Is KOG the Next Big Growth Play?
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Now we all know about the Shale Boom in America. One of those booms is in North Dakota, known as the Bakken Shale. Oil production in the Bakken is shooting upwards. According to North Dakota’s Department of Mineral Resources, oil production was 350,000 bpd in 2011, and now is up to 560,000 bpd currently. Many see this increasing to 750,000 to 1,000,000 bpd within a few years. Several of the key players in this area are Whiting Petroleum Corp. (NYSE: WLL), Kodiak Oil and Gas Corp. (NYSE: KOG), EOG Resources Inc. (NYSE: EOG), and Hess Corp. (NYSE: HES). The player I will focus on in this post is Kodiak.
North Dakota and Regulations
Currently North Dakota has a unemployment rate of 3% (from the BLS website) and a $2 billion dollar surplus (from North Dakota's budget office). Compare that to the national 8.2% unemployment rate and massive deficits many other states have right now. Some say that "fracking" will be banned like it is in France (they have an unemployment rate of 10% by the way), but I hardly see that as being the case. Hydraulic fracking is too important in the United States and millions of jobs will be created in the US with this new technology. So as far as regulations go, do not worry. Political rhetoric will be political rhetoric, and nothing more. Plus, in France where "fracking" is banned, officials inside the Industry Department (of France) have stated that there could be as much as 100 billion barrels of oil in Southern France, so we could see it legalized sometime soon to bring down their high unemployment rate.
Production and Growth
Kodiak currently trades at $8.61 a share and has a PE of 100 (TTM), so it is priced for growth. Why is it trading at a PE of 100? Well, according to a recent statement by KOG, "for the second quarter 2012, Kodiak reported average sales volumes of 12,696 barrels of oil equivalent per day (BOE/d). This represents a 385% increase over sales volumes of 2,618 BOE/d for the second quarter 2011 and a 20% increase over first quarter 2012 sales volumes of 10,578 BOE/d. Crude oil accounted for 90% of second quarter 2012 sales volumes.". And, "during the first two weeks of July 2012, the Company's net production has averaged between 17,000 and 18,000 BOE per day." So KOG's oil production is skyrocketing. The estimate for their FY 2012 EPS is $.57, and for their FY 2013, the estimate is $.92. If these estimates hold true, that means KOG would have a PE of 16.5 in 2012 and 9.3 in 2013. If Kodiak continues to perform the way it is has been, this stock could see some significant upside.
Also, Kodiak continues to have its revolving credit line increase. Kodiak's credit line used to be $225 million with Wells Fargo. But, due to Kodiaks continued success, that has since been increased to $750 million. This will help KOG continue on its path to $15 plus a share.
Going forward, KOG is expected to grow its EPS by 50% annually for the next 3 to 5 years, and based off of its rapidly rising oil production levels and high oil prices, this looks possible. This is a great growth play, and for investors looking to benefit from the shale boom, this is a great way to do so. Anywhere around $8-$9 dollars a share is a great place to buy in (if it goes under $8, barring any extenuating events, buy buy buy). If KOG spikes above $10 a share, wait for a pullback then get in. On August 3, 2012, KOG posts its Q2 earnings.
Other players in the Bakken are Hess Corp, Whiting Petroleum, and EOG Resources. Whiting Petroleum holds 683,000 acres in the Bakken Shale and expects strong growth in that region going forward. Whiting had 22% year over year production growth in its 2012 Q1. Hess holds 900,000 acres in the Bakken and saw its production levels grow 68% year over year in its 2012 Q1. EOG Resources has 600,000 acres in the Bakken and saw 49% production growth year over year in 2012 Q1. Every player in the Bakken is seeing strong production growth and this correlates into stronger earnings and a higher stock price. Kodiak has 155,000 acres in the Bakken Shale and 12,000 acres in the Vermillion Basin according to its website.
Map of Kodiak's Acreage
This is a map from Kodiak's website of their Bakken plays. The Koala play is panning out very nicely and they plan on drilling more wells in that location.
Now, KOG is dependent on the big macro and oil prices. With China surpassing the USA as the largest auto market in the world and millions in the BRIC nations moving into the middle class, I see oil prices only heading higher as more people get cars and more people use other products that are made from oil as consumer spending increases. Plus, China is considering further stimulating its economy and Ben Bernanke may issue out another round of QE. Even if these moves are ineffective (like QE), oil prices will go up. $100 a barrel seems to be here to stay for a while, and with most of Kodiak's production in crude oil (90%), they will ride the 'oil-a-coaster' to new highs. Also, oil production is reaching the point that it can no longer keep up with consumption, as seen in BP's 2011 energy review. This is putting a lot of upwards pricing pressure on crude oil prices.
This is from the EIA website, "EIA expects the price of West Texas Intermediate oil to average about $100/bbl in 2012, $5/bbl higher than the average price last year. For 2013, EIA expects WTI prices to continue to rise, reaching $106/bbl in the fourth quarter of next year. EIA’s forecast assumes that US real gross domestic product grows by 1.8% in 2012 and by 2.5% in 2013." If the United States can grow by 2% or more, this will also benefit KOG as oil prices could be marginally higher. Global growth is slowing down, but further stimulus and interest rate cuts could help turn the global economy around.
While most of Kodiak's production is in crude oil, they still produce some natural gas. With a couple natural gas export facilities to go online in 2015 and 2016, Henry Hub prices should go up, further benefiting KOG going forward. Most expected nat gas prices to average $2.50 in 2012, but it is currently trading at $3.09, which is good news for KOG. The heat wave going across America, which is causing a drought, is also providing upwards pressure on natural gas prices because more electricity will be needed to power the AC systems to cool down those households.
On the Motley Fool's CAPS, the community gives it 4 out of 5 stars, with 744 giving it an outperform and 37 giving it an underperform. As far as Wall Street goes, they give it an outperform rating. This company could be bought out in the future, but I would not buy into it for that reason.
Another metric pointing towards KOG being cheap is that KOG is trading at 3.3 book value, compared to the 5.45 industry average. KOG continues to keep on drilling, and it is planning on completing 14 more wells in the third quarter. As a result, I'm bullish on KOG.
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