Kodiak - Buy Ahead of Earnings
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Williston Basin producers, Kodiak Oil & Gas (NYSE: KOG) included, might have a better than expected second quarter to discuss if recent hints from Williston players are any indication. Although Kodiak is staying quiet on its recent production levels, several competitors are sharing predictions falling within or ahead of guidance for the quarter.
Voyager Oil & Gas (VOG), recently released an operations update that indicated Voyager increased its second quarter production by 40% over the year prior, to 900 boepd, which is accelerating as the quarter draws to a close. Similarly, Northern Oil & Gas (NOG) expects its second quarter production to exceed first quarter production by 20%, or about 10,200 boepd.
On these bullish reports, new operators are rushing in. Ward Williston Oil, one of the first Williston Basin drillers, transferred operatorship of its 162 Williston wells to Enduro Operating LLC, a quiet subsidiary of Texas' Riverstone Holdings LLC, earlier this summer. Ward Williston urged its wells to production not through horizontal drilling but through vertical drilling into shallow pay zones, at a much lower cost with a still respectable depletion curve.
Apache (NYSE: APA) is also bullish on the Williston, and is indicating that the company's holdings on the play are part of what CEO Steve Farris calls"the beginning of a new life cycle" for Apache - that is, a life cycle that does not include substantial new acquisitions in the foreseeable future. With Apache as a prime mover I think that Williston activity is only at the start of an upswing.
Perfect Environment for a Boom
North Dakota was named the country's fifth best state overall for businesses through a survey conducted by CNBC, and number two for strong economics. Andy Peterson, President of the North Dakota Chamber of Commerce, points to a functional state government, low income and corporate tax rates, and a legal and regulatory structure that is favorable to businesses as reasons for the state's position. Most of these are exemplified by work on the Williston Basin, the main focus for Kodiak.
North Dakota's crude by rail capacity increased by over half in June, at 55%, due to two new loading facilities in the western part of the state. The jump was driven in large part by Musket Corp, which increased its facilities' capacity from 10,000 to 60,000 barrels per day. Rangeland Energy has a capacity double that of Musket, at 120,000 barrels per day. As small infrastructure specialists like Musket and Rangeland continue to build, North Dakota Pipeline Authority Director Justin Kringstad is predicting that crude by rail capacity could reach 710,000 barrels per day by the end of this year, up from 470,000 currently.
Not all of the Bakken news is good, however. Analysts at Zacks recently downgraded SM Energy (NYSE: SM) from neutral to underperform based partly on expectations that SM's "holding in the non-core region of the Williston Basin will lag the output of its peers with acreage in the core region of the Basin."
North Dakotan residents are similarly cautious about the boom, which they note does not bear many similarities to the boom and ensuing bust that occurred here in the 1980s but could well end up becoming a corollary. The population of the city of Williston more than doubled in the past decade, from 13,500 to 32,000, and construction permits are soaring. Nearby cities are also seeing similar increases, as well as shortages in retail, housing, and other expected services that echo the infrastructure and resource shortages that oil companies are seeing out on the play.
Outlook
Kodiak has a history of trading below value, and part of the reason might be because it is largely institutionally held, with about 66% of shares held by institutions and a further 5% held by insiders. This can have a blunting effect, which is bad for those who want to sell but excellent for those looking for a great value buy ahead of earnings. Kodiak's growth is nothing short of exponential, and one of the things I like is that it is managing to navigate itself to profitability without taking on the kind of debt that would hamper its future operations.
Kodiak's total assets grew from $79,683 at the close of 2009 to $369,937 at the close of 2010, then jumped to about $1.7 million at the close of 2011. Its liabilities followed a similar curve to drive that growth, from $9,755 at the end of 2009 to $70,890 at the end of 2010, before escalating to $859,797 as of December 2011. This gives Kodiak a current debt to equity ratio of 0.7, which is edging towards the high end but still manageable. This is especially true as Kodiak's investments in the Williston pay off with increasing production.
Kodiak is currently trading around $9, after shattering its one month resistance around $8 earlier in July. Its current price gives it a price to book of 2.7 and a forward price to earnings of 9.0, which are not rock bottom values but still represent a reasonable chance at returns, even more so as speculation runs that Kodiak is a potential target for takeover.
Kodiak does have many markers of a quick takeover target, with attractive and increasing production, manageable debt, and an easy to understand business model, since substantially all of its production is in the Williston. Moreover, Kodiak has a market cap of $2.4 billion. With a fairly average premium of 30%, that means a bid for Kodiak could come in as low as $3.1 billion, a sum most of the larger players could part with without blinking.
Apache and Exxon Mobil (NYSE: XOM) would not be likely to show interest, Apache because of its pullback from acquisitions and Exxon Mobil because it is showing conservatism in the U.S. as its new exposure to natural gas punishes the bottom line. However, Anadarko Petroleum (NYSE: APC) is pursuing notably more prospective plays and would have the financial flexibility to maneuver a deal. Royal Dutch Shell (RDS-A) might also look at Kodiak as an opportunity as it tries to shore up its U.S. onshore presence.
Whether Kodiak continues to surge ahead or is pushed by a takeover bid, I think that the company is in a financially and logistically sound position and an excellent buy ahead of second quarter earnings. Investors may want to act quickly though, since Kodiak will report its second quarter earnings on August 3.
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