President Barack Obama's quest to reduce foreign oil imports by increasing domestic oil production is beginning to reveal initial results. Exploration and production companies operating in the Bakken shale play have recorded increasing profits, thanks to increased production in the good ol' US of A.
Denver-based Kodiak Oil & Gas (AMEX: KOG ) recorded a 133% increase in oil and gas sales to $13.4 million for the first quarter this year, compared to the year-ago quarter. However, the company was unable to convert revenue into net profit because of unrealized losses on derivative contracts to the tune of $9.3 million. As a result, net losses stood at $7.2 million for this quarter. Fellow Bakken operators Continental Resources (NYSE: CLR ) and Brigham Exploration (Nasdaq: BEXP ) have suffered the same fate with regards to these instruments. So with yet another small-cap E&P company's bottom line getting spoiled because of these hedging instruments, the question is, how much should we read into these losses?
The real deal
Foolish investors should look for efficiency and performance of a company's core business rather than take into account the final bottom line, which gets manipulated by noncash items such as derivative instruments. That's why we are more interested in core operating results. Operating income more than doubled this quarter to $2.4 million, and this is why I'm specifically bullish about this company. I believe this is just the start of something big.
Production grew sharply by 99% this quarter as compared to last year's first quarter. The company is currently mobilizing its third rig in McKenzie County where it expects to spud the first well in May 2011. With only 6 out of 22 stages completed and producing, there is a long way to go for this company. In all probability, production for Kodiak is only going to expand.
Foolish bottom line
In the long run, Foolish investors are going to benefit. In fact, Kodiak is my top bet in the Bakken shale play. Present macroeconomic conditions and changing government policies suggest that the game is only getting better for this company.
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