and production plays. Kodiak, like many other oil and gas companies, took a hit when natural gas prices plummeted, but is now poised to profit handsomely when prices go back to predicted norms later this year. Like the little engine that could, Kodiak keeps truckin' along continually producing month after month. It is this consistency, as well as its clean financials, that lead me to believe that Kodiak is one of those oil and gas companies that must be included in the energy segment of an investor's portfolio.
Kodiak was one of the early players in the Bakken shale area, which is still producing big profits for companies of all sizes. The company has built up a position of 157,000 net acres here. In the Koala project area in northern McKenzie County, ND, Kodiak recently completed three high-working-interest wells in the Middle Bakken Formation. The wells had 24-hour initial production rates of 3,117, 2,971 and 2,709 barrels of oil equivalent respectively. Showing the tenacity of the company, one of the Koala wells was a successful remediation of a previously announced completion failure experienced during fourth quarter 2011.
In the Dunn County project area, fracture stimulation procedures were recently completed on two wells in the Skunk Creek area. These wells were completed in the Middle Bakken Formation, and Kodiak expects to place these wells on production soon. Kodiak owns a 100% working interest and an 82% net revenue interest in each of these two wells. Also, completion operations have commenced on a four-well pad in the Smokey project area in central McKenzie County, ND, where Kodiak owns a 96% working interest and a 76% net revenue interest in each of the wells. A second completion crew has mobilized and will be commencing completion procedures on a two-well pad in the Polar project area in southern Williams County, ND where Kodiak owns 69% working interest and 54% net revenue interest.
Whiting Petroleum (WLL) along with Samson Oil & Gas (SSN) are players in the same region, but they are not quite as successful as Kodiak has been. In the company's Interim Corporate Update, CEO Lynn A. Peterson stated, "We are making steady operational progress through the second quarter. We continue to drill and complete high working interest wells in the core of our acreage position with very good production rates. We are very pleased with the successful remediation of one of our wells with previously announced liner issues. The liner repair and resultant completion is clearly a positive development, and we look to remediate other damaged wells as we move through the remaining quarters of 2012. Our second quarter completion schedule remains on track, with six gross (5.22 net) wells remaining to be completed." Because of its size, and its success, Kodiak has been a potential takeover target, but the timing has been off for possible suitors. Companies like Chesapeake (CHK) and others have actually been trying to sell off assets raising cash to put into greater plays. This has kept Kodiak out of the sights for a while.
To help with the debt Kodiak had taken on, the company last month upsized and priced a private offering of $150 million in aggregate principal amount of senior notes due 2019 in a private placement to eligible investors. The size of the offering was increased from the previously announced $100 million to $150 million aggregate principal amount. The notes were to bear interest at 8.125% per annum and were being issued at a price of 104% of their face amount. The company closed the notes offering on May 17, 2012, subject to the satisfaction of customary closing conditions. This move by the company was wise in that it gave Kodiak leverage to move forward using the net proceeds of the offering to repay all of the outstanding debt under the company's first lien credit agreement, to fund capital expenditures for development and infrastructure and drilling, principally in the Bakken play located in North Dakota, and for general corporate purposes, including financing potential acquisitions of oil and gas properties in certain core areas.
Financially, Kodiak is getting stronger. The company has budgeted capital spending of $585 million in 2012, with 94% of that dedicated to drilling and completion costs. The level of spending will cover 73 gross wells during 2012, with the balance of the funds spent on infrastructure to process and transport production as wells as additional leasehold acquisitions. Year on year the company grew revenues 287.11% from $31.00 million to $119.99 million while net income improved from a loss of $2.40 million to a gain of $3.88 million. The company has a EPS Growth Rate of 205.75%, a Operating Profit Margin of 36.26%, and a 1-Year Projected Earnings Per Share Growth Rate of 73.77%. The company has a P/E ratio of 435, equal to the average energy industry P/E ratio and above the S&P 500 P/E ratio of 17.7.
Kodiak estimates that its acreage holds 817 potential drilling locations in the Williston Basin, which includes the Bakken and the Three Forks formation. While the company is expanding into new areas, it is first looking at controlling its debt, which was increasing as new plays were discovered. Thankfully, Kodiak is now getting on track to be a leaner, healthier company growing organically using existing plays and capital for further expansion. With such wise management strategies and successful exploration and production activities, this is definitely a company to buy and keep.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.