One of the best United States oil stories is the Bakken shale, one of the most prolific oil-producing areas in North America. An up-and-comer in this area is Kodiak Oil & Gas (NYSE: KOG ) , a Bakken producer that's been significantly ramping up its oil production quarter after quarter.
Company snapshot
| Market Cap |
$1.9 billion |
| Net Cash |
$24 million |
| TTM OCF |
$41 million |
| TTM Capex |
$373 million |
| Price-to-OCF Ratio |
46.6 |
| Recent Price |
$9.20 |
Source: S&P Capital IQ. TTM = trailing 12 months.
As the company itself admits, Kodiak's story is quite simple. All of its operations are in North Dakota, and the company simply needs to execute on its growth strategy of developing its land. The company now has 155,000 net acres in the Williston Basin that have largely been de-risked. Going forward, the company will spend heavily on drilling and completing wells, with the occasional acreage addition.
From the above table, you can see that the company's operating cash flow trails its capital expenditures quite noticeably. Production has been rising rapidly, but the company has resorted to equity issuances in the past to raise money for drilling, as shown by its increasing share count over the past several years. Kodiak's use of equity financing let it have an enviable net cash position as of the third quarter, though the balance sheet has yet to reflect a $650 million senior note offering that was announced in November.
However, the company expects its production to ramp significantly in the coming quarters. Kodiak currently forecasts a 2012 exit rate of 30,000 barrels per day, much higher than the roughly 2,000 barrels per day that Kodiak produced in the first quarter of 2011. This has been helped by recent acreage additions that added about 6,500 barrels per day to the pro forma results for 2011.
In 2012, the company expects to spend $585 million in its capital spending program, with $550 million going to drilling and completing 51 net wells. Fresh off the aforementioned senior note issuance and an equity offering of 48.3 million shares in November that raised $356 million, the company still has $400 million in liquidity. Kodiak expects to fund the massive drilling program through its liquidity and cash flow alone, which hopefully means no more equity or debt issuances in the near future. Hopefully, the greatly increased 2012 exit rate will reduce the need for outside capital in 2013 and beyond.
On a final note, the company has hedged 4,010 barrels of oil equivalent per day, or BOEPD, at an average of $91.06 through swaps, and an additional 1,130 BOEPD through collars, with a weighted average floor of $79.69 -- for a total of 5,140 BOEPD for 2012. The company plans to hedge additional volumes as more wells come on line. This should provide visibility of cash flows, which helps greatly for planning purposes.
Foolish bottom line
All told, the company's pipeline of drilling locations is brimming, with more than 800 net prospective low-risk locations. The company currently has five operated rigs and two non-operated rigs running. By late 2012, the operated rig count should be up to eight. It's nice to have a large inventory of low-risk locations, since drilling success in that scenario is quite repeatable. As long as the price of oil stays high and additional hedges are utilized, Kodiak should enjoy increasingly stable cash flow from its rising oil production.
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