Current Discount Makes Kodiak a Highly Attractive E&P
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Kodiak (NYSE: KOG) is an appealing asset in the E&P industry that is currently available at a significant discount in comparison to integrated energy firms like Exxon Mobil (NYSE: XOM). Its stock price decreased from the recent lull in commodity pricing but the impact was not as drastic as it was for some of its competitors. Kodiak is an appealing asset due to the outstanding potential in its North Dakota acquisitions in conjunction with its effective drilling operations throughout the first quarter of 2012 that translated into substantial revenue growth. The combination of the recent rebound in the market and a promising interim report are is likely to increase Kodiak’s stock beyond current resistance levels before 2013.
Kodiak has capitalized on its acquisition in the Bakken basin similar to competitors like Marathon Oil (NYSE: MRO) and Exxon. Despite struggles abroad, Marathon has had most of its success in 2012 due to its activities in its Eagle Ford Shale and Bakken assets. Exxon is doing business as XTO Energy in the Bakken and is one of the top producers in the area. Kodiak is having an impressive turnaround from 2011 based on its acquisitions and effective drilling techniques. North Dakota is currently being viewed as the best region for drilling oil in the United States. Along with Exxon Mobil, Kodiak may be one of the best oil producers in the industry. Kodiak has made key acquisitions of wells in the area that have previously drilled and operated by major energy E&P firms. Capitalizing on its Koala prospect with effective drilling techniques has been significant for this E&P. Kodiak has over 150,000 net acres in the Bakken region of the Williston Basin in North Dakota. It currently has over 800 drilling locations in its acreage including sites on the Bakken and Three Forks formations. Kodiak’s substantial acreage in this area also makes is an attractive buyout candidate or gives it significant leverage to generate more capital.
Both the price of oil and recent performance in Kodiak’s stock have the ability to increase the price throughout the remainder of the year. In the first quarter of 2012, Kodiak's revenue increased by 499 percent YOY up to almost $80 million from around $13 million in the first quarter of 2011. The main catalysts was the additional acquisitions, in turn a 474 percent increase in production YOY. In the first quarter of 2011, Kodiak produced around 1,860 BOE, in the first quarter of 2012, Kodiak produced around 10,570 BOE. Kodiak earned around $1.7 million in the first quarter of 2012, opposed to losing around $7.2 million YOY. Committing to pursuing its exploration activities and adhering to its effective drilling thus far will support an increase for its stock price throughout the year. Kodiak produced an interim report for the second quarter to show its on track with its initial guidance of the quarter. Maintaining drills with high working interest and repairing damaged drills is improving its efficiency in its current assets. Kodiak is currently brining multiple wells into production throughout a variety of areas on its current assets.
Kodiak still has substantial opportunity to grow as only 41 percent of its acreage is currently developed. Almost 45 percent of the current increase in sales volume can be attributed to its recent acquisitions. Almost 96 percent of its revenue was generated from its crude oil production. Kodiak has benefited from having a balanced portfolio, unlike Chesapeake Energy (NYSE: CHK) which is taking a severe hit from the depressed gas prices throughout the year. Weakened oil and gas prices have hurt competitors like Chesapeake far more than Kodiak Oil & Gas. Natural gas is not as coveted as oil, while gas prices have also declined far more than oil prices. This is mostly due to advances in technology and a rapid increase in domestic supply driven mostly by firms like Chesapeake. When commodity prices do rebound, efficient drillers like Kodiak and SandRidge Energy (NYSE: SD) will see significant upticks in their stock price. SandRidge is a direct competitor, but it’s very similar to Kodiak and capable of significant capital appreciation this year as well. This idea is based on their effective and sophisticated liquid production operations in conjunction with their discounted stock price closely tied to commodity markets. Both of these firms have the opportunity to turn in substantial profits once the gas and oil prices begin to rebound.
As long as Kodiak can keep its production costs in check it will be a promising year throughout the remainder of 2012. Its hydraulic fracturing technique is more expensive than some competitors’ production costs but it has proven effective in turning a profit so far as well. Much of this success, the viability of it depends greatly on crude oil prices not declining significantly through the remainder of the year. Having adequate manpower and equipment are essential to smaller and mid-sized E&P’s in order to compete with the major firms in the industry. Kodiak should do well as long as it adheres to its current operations and crude oil prices remain stable throughout the year. Stabilization in Europe will bode well for this stock also. Based on its success throughout the first half of 2012, this is one of the most attractive investments available at a discount in the E&P industry.
jordobivona has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil and 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.