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 the end of last year, it boasted proved reserves of 52 Mmboe, of which 89% were liquids. And since 63% of those proved reserves are undeveloped, the company has ample room to ramp up production.

Ramping up production
Kodiak has managed to increase oil production quarter after quarter, largely on the back of its success in North Dakota. From a year-over-year perspective, the company has nearly tripled revenues, while growing net income from a $2.4 million loss to a $3.88 million gain. The company's operating margin, at around 36%, is also quite remarkable, especially for a small cap.

However, while production is growing quickly, so is capex, owing to the high costs of drilling in the Bakken. Bakken wells are much more expensive than wells in shallower, conventional plays, and the company is outspending cash flow by quite a bit. But so far, it has managed to raise capital quite successfully.

Capital-raising efforts
The company recently upsized a private offering of senior notes, from $100 million to $150 million. It plans on using the proceeds from the offering to repay outstanding debt, fund capex, and for general corporate purposes. Back in November of last year, the company raised nearly $990 million through a $650 million senior note issuance and a stock offering of 48.3 million shares.

Hopefully, there won't be any more dilutive equity issuances in the near future, as the company should now have sufficient liquidity and cash flow to fund its drilling operations. But investors should definitely keep an eye on the company's cash balance when it reports second-quarter results.

Final thoughts
All in all, I like what I'm seeing from this company so far. It has a large inventory of drilling locations in acreage that's largely been de-risked. And with more rigs and wells coming online and impressive recent production rates, I think the company has a fighting chance of meeting its year-end exit target of 27,000 barrels of oil equivalent per day.

As long as oil prices remain favorable and it continues to ramp up production while watching its costs like it has been, I think this company could soar. It's certainly a riskier stock than many you can choose from in the energy space, but of course it's also got more upside.

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