Kodiak Oil & Gas: Can This Speculative Stock Double By 2014?

| About: Kodiak Oil (KOG)
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by Tim Plaehn

Kodiak Oil and Gas (KOG) is a small energy exploration and production company that is close to moving into the big time in the hot Bakken oil play in North Dakota. As recently as 2009, Kodiak had a capital expenditures drilling budget of $40 million. At that time, the company was just starting to drill in the Bakken. Jump ahead to 2012 and the company is planning to spend $585 million on capital expenditures for the year. This was a penny stock -- 19 cents per share -- at the bottom of the 2009 bear market, and now the stock is headed for status as a serious energy company if production keeps growing at rates similar to the triple digits put up in 2011. While I see this as a speculative play, with a real chance to double in the upcoming quarters, there are several risks investors need to be aware of that I will address below.

With its 2011 year-end results, Kodiak Oil & Gas reported oil and gas sales of $120 million, up 287% from the $31 million of sales in 2010. Adjusted EBITDA of $76.4 million was up 372%. Another way to view the growth is to compare the 364,000 barrels of oil sold in the 2011 third quarter, and then production increasing to 662,000 in the fourth quarter. In 2012, the company plans to go from pumping 10,000 barrels of oil per day at the start of the year to 27,000 per day at the end of the year.

Activity and results for Kodiak have exploded over the last few years. The company has gone from drilling a few wells in smaller, less attractive plays in Wyoming and Colorado to becoming a surprising player in the Bakken play. The company has drilling rights on 157,000 acres in the play and is ramping up the drilling of new wells to take advantage of the leases in this highly productive oil play. At this point, the company has about 40% of its proven reserves under production and the balance awaiting development. The drilling leases expire at the end of 2013, so the company plans to put the remainder under the drill rig by the end of 2013. During 2012, Kodiak will have seven drilling rigs operating with plans to drill 71 wells. In 2011, the company drilled 47 wells, completing 36. At the end of 2011 the company was pumping from 137 wells. Due to joint venture agreements, Kodiak's current share amounts to 60.2 producing wells.

The Bakken Play has drawn energy companies ranging from the mega-cap names like Exxon Mobil (XOM) and ConocoPhillips (COP) to midsized companies like EOG Resources (EOG) and Continental Resources (CLR). Continental Resources is the top producer in the Williston Basin/Bakken play with reserves of over 500 million barrels of oil equivalent. Continental Resources increased production by 57% in 2011 and was pumping 75,000 barrels of oil per day at the end of 2011. The company expects a 30% increase in production for 2012.

As a smaller player in the North Dakota oil production race, Kodiak has proven reserves of 52 million barrels of oil equivalent. Kodiak is also a small player with a small production base, which -- with enough drilling and capital spending -- can be rapidly increased over the next few years. Company reports state there are 800 drilling sites available in the leased acreage, providing drilling opportunities for the next six to eight years at the current pace. The growth potential has allowed the Kodiak share price to outperform Continental Resources over the last year. Kodiak is up 36% compared to a 13% gain for Continental Resources.

The rapid share price rise over the last six months -- doubling since early October -- makes an investor wonder whether the market value of Kodiak has gotten ahead of actual results. With a $2.4 billion market cap, the company is trading at five times the Wall Street forecast for 2012 revenues. Also, the projected revenues are about equal to the amount of money the company has forecast for capital expenditures. It is important to remember that this is still a young company spending a lot more developing its resources than it is earning, as measured by net profits per barrel of oil.

Investors considering Kodiak Oil & Gas should be aware that this is still a very speculative investment. If for some reason the 2012 plans do not work out, this stock could very quickly lose a very large portion of its value. That said, the potential rewards appear to outweigh the possible risks. The company has significant proven reserves and the potential to more than double revenue and EBITDA on an annual basis for the next several years. There is potential for a double or triple in the share price by the end of 2013. Once all of the current lease holdings have been developed, future potential depends on whether the company attempts to add more drilling rights or just work the currently held rights for the maximum cash flow potential.

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