Kodiak Has Substantial Upside Potential

| About: Kodiak Oil (KOG)
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By Ahmed Ishtiaq

Kodiak Oil & Gas Corporation (NYSE:KOG) is an independent energy company. The company is focused on the exploration, exploitation, acquisition and production of natural gas and crude oil in the United States. Kodiak's operations are primarily concentrated in the Williston Basin of North Dakota, Montana and the Green River Basin of Wyoming, and Colorado. Kodiak has some of the best acreage for drilling, and the company focuses on Bakken pool area.

As of the time of writing this article, Kodiak stock was trading at around $9.28, with a 52-week range of $6.92 - $9.23. It has a market cap of about $2.5 billion. The trailing twelve-month P/E ratio of 37.2 is above the forward P/E ratio of 9.2. P/B, P/S, and P/CF ratios stand at 2.5, 7.2, and 13.5, respectively. The operating margin is 32.8% while the net profit margin is 19.4%. The company has slightly higher debt load than the overall industry average. Current debt-to-equity ratio of the company stands at 0.9, compared to 0.5 for the industry.

Out of 10 analysts covering the stock, three have a buy recommendation, three believe the stock will outperform, two are asking to accumulate, and only one analyst is neutral. Kodiak does not have a single analyst rating the stock as a sell. Average five-year annualized growth forecast estimate is a little too optimistic at 50% by the analysts. Taking into account the previous EPS growth rate and future market conditions, I have assumed a little lower EPS growth rate at 35%.

We can estimate Kodiak's fair value using discounted earnings plus equity model as follows.

Discounted Earnings plus Equity Model

This model is primarily used for estimating the returns from long-term projects. It is also frequently used to price fair-valued IPOs. The methodology is based on discounting the present value of the future earnings to the current period:

V = E0 + E1 /(1+r) + E2 /(1+r)2 + E3/(1+r)3 + E4/(1+r)4 + E5/(1+r)5+ Disposal Value

V = E0 + E0 (1+g)/(1+r) + E0(1+g)2/(1+r)2 + … + E0(1+g)5/(1+r)5 + E0(1+g)5/[r(1+r)5]

The earnings after the last period act as a perpetuity that creates regular earnings:

Disposal Value = D = E0(1+g)5/[r(1+r)5] = E5 / r

While this formula might look scary for many of us, it easily calculates the fair value of a stock. All we need is the current-period earnings, earnings growth estimate, and the discount rate. To be as objective as possible, I use Morningstar data for my estimates. You can set these parameters as you wish, according to your own diligence.


Historically, the average return of the DJI has been around 11% (including dividends). Therefore, I will use 11% as my discount rate.

In order to smooth the results, I will also take the average of ttm EPS along with the mean EPS estimate for the next year. The average EPS for Kodiak is $0.34.

While analysts tend to impose subjective opinions on their estimates, the average analyst estimate is a good starting point. Average five-year growth forecast is 35%. Book value per share is $3.78.

Fair Value Estimator





E0 (1+g)/(1+r)




















Fair Value Range

Lower Boundary


Upper Boundary




(You can download FED+ Fair Value Estimator, here.)

I decided to add the book value per share so that we can distinguish between a low-debt and debt-loaded company. The lower boundary does not include the book value. According to my five-year discounted-earnings-plus-book-value model, the fair-value range for Kodiak is between $11.74 and $15.52 per share. At a price of about $9.28, Kodiak is trading below the lower boundary of its fair value range. The stock still has up to 67% upside potential to reach its fair value maximum.


The U.S. economy is showing strong growth, and especially the boom in the oil and gas sector is extremely encouraging. The company has shown remarkable growth in its revenues over the past year, recording over 200% year-over-year growth in reported revenues. At the moment, oil is trading at fairly low spot prices, but that can change soon. Demand for energy is increasing due to a recovery in the global economy, which should further drive up revenue for Kodiak. I believe the assumed growth rate in earnings is easily attainable for Kodiak. At the current price levels, Kodiak is slightly expensive. However, future growth prospects make it an extremely attractive investment and investors seem willing to pay the premium.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Efsinvestments is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.