Why I Still Own Kodiak Oil & Gas Corp

Source: Kodiak Oil & Gas

As long-term investors, we need to look at the future of a company over the course of several years, not months. I have owned shares of Kodiak Oil & Gas (NYSE: KOG  ) since its stock traded at $7 a share. I've held onto those shares because Kodiak has proven that it can deliver. 

Spend less, make more?
Over the past few years, Kodiak Oil & Gas has continuously posted triple-digit gains in output growth. It won't be able to keep growing as fast as it has been, but this shouldn't discourage investors, as Kodiak is still guiding for 47% output growth this year (midpoint of guidance.)

What makes that 47% all the more important is that Kodiak is going to complete 100 net wells this year, the same amount it completed in 2013, for $80 million less. Higher levels of output (that is almost all crude) combined with lower costs is good news for investors. 

A bullish call from the biggest player in town
This is just the strategy for 2014. Long-term investors need to look even further out. Harold Hamm, the CEO of Continental Resources (NYSE: CLR  ) , has shared his views on where the Bakken will be in six years. He sees the Bakken shale producing 2 million barrels of oil equivalent a day by 2020, double current production levels. 

Whether you trust him or not, Continental Resources does control 1.2 million net acres in the Bakken and was also the first company to discover the Parshall shale in North Dakota. Currently, Continental Resources accounts for 10% of the Bakken's output, or roughly 100,000 boe/d. Harold Hamm has even gone so far as to say that Continental Resources will triple its 2013 production levels by 2017. If the Bakken is going to hit 2 million boe/d, you can be sure that Continental Resources is leading the way, with a lot of help from Kodiak Oil & Gas. 

Past, present, future
In 2010, Kodiak was pumping out 1,260 boe/d, which was a 466% improvement from 2008. By 2013 Kodiak managed to extract 29,200 boe/d from the Bakken, and this year the number will be closer to 43,000 boe/d. Looking into the future, Kodiak will be right aside Continental Resources boosting America's energy sector to new heights. 

Kodiak's is also lowering costs. The average well completion cost stood at $12 million in 2012. Luckily for Kodiak, Continental Resources, and every other shale player in the U.S., well costs across are aggressively trending downwards. By the fourth quarter of 2013, Kodiak was able to lower its well completion costs below $10 million. The future looks even brighter, as Kodiak Oil & Gas is forecasting well completion costs will hit roughly $9 million this year.

The same goes for Continental Resources -- its $8 million well completion target was met three months early in 2013, and by the end of 2014, Continental is hoping to get that down even lower to $7.5 million.

Foolish conclusion
Kodiak Oil & Gas has a history of success, rising from the dark lows of 2009 to record highs over the past six months. This year is going to be big for Kodiak, as costs head lower while production climbs higher. Some say the Bakken boom is at its peak, but I believe we have only just scratched the surface of this prolific play. To any investor looking for market-beating returns, take a look at Kodiak. It trades at 12.6 times forward earnings, but its bottom line is expected to grow by high double-digits this year, making Kodiak Oil & Gas a great growth stock with a low valuation.

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  • Report this Comment On April 28, 2014, at 2:05 PM, monkota wrote:

    Very good article. In addition to the Bakken, we also have to consider the Three Forks. There are also other formations which can be produced with future technology. I remember the time when the companies drilled through the Bakken, because it was such a tight formation. The company drilling the well was lucky to recuperate their costs, let alone make any money on it. Then came horizontal drilling and multi-stage fracking.

    Then of course there could someday be secondary recovery. At present it looks rather unlikely. But who knows. So did the Bakken at one time.

    I also think Kodiak is a well managed company, and yes, I do own Kodiak, but I really believe it is a very good stock. Also, just to keep the record straight, I do not personally know anyone who now works for Kodiak, or ever has.

  • Report this Comment On April 29, 2014, at 12:33 PM, callumturcan wrote:

    @monkota the Three-Forks benches below the Middle Bakken offer immense potential, and through downspacing, companies like KOG and CLR will be able to tap into the wealth. I wouldn't look as far as EOR projects yet, there still are roughly 40,000 - 45,000 wells to be drilled in the Williston Basin. 2014 and 2015 are going to be the years when investors will be updated on just what to really expect from the Three-Forks (plenty of downspacing projects coming online and being phased into normal drilling schedules), which will be very exciting.

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