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Kodiak Oil and Gas Company (NYSE:KOG) is a Denver-based independent firm, engaged in exploitation, acquisition, exploration and production of crude oil and natural gas. Kodiak operates primarily in two locations, the Williston Basin of North Dakota and Vermillion Basin of Wyoming and Colorado. At the Williston Basin, the company owns and operates approximately 155,000 acres of land. The company focuses on the Bakken pool in this area. According to the assessment made by the United States Geological Survey, there are over 4 billion barrels of oil reserves in the area.

After the release of a survey in April 2008, Kodiak allocated the majority of its budget towards the Williston Basin site. The second location controlled by Kodiak is the Vermillion Basin. This area mostly consists of leasehold land. This area is also rich in natural gas reserves. BLM administers this area and leases the land for the duration of 10 years. The US department of interior collects a royalty of 12.5% for these lands.

Stock Performance

(click to enlarge)KOG Chart

KOG data by YCharts

As of Friday's close the stock were trading around $9.00. Kodiak has a market cap of $2.37 billion. Average daily volume for the stock is just above four million shares a day. One year target estimate for the stock is around $11. 52-week range for the stock is $2.43 - $7.70. Stock has breached the resistance level of $7.7 in late November last year, falling below this level only once in the month of June this year.

Financial Performance and Ratio Analysis

Kodiak recently announced its results for the second quarter of the year 2012. After the impressive numbers for the first quarter, there were doubts among investors about the sustainability of the numbers. As it turns out, all those fears were baseless, and the company turned even better results for the second quarter. There was an increase in the crude oil sales of 385% over the same quarter last year. An increase of 20% over the first quarter of 2012 is certainly an impressive feat. This shows that the company has not just been able to sustain the growth but has surpassed all expectations. The crude oil segment of the company contributed more than 90% towards the revenues. Crude oil remains the principal cash flow driver for the firm. The firm is making efforts to increase sales in the natural gas department. Current P/E ratio is alarmingly high at 157.89, while EPS is $.06. Forward P/E estimates for the company are particularly attractive at 8.82. P/S ratio stands at 12.71; Kodiak has an impressive PEG of .32. In May, 2012, the company announced a private placement of senior notes worth $150 million to eligible investors. The 8.125% notes, issued at a premium price of 104% of the face value, raised $154 million after commissions for the company. The firm plans to use the proceeds to make payments against the first lien credit agreement of the company. These notes mature in 2019.

Operations

Kodiak plans on keeping its operations at a pace to meet the demand. The company is currently operating seven drilling rigs. Kodiak management expects to complete 14 gross (11 net) operated wells for the third quarter of 2012. Average production for the first two weeks of July has been 17,000 and 18,000 BOE per day. Kodiak is currently working on reducing the costs associated with the production process. Company successfully implemented cemented liner method. The firm expects rapid completion and timely cash flows by using zipper fracs on multi-well padded locations. Company is currently selling 60% to 65% natural gas produced from the wells.

Competitor Analysis:

Kodiak

Double Eagle (NASDAQ:DBLE)

Gasco Energy (GSX)

Marathon (NYSE:MPC)

Industry

Quarterly Rev Growth:

5

-0.41

-0.26

0.03

0.18

Gross Margin:

0.78

0.55

0.32

0.56

0.51

Operating Margin:

0.19

0.45

-0.15

0.29

0.1

P/E:

157.89

5.75

N/A

8.06

12.32

PEG (5 yr expected):

0.32

-4.3

N/A

0.87

0.55

P/S:

12.71

1.08

1.67

1.27

3.5

Table above shows that Kodiak beats its competitors on most of the indicators. Its gross margin is way above industry average. The company might look expensive compared to Marathon Petroleum in terms of P/E ratio. However, Kodiak has much better growth prospects than most of its competitors, including Marathon Oil. With this growth, I believe the firm will leave its competition far behind.

Summary:

There are few companies which can boast growth as good as Kodiak Oil and Gas Company's. Kodiak has prime lands for drilling. The lands under its control are rich in oil reserves. The Company has the capability of expanding its operations, and increase production. Along with increasing the production, company is also in the process of acquiring acreage in the prime location. Kodiak has acreage in the area which is of a lot of importance for the domestic oil market. Although oil prices do play a role, I expect strong demand for energy to raise prices and bring in hefty revenues for the company. Kodiak still remains a leading producer in the Williston Pool. There is a lot of potential in this stock. I would rate it a buy.

Source: Growth Prospects Make Kodiak A Buy