Kodiak Oil & Gas (KOG) is an appealing E&P asset that is currently undervalued. Current shareholders should hold while interested investors should consider initiating a long term position before its next earnings release. This stock is susceptible to commodity market fluctuations like many smaller E&Ps but its successful 2012 production thus far makes it an ideal asset for long term growth and capital appreciation. Kodiak had a strong second quarter earnings report and recent interim report that support a bullish outlook on its long-term growth potential. Kodiak has only developed less than 50% of its assets; its stock may have a strong uptick once the commodity markets stabilize. Its strategic approach for increasing production rates and efficiencies set it apart from other us E&Ps and integrated energy firms that are more exposed to global economic headwinds.
SandRidge Energy (SD) is the other growth stock that is most comparable to Kodiak. Tesoro (TSO) is also comparable as it's recently initiated a major stake in the Williston Basin in North Dakota. EOG Resources (EOG) and Apache (APA) are two US based E&Ps that can serve as reliable benchmarks when reviewing Kodiak's metrics. Both Kodiak and SandRidge have market caps under $4 billion and trade for under $10 per share. EOG Resources and Apache have market caps over $30 billion and trade for over $110 and over $85 per share, respectively. Kodiak's price is 26 times earnings but its forward price is around 12.5 times earnings.
SandRidge's price is around 6.9 times earnings but its forward price is 54 times earnings. Tesoro and Apache are around 10 times earnings while EOG Resources is around 21.6 times earnings. Kodiak's 2.5 price-to-book and 9.8 price-to-sales ratios are the highest among these US based E&Ps. EOG Resources 2.7 price-to-sales and 2.3 price-to-book ratios are the second highest. Apache's $8.35 EPS is the highest among the E&Ps, while Kodiak's 0.36 EPS is the lowest. Kodiak's 89% sales growth in the past 5 years and its 287% sales growth in the past quarter, YOY are the highest amongst these E&Ps.
SandRidge's 29.5% and 31.6% growth, respectively, are the second highest among the E&Ps. Kodiak's ROE is around 13.9%, its operating margin is around 33.7% and its profit margin is around 36.7%; these are some of the highest margins among these E&Ps. Kodiak's beta score is close to three and the highest among the E&Ps. Its average volume is around 6.1 million; only SandRidge's average daily volume of around 10 million is higher. Kodiak is trading at a 1.2% deficit YTD through October and it's up 4.9% in the past month. Kodiak's stock is currently around 14.2% lower than its 52-week high. Kodiak's stock has increased 13.1% since its last earnings release.
Kodiak's second quarter earnings report detailed how it was successful in improving revenues and earnings thus far in 2012. Kodiak's total revenues were $85 million, up from $22 million, YOY. Total operating expenses increased to $59.5 million from $13.1 million, YOY. Second quarter net income increased to $93 million from $14 million, YOY. The increase in net income was mainly due to commodity derivative gains totaling $95.5 million from $4.85 million, YOY. The increase in revenue was mainly due to the increase in production; Kodiak expects cash flow from operations to increase behind the recently improved rate of production. Total second quarter production increased to 1.155.4 MBOE from 962.6 MBOE, YOY. The Williston Basin is the major asset that drives Kodiak's revenue.
Kodiak currently has over 234,000 gross acres in Williston Basin and 188 gross wells in production; its main focus is the middle Bakken and Three Forks formations. Kodiak drilled and completed 14 wells in the second quarter; two of these were producing over 1,180 BOE/day, two were producing over 1,3500 BOE/day and one was producing over 1,500 BOE/day in the first 30 days of operation. Kodiak expects most of its wells to have pipeline access for oil by the end of 2012.
Between the Green River Basin and the Williston Basin, Kodiak has over 268,000 gross acres to in its portfolio. Kodiak's totaled combined proved reserves totaled 70.1 MMBOE, increasing 36%, YOY. Around 60% or 42.2 MMBOE are still proved undeveloped reserves. Around 86% of Kodiak's total proved reserves are oil, a decrease of 300 bps, YOY. Due to developments in the Bakken, total second quarter oil sales volume increased 367% to 1,043.9 MBbls from 223.8 MBbls, YOY.
Kodiak's recent interim report detailed more success it's had with new wells in the Bakken and Three Forks formations. There are three wells in the Koala project area and three wells in the Polar project area as well. The three wells in the Bakken formation reached 3,213 BOE/day, 3,035 BOE/day and 3,666 BOE/day in the IP 24-hour test. The three wells in the Three Forks formation reached 24-hour IP rate of 2,895 BOE/day, 3,124 BOE/day and 2,528 BOE/day. Kodiak's net production YTD through late September averaged around 20,000 BOE/day, an increase from 17,200 BOE/day in July. Kodiak plans to return to 7 rigs by 2013 in accord with its focus on managing costs, increasing production efficiency and improving the entire drilling and completion process.
Kodiak projects an average of 17,000 BOE/day for 2012 but expects to end the year producing at a rate of 27,000 BOE/day; Kodiak finished 2011 at a rate of 3922 BOE/day. Kodiak expects its new wells in Koala to produce at rate of around 1300 BOE/day. Kodiak has plans to drill over 800 net wells throughout the next ten years and is currently building a pipeline from its Polar field to mitigate the risks from the winter.
Maintaining this rate of production, improving efficiency and lowering operating costs are essential to Kodiak's long-term growth. Kodiak's current low price is an opportune entry point; strong earnings releases could help the stock rally while increased production from Saudi Arabia or slow growth in China could lead to an oversupply and bring industry prices down in the medium term looking towards 2013.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.