Kodiak's Progress Not a Surprise

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.

Number-crunching
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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Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. 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.


Read/Post Comments (4) | Recommend This Article (12)

Comments from our Foolish Readers

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  • Report this Comment On May 11, 2011, at 10:31 AM, hanover67 wrote:

    I own KOG and was surprised by the negative impact of the derivative issue, as I had not seen any reference to it in discussion about the company. It makes me wonder how big this breadbox is, and what future effect it wil have on the company's reported earnings. If this is hedging their future output, they should explain it rather than just say "Here's what it did."

  • Report this Comment On May 11, 2011, at 4:54 PM, Godzillah wrote:

    President Barack Obama's quest to reduce foreign oil imports by increasing domestic oil production is beginning to reveal initial results.

    What bull crap, the Bakken was discovered in the early part of the decade!!!

    Keep the politics out of the commentary, it will improve your credibility.

    The country succeeds despite what goes on in Washington, not because of it!

  • Report this Comment On May 11, 2011, at 8:02 PM, buffalonate wrote:

    Obama tried to increase oil production offshore. He had nothing to do with the Bakken production.

  • Report this Comment On May 19, 2011, at 3:38 PM, chipsnbob wrote:

    hanover67 I traded CHK Chesapeake Energy a few times over the last few years and they had the same problem. Over all they made a lot more than they lost over the years, but the ups and downs made it hard to predict and caused the stock to fall in response without warning now and then.

    The CEO even got so heavily involved in trading his own account on margin, he had to sell everything he had to meet margin calls when he guessed wrong. He's still there and the company now tells you how much of this year's and the next 2 or three years are hedged and at what price so you can make better decisions about investing in the stock. Generally he has hedged the forward years at very good prices and it has given the company a lot of profit recently, but if gas prices spike like oil has lately, the co. could report losses instead of huge profits.

    That said, I am buying some KOG today, based on their production outlook over the next few years. I hope they don't blow all the projected gains on speculation in the futures market. It wouldn't be the first co. to do so.

    Good luck

    Bob

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