Is Kodiak Oil & Gas Actually Undervalued?

Kodiak Oil & Gas (NYSE: KOG  ) made an impressive presentation at last month's Credit Suisse Energy Summit, showing why growth appears imminent. That's why I think its current valuation makes the stock look pretty cheap.

Fellow Fool Rich Smith recently talked about how Wall Street's Canaccord Genuity has upgraded the Denver-based company and placed a price target of $12.50 on the stock. Rich also points out that at 53 times, the trailing P/E doesn't exactly look attractive when compared to the likes of ExxonMobil, whose shares trade at a little over 10 times its earnings.

But the big question is: Does the current valuation look discouraging, or are we going to witness some solid growth in the next couple of years? I believe it's the latter. Here's why:

Hitting the ground running in 2012
Between mid-October and January, Kodiak completed eight gross operated wells, with the initial 24-hour production test averaging 1,682 barrels of oil equivalent per day. In addition, it has a working interest in five non-operated wells in Dunn County that have been completed but whose performances are yet to be disclosed. Thanks to the Williston Basin acquisition, the company ended January with a production rate of about 15,000 Boe/d -- up from 10,100 Boe/d at the end of 2011. That's nearly a 50% production hike in one month's time. Yowza!

Ambitious
As a result of the acquisition, Kodiak has contracted for a seventh rig, which is scheduled to be delivered in the second quarter this year. Management now aims to develop its entire 155,000 net acreage in Williston by mid-2013, thereby eliminating a possible expiry of its leasehold due to non-production from the properties. Now that's where I'm expecting massive production growth to take place.

Capital expenditure for 2012 is pegged at $585 million -- a whopping 133% growth from last year's spending. Kodiak expects to drill 73 gross (51 net) wells, with a full-time 24-hour frac crew already in place. It's also heartening to see that the company is setting aside $25 million for investments in infrastructure. This enables seamless connectivity to Enbridge's (NYSE: ENB  ) network of pipelines once production volumes mature.

Foolish bottom line
Judging by the figures, Kodiak's production should witness strong growth in the next couple of years. I wouldn't base my investment decision on its current valuation. The overall market, I believe, is yet to factor in these exciting prospects, simply because it's uncharted territory for the company. Investors must watch this company like a hawk. In order to stay up to speed on the top news and analysis on Kodiak, you can start here by adding the company to your free watchlist.

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.


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