Kodiak Oil & Gas Corp. Earnings: Market Overreaction?

Kodiak Oil & Gas' stock got hammered after its earnings miss. Did investors overreact?

May 2, 2014 at 3:00PM

Photo credit: Flickr/Colby Stopa.

Challenging winter weather wrecked the first-quarter results of Kodiak Oil & Gas (NYSE:KOG). Production slipped 6% from the preceding quarter, which forced the company to revise its full-year output guidance lower. Investors promptly sold the company's stock off by more than 5%. Is that an overreaction, or are investors wisely selling off the stock? 

What went wrong?
Kodiak Oil & Gas was simply unable to overcome a really rough winter in North Dakota. That problem was compounded by the type of wells the company was drilling in the quarter. Kodiak drilled a third of the wells in a weaker part of its acreage so that those leases could be held by production and not expire. The area has a thinner reservoir section and less source rock. This results in lower reservoir pressures and less gas, leading to lower production rates.

These wells need to be put on a pump shortly after being completed in order to improve production. But the company saw a delay in getting many of these pumps installed because of the weather. This set production behind, and now Kodiak Oil & Gas doesn't think it can make up the shortfall to meet its production growth target for 2014.

Competitors unaffected
Investors, however, see this as a sign that some of Kodiak Oil & Gas' acreage might be weaker than expected. One reason is the fact that while many energy companies complained about the weather, it didn't affect their production to the degree experienced by Kodiak. For example, Whiting Petroleum (NYSE:WLL) noted in its earnings release that its North Dakota teams "overcame one of the most severe winters on record so that we met all of our guidance numbers in the first quarter." In fact, Whiting Petroleum set a record for production in the Williston Basin, despite the harsh winter weather. Furthermore, production that is more geographically diversified across the U.S. made Whiting Petroleum less susceptible to the weather's impact on its operations in North Dakota.

 Hess Bakken

Photo credit: Hess.  

Meanwhile, Hess' (NYSE:HES) earnings press release didn't even mention the weather being a factor in the company's first-quarter results. While Hess experienced production curtailments in North Dakota in the first quarter, the company attributed that to the temporary shutdown of its Tioga gas plant. With the plant coming back online in late March, Hess saw production levels rise back to what it expected.

It will be interesting to see whether the weather had any impact on other Bakken drillers. We won't know that for a few weeks, as not all companies operating in North Dakota have reported first-quarter results yet. However, given that most of the region's top operators are more geographically diversified, the likelihood of the weather having the same kind of impact it did on Kodiak Oil & Gas is muted. 

Investor takeaway
Kodiak Oil & Gas really disappointed investors this quarter. That's why I don't think that the market is overreacting in selling off its stock. The weather issues the company cited so far appear to be issues specific to Kodiak. The real worry is the weaker well results, which might be more than just weather-related. Investors should keep a close eye on the company's well results going forward, as it is entirely possible that the company is sitting on weaker acreage than previously thought.

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Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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