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Great Opportunity to Buy Kodiak Oil

Jan. 21, 2011 1:31 AM ETKOG, EQNR, SSN, CHRD, NOG5 Comments
Michael Filloon profile picture
Michael Filloon's Blog
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The first time I checked out the Kodiak Oil and Gas website I was a little skeptical.  Looking at a stock that has doubled since December, can make an invester wary.  The PE ratio sitting at 453.  Granted those numbers only mean something when converted to a PEG ratio, but still that is a big number to lay an investment on.  When I looked a little further I saw a forward PE of 14.37.  I had to admit to myself that I really liked any oil exploration and production company with Bakken exposure only trading at 14 times twelve months out.  If there was anything that stood out about this company was their position in the Bakken formation.  They have 113000 gross acres in the Bakken,Three Forks/Sanish.  Kodiak has approximately 300 locations in this area and they seem to be developing the area quickly.  Once I started looking into their production I could see why the PE ratio was such a large number.  From the second quarter of 2010 to the end of the year they had increase production by approximately 270%.  Better yet, there production is mostly oil.  The 2011 capital expenditures are expected to be at 190 MM drilling and completion.  This includes three operated rigs and one non-operated rig.  Twenty eight operated wells and ten non-operated wells is what they estimate they will complete this year.  Almost as important is the 10 MM to be spent on pipeline infrastructure.  Currently, oil exploration companies in the Bakken could run into near term problems to get the oil out.  Oil is being sent out by train and by truck, creating extra expense.  Kodiak seems to be proactive with respect to cap ex spending as they spent 27 MM in 2009 and 75 MM in 2010.  These numbers do not include any additional acreage they are planning to add.  This with their intent to spend even more in 2011 leads me to believe they could be a big winner in the near term.  Kodiak(KOG) estimates they could have up to 350 possible well locations.  Kodiak (KOG) has gotten good results.  They are using an increased number of frac stages and larger amounts of proppant.  They are planning that over 90% of their 2011 cap ex will be done on long laterals.  This should further increase their production results.  Going forward Kodiak (KOG) should be able to maintain adequate liquidity with the recent 150 MM equity capital raise.  Borrowing base has been increased to $50 MM.  A second lein facility of $40 MM is now available.  They have also done some hedging to protect to the downside, just in case oil does go down in the short term.  Kodiak Oil and Gas (KOG) has a very large and valuable land position with in the Bakken.  They are heavily levered to oil.  They have two rigs running with a third on the way at the end of the first quarter.  There is one non-operated rig currently drilling.  They are rapidly increasing crude production.  2010 exit rate of approximately 2700.  They will have five well completions by the end of this quarter.  In 2010 they drilled 21 gross wells and will do 38 more this year.  To give an idea of what all of this has done to the companies balance sheet, they made six cents per share in 2010, that number will increase to 41 cents a share in 2011.  In 2011, they are estimated to grow by 583.3% for the year.  Kodiak(KOG) has been getting 90 day well completions.  Lastly, they are making infrastructure improvements to help get their oil out.  In summary, I like Kodiak Oil and Gas(KOG).  That isn't much of a surprise as I like alot of names in this space like Brigham(BEXP), Northern Oil and Gas (NOG), Oasis (OAS), and Samson (SSN).  I am still an oil bull.  Even if oil pulls back in the short term, it will give and opportunity to buy some of these names cheaper than a few weeks ago.  Last month OPEC stated they thought $100/barrel of oil was a fair price and would not increase production.  The last time oil spiked to $100, OPEC did not increase production until well after that mark.  I think on those words we can guess that oil is moving up.  Most of the other Bakken plays have a forward PE in the mid-twenties.  So as a longer term pick, this stock is a value and a great opportunity.  Watch the price action here.  Looks like $5.70 is where Kodiak(KOG) has support, I would watch this level closely.  I will be buying shares soon. Disclosure: I am long SSN.Additional disclosure: I may take a long position on BEXP, NOG, KOG sometime in the next 24-48 hours.

Disclosure: I am long KOG, SSN.

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