Is Kodiak Oil & Gas a Good Buy Today?

Every investor has to ask one question before they add a stock to their portfolio: "Is this a good buy today?" We're taking a closer look at one company that's got many would-be investors wondering just that. Is Kodiak Oil & Gas (NYSE: KOG  ) a good buy? There's a ton of information we can dig into for an answer, so let's see what we can discover.

Tracking the trends
One way to find out how the market views Kodiak is to look at its stock performance as compared to its key metrics, like revenue, net income, and free cash flow. Is Kodiak's price responding to its earnings, or is there a discrepancy that we might be able to take advantage of?

KOG Total Return Price Chart

KOG Total Return Price data by YCharts.

What this chart actually shows is that revenue, gross profit, and net income have all grown at a faster rate than Kodiak's stock price over the past five years. Kodiak's net income would skew this chart drastically, but so would revenue and gross profit, which have left the company's stock price in the dust. There's one part of the picture that this graph doesn't show -- the driving force behind Kodiak's growth:

KOG Free Cash Flow TTM Chart

KOG Free Cash Flow TTM data by YCharts.

As you might expect, free cash flow has turned sharply negative while debt has soared. That's nothing out of the ordinary for a rapidly growing exploration and production company. In Kodiak's favor is its avoidance of the multiple trust spinoffs that SandRidge Energy (NYSE: SD  ) has undertaken to fund its transition toward oil extraction. However, Kodiak has doubled its share count in the past five years.

Since many of Kodiak's early results are negative, calculating annualized changes is a little more difficult:

Metric

Current Result

5-Year Annualized Change*

Stock total return (5 years) 122.8% 25.9%
TTM revenue $250 million 94.4%
TTM gross profit $196 million 89.6%
TTM net income $92 million N/A
TTM free cash flow ($1.20 billion) N/A
Total debt $805 million N/A

Sources: Morningstar and Google Finance. TTM = trailing-12-month. *Annualized as 5.5 years from 2007 annual results to TTM results, except stock price. N/A = not applicable due to negative results or lack of change earlier in period.

Kodiak's short history as a profitable company with a trackable P/E ratio has seen wild swings in that number, but at 23.8, it's at all-time lows now, and barring a significant stock-price rise before the end of the year, Kodiak should only get cheaper. Management's targeting 27,000 barrels of daily production by the end of the year, which is a shockingly ambitious goal for a company that's only just reported a production rate a hair under 13,000 barrels per day in its most recent quarter.

Looking ahead
Now that we've gotten a look at Kodiak's past, let's see what its future might hold. We've got plenty of opinions from Wall Street, but it's also worth looking at The Motley Fool's CAPS rating of this company and its own anticipated guidance.

Forward Period

Expected Result

Upcoming quarter $133 million revenue, $0.13 EPS
Full year (2012) $469 million revenue, $0.47 EPS
Next year (2013) $823 million revenue, $0.77 EPS
Full-year (2012) sales growth 290.8%
Full-year (2012) EPS growth 370%
Five-year annualized forward growth 50%
Latest full-year corporate guidance 27,000 barrels per day at year-end
Motley Fool CAPS rating and % outperform **** (95.3%)

Sources: Yahoo! Finance, company earnings call, and Motley Fool CAPS.

Analysts seem to have the same high opinions of Kodiak that our CAPS players do. However, the market hasn't responded yet this year, and shares have posted a loss for the year to date. Foolish contributor Arjun Sreekumar points out that Kodiak's size makes it more vulnerable to oil swings than larger Bakken players EOG Resources (NYSE: EOG  ) and Continental Resources (NYSE: CLR  ) . However, much of its acreage remains undeveloped, and hedging strategies should help handle all but a catastrophic 2008-style oil price crash. Its small size and proven reserves could also make it an attractive takeover target if share prices stagnate much longer.

Competition in the Bakken is fierce, so Kodiak may not have much room to expand once it develops its acreage. That won't happen yet, so shareholders have time to ride Kodiak's growth further. My fellow Fool Sean Williams has pointed to Triangle Petroleum (NYSE: TPLM  ) as a potentially superior Bakken play, thanks to its lack of debt. However, Triangle is so small that its upward momentum is more limited than Kodiak's, which has more acreage and much larger total reserves. All in all, it's hard to argue that Kodiak is overvalued today. If you're on the hunt for a small oil driller with big upside, it certainly fits the bill.

Kodiak isn't the only company benefiting from high oil prices. We've identified three well-positioned energy stocks set to soar when oil returns to $100 a barrel. Want more information? It's all in our popular free report -- you access it all here for a limited time.

Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter @TMFBiggles for more news and insights. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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