Is Kodiak a long shot?
Abantika is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The recent upgrade of Kodiak Oil and Gas (NYSE: KOG) from Global Hunter Securities has lifted the spirits high for its investors. The Company that beat the street estimates, witnessed an upward movement of 8% on its share price. Let us dig deeper to see what could catapult Kodiak’s future success.
Higher production led to increased sales. The completion of core leasehold areas along with higher working interest in the wells led to increased crude oil production. The Company’s gas volumes also increased with the current utilization rate of 60% to 65% of produced gas capacity from Kodiak operated wells. The utilization rate is most likely to improve in Gas sales due to the involvement of additional third party mid stream infrastructure. However, falling prices of natural gas have eaten away margins considerably. Still, Kodiak is better posited with crude oil contributing 96% of the revenues. Marathon Oil (NYSE: MRO), which was also badly hit due to lower natural gas prices has coped up well due to higher oil production.
What about Future Performance?
As crude oil is the primary cash flow indicator, future production of the same plays a pivotal role. Currently operating seven drilling rigs, Kodiak expects to complete 14 Gross (11 Net) operated wells during the third quarter. Given the completion of wells takes place, sales should be significantly high for the same period. Continued strong performance from Bakken and Three Forks should also lead to the desired 27,000-barrel oil equivalent per day exit rate by the year-end and increased income in the second half of 2012, thus, achieving full-year guidance.
Another factor which should contribute immensely to increased production is the change of the drilling focus to core acreage in the oil-levered Williston Basin. Kodiak’s acreage grew from 55,400 in Aug 2010 to 155,000 in June 2012. This indicates a staggering growth of oil production in future.
Well, increased income when supported with cost cutting efforts can really turn around the cash position of the company. And, I guess that is exactly what Kodiak intends to do. In the second quarter, the company had savings of 5% to 10% of total revenues. This was largely due to many cost cutting initiatives undertaken. For example, Kodiak implemented cemented liner method and employed Zipper fracs on multi-well pad locations. Williston wells are in general subjected to higher costs. Using Zipper frac technique should lead to quick completion of wells and the creation of more timely cash flows. Competitors are also following similar footsteps. GMX Resources (NASDAQOTH: GMXRQ) is combating high well costs by implementing new drilling techniques.
Kodiak also reduced its drilling times by 3 to 5 days. This is highly noteworthy as rig burn rates are generally $100 thousand/day and reducing drilling times will significantly trim down cost.
However, not everything that glitters is gold. Kodiak which exhibits higher production and expects increased quarterly performance in the future, has a huge debt on its balance sheet. The company till date secured capital effortlessly and frequently leading to a high debt to equity ratio. The proceeds from the fund have been largely used in acquiring acreage and is expected to be used for repaying outstanding debt, fund capex, and other corporate purposes. However, if the company fails to generate cash flows in the future, a high debt to equity can cause dire consequences.
For example, Chesapeake Energy (NYSE: CHK), the second-largest producer of natural gas in the U.S. is facing tragic consequences for having a high debt on its balance sheet. Falling natural gas prices have cut a hole in its cash flows and the company is currently thinking of asset sales to meet the shortfalls.
Increased production of oil and gas coupled with cost saving initiatives and good future prospects (w.r.t production), makes Kodiak a good investment. If Kodiak can bring down its debt to equity ratio as oil is the main revenue generator, success is inevitable for Kodiak. Currently, I am long on Kodiak.
Chanakyaspeaks has no positions in the stocks mentioned above. The Motley Fool has the following options: long JAN 2013 $16.00 calls on Chesapeake Energy, long JAN 2013 $25.00 calls on Chesapeake Energy, long JAN 2014 $20.00 calls on Chesapeake Energy, and long JAN 2014 $30.00 calls on Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.