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The past couple of months have been a bit bumpy for investors holding smaller and mid-sized American oil producers. The European crisis and fears of a slowdown in China have led to falling oil prices and producer stock prices as well.

On the other hand, if you have been invested in smaller and mid-sized Canadian oil producers, things haven't been a little bumpy over the past couple of months -- things have been downright nasty. The sell-off in Canadian oil producers (and most resource stocks) has been similar to the panic in late 2008. I should know -- my portfolio is feeling the pain.

This has created what I think is a very nice opportunity in Canadian oil producer stocks, especially those focused on emerging unconventional plays. I think I can demonstrate this by comparing an emerging American oil producer, Kodiak Oil & Gas (NYSE:KOG), with a similar Canadian oil producer, Petrobakken (PBKEF.PK).

By comparing the two, I believe I can show that the valuation of the Canadian producers is much more compelling.

Kodiak Oil & Gas Valuation

1. Step One: Calculate Enterprise Value

  • Shares outstanding -- 263 million
  • Most recent closing stock price -- $9.00
  • Market Capitalization -- $2.367 billion
  • Total debt outstanding -- $800 million
  • Enterprise Value -- $3.167 billion

2. Step Two: Examine Valuation Metrics

  • First Quarter Production -- 10,578 barrels per day
  • Enterprise Value / Production = $299,395 per flowing barrel
  • First Quarter Cash Flow Annualized -- $200 million
  • Enterprise Value / Annual Cash Flow -- 15.83 times

Petrobakken Valuation

1. Step One: Calculate Enterprise Value

  • Shares outstanding -- 188 million
  • Most recent closing stock price -- $12.37
  • Market Capitalization -- $2.326 billion
  • Total debt outstanding -- $1.3 billion
  • Enterprise Value -- $3.625 billion

2. Step Two: Examine Valuation Metrics

  • First Quarter Production -- 46,722 barrels per day
  • Enterprise Value / Production = $77,599 per flowing barrel
  • First Quarter Cash Flow Annualized -- $740 million
  • Enterprise Value / Annual Cash Flow -- 4.90 times

Compare the Valuations

No two companies are exactly the same, so differences have to be factored in when thinking about valuation. These two companies are quite similar, though, so their valuations should be at least in the same ballpark. Both companies are pure plays on unconventional or tight oil production. Both companies have significant assets in the Bakken light oil play. Both companies produce almost exclusively oil (little natural gas).

Petrobakken produces more than four times as much oil and has almost four times as much cash flow, yet the enterprise value of both companies is fairly similar (in the $3 billion to $3.5 billion range). Kodiak is trading at 15 times its first-quarter cash flow (annualized). Petrobakken is trading at 4.9 times its first-quarter cash flow (annualized). Does Petrobakken really deserve a multiple that is one-third that of Kodiak?

Kodiak is trading at $299,395 per flowing barrel of production. Petrobakken is trading at $77,599 per flowing barrel. Does Petrobakken really deserve a multiple that is one-quarter that of Kodiak?

Kodiak is a much faster growing company to be sure, so there should be growth factored into the valuation. Petrobakken, however, is also a growing producer and pays a dividend yield that right now is pushing 8%. Kodiak has 800 identified future drilling locations. Petrobakken has 2,225 identified future drilling locations. The actual amount of growth in terms of barrels of oil and cash flow for Petrobakken will likely be larger.

My point isn't that Kodiak is overvalued. Kodiak is a fast-growing unconventional oil producer with a future that is going to see that growth continue. I like those. My point is that Petrobakken is also a pretty fast-growing unconventional oil producer, also with a future of continued growth, but valuation multiples that are a fraction of Kodiak's.

I think the future growth prospects of Petrobakken (and other Canadian producers) are being greatly unappreciated by Mr. Market. If you like the fast-growing unconventional American oil producers, I encourage you to have a closer look at Petrobakken and other unconventional Canadian producers. I believe the Canadian producers have all of the attributes investors like in the American producers, but much more attractive valuations.

Source: If You Like Kodiak Oil & Gas, You'll Love Petrobakken