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Is Kodiak Oil & Gas a Buy?

Arjun Sreekumar
July 24, 2012

Kodiak Oil & Gas (NYSE: KOG  ) is a small-cap energy company that's basically a pure play on unconventional oil production. The bulk of its operations are focused in the Bakken, one of the most prolific oil shale plays in North America. Let's take a closer look at what this company has been up to and whether or not it presents a compelling investment opportunity.

An oil-focused story
With natural gas prices still below $3 per Mmbtu, energy companies focused on oil production are reaping the benefits of higher relative prices. Denver-based Kodiak Oil & Gas, a small-cap independent oil and gas producer focused primarily in the Williston basin of North Dakota and Montana, is one of them.

In the first quarter, the company posted revenue of nearly $80 million, amounting to an almost fivefold jump from the year-earlier quarter. Reflecting its status as an oil-focused company, 96% of this revenue came from oil.

In stark contrast, other oil and gas producers like Encana (NYSE: ECA  ) and Chesapeake (NYSE: CHK  ) are still very much natural-gas-focused. Chesapeake's current production mix is still nearly 80% devoted to natural gas and Encana's even more so, with around 95% of production focused on dry gas.

Banking on the Bakken
Kodiak was one of the earlier players to enter the Bakken, a vast and prolific oil shale underlying parts of North Dakota, Montana, and Saskatchewan. The company's premier assets are located in the Williston Basin, where it continues to accumulate acreage. As of January this year, it boasted 157,000 largely de-risked net acres in the region.

Kodiak has seven operated rigs running in the Bakken and is using long laterals, some deeper than 10,000 feet, which are posting higher rates of return. The company's target exit rate (how much oil it expects to be producing by the end of the year) is 27,000 barrels per day. It projects to average between 17,000 and 21,000 barrels of oil equivalent per day for the year.

Judging by recent initial production rates, Kodiak may have some of the most desirable acreage in the Williston. As of th