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Kodiak Oil & Gas Corp. (NYSE:KOG) is a volatile play as it sports a high beta of 2.35 but the long-term trend is strong and traders willing to deal with this volatility could be rewarded well in the years to come. On the 20th of June, we wrote an article making a bullish case for taking a position in this company. At the time of the writing we suggested that individuals should consider waiting for Kodiak Oil & Gas to test its lows again before jumping in. On the 4th of June, it traded as low as $6.92 and finished the day at $7.17. Four days after writing the article it traded as low as 7.01 and closed at $7.15. It traded as high as 9.97 on the 18th before pulling back and is currently trading at $9.14. Today we are going to take another look at this play. We will look at it both from a technical and a fundamental perspective. Before we examine a company, we put it through a selection process that is described below to make sure it fulfills certain basic requirements.

The selection process:

1) Quarterly earnings growth rate in excess of 100%

2) Cash flow per share should be trending upwards for the past 3 years

3) A quarterly revenue growth rate in excess of 80%

4) Annual EPS before NRI should be trending upwards for the past five years

5) An interest coverage ratio of 4.00 or higher

6) A projected EPS growth rate for the next 3-5 years in excess of 30%

Points of interest

  • Short percentage of float also increased from 4.3% to 10.9% in the same time period. This is a rather high number and makes this stock a good candidate for a short squeeze.
  • It sports a very strong quarterly revenue and earnings growth rate of 287% and 563% respectively.
  • The percentage of shares held by insiders increased from 4.7% in June 2011 to 10.32%, an increase of over 100% in roughly 4 months
  • Zacks has a 3-5 estimated EPS growth rate of 50%
  • A strong five year sales growth rate of 93%

Charts and tables of value

(click to enlarge)

The consensus EPS and the stock are both in strong up trends. A stock tends to perform better when it is trading above the EPS consensus estimate line. Kodiak Oil & Gas is trading well above the EPS consensus line, so the long-term outlook still looks bright.

(click to enlarge)

$100K invested eight years ago would have grown to $230K as indicated in the table above. We simply multiplied the result by 100 to arrive at our answer. The table uses a starting value of 1K.

The competition

Kodiak Oil & Gas Corp is going to be compared with three competitors using several key metrics such as P/E, quarterly revenue growth, operating margins, PEG, etc. This will give you further insight into the company, and it could also help you determine if Kodiak Oil & Gas is the right play for you. It trounces the competition in terms of quarterly revenue growth rates and operating margins.

KOG

(NASDAQ:DBLE)

(GSX)

(NYSE:MRO)

Industry

Quarterly revenue growth

2.88

-0.50

-0.72

0.01

0.33

Revenue

250.24M

38.66M

13.10M

14.88B

202.60M

Gross Margin

0.78

0.49

0.17

0.59

0.56

EBITDA

226.71M

30.41M

-2.10M

7.42B

49.41M

Operating Margin

0.57

0.28

-0.40

0.33

0.16

Net Income

91.90M

2.21M

-15.95M

1.76B

N/A

EPS

0.38

0.20

-0.10

2.48

N/A

P/E

24.18

25.38

N/A

12.06

11.98

PEG (5 yr expected):

0.41

-5.68

N/A

7.54

0.69

P/S

9.81

1.46

1.73

1.43

2.97

M= Million B= Billion

The Technical Picture

(click to enlarge)

The stock has run into resistance every time it has attempted to trade past $9.95 over the last two months. It has also just completed what appears to be a double top formation. In general, double top formations are bearish in nature and usually signal that the stock is ready to pull back. A weekly close below $9.00 would most likely drive the stock down to the $7.50-$7.70 ranges. As the stock has put in a double top formation and has been unable to trade past $10.00, we would wait for a test of the $7.50-$7.70 ranges before jumping in. One other strategy would be to wait for a test of the $8.00 ranges and then sell in the money puts with a strike at $8.00. If the shares are put to your account, your final price when the premium is factored in could be well below $7.00. You have a higher chance of having the shares put to your account if you sell in the money puts. If you are in no hurry to have the shares put to your account, you could sell puts with strikes at 7.00 or lower.

If you opened a position back in June (based on our article), then it would not hurt to take some profits now or at least hedge your position by selling some covered calls. If you are a bit aggressive, you could use some of the proceeds to purchase puts.

Fundamental data

The data below is laid out in such a manner that it should be easy for you to quickly scroll down and determine if the stock meets with your minimum investment criteria. Some of the key areas to pay attention to are sales, net income, annual EPS before NRI, Interest coverage ratio, cash flow and 3-5 year projected EPS growth rates.

Company: Kodiak Oil & Gas

Key ratios

  1. Percentage Held by Insiders = 10.3%
  2. Long-term debt-to-equity ratio = 0.81
  3. Profit Margin = 36%
  4. ROE = 14%
  5. Quarterly Revenue Growth = 287%
  6. Quarterly Earnings Growth = 563%
  7. Operating Cash Flow = 119M
  8. Short Percentage of Float = 10.9%

Growth

  1. Net Income ($mil) 12/2011 = 4
  2. Net Income ($mil) 12/2010 = -2
  3. Net Income ($mil) 12/2009 = -3
  4. EBITDA ($mil) 12/2011 = 51
  5. EBITDA ($mil) 12/2010 = 6
  6. EBITDA ($mil) 12/2009 = 1
  7. Cash Flow ($/share) 12/2011 = 0.32
  8. Cash Flow ($/share) 12/2010 = 0.07
  9. Cash Flow ($/share) 12/2009 = 0.01
  10. Sales ($mil) 12/2011 = 120
  11. Sales ($mil) 12/2010 = 25
  12. Sales ($mil) 12/2009 = 11
  13. Annual EPS before NRI 12/2007 = -0.05
  14. Annual EPS before NRI 12/2008 = -0.1
  15. Annual EPS before NRI 12/2009 = -0.02
  16. Annual EPS before NRI 12/2010 = 0.03
  17. Annual EPS before NRI 12/2011 = 0.17

Performance

  1. Next 3-5 Year Estimate EPS Growth rate = 50
  2. ROE 5-Year Average = -7.06
  3. Current Ratio = 1.76
  4. Current Ratio 5 Year Average = 3.93
  5. Quick Ratio = 1.5
  6. Interest coverage = 5.40

Conclusion

This is a volatile play, but the long-term prospects appear to be bright. It sports very strong quarterly earnings and revenue growth rates, a good interest coverage ratio, and it has an excellent estimated 3-5 year EPS growth rate of 50.00%. As the stock is running into resistance and appears to have put in a double top formation consider waiting for a test of the stated ranges before jumping in.

An alternative strategy would be to sell puts at strikes you would not mind owning the stock. The benefit of this strategy is that it reduces your overall cost as you get to apply the premium towards your purchase. Secondly, if the shares are not assigned to your account, you get paid for your efforts via the premium. The disadvantage is that there is no guarantee that the stock will be put to your account.

EPS charts obtained from zacks.com.

Disclaimer

It is imperative that you do your due diligence and then determine if the above play meets with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

Source: Kodiak A Good Long-Term Play, But Wait For A Pullback Before Jumping In