Wall Street Expects Too Much From This Oil Company

There is a silly, little trick that can give investors a small indication of how a quarterly earnings result will go. Look at what time during the day the earnings report is being released. If a company is releasing an earnings report that isn't what investors are looking for, then it is more likely to come out at the end of the day. This isn't a tried and true method, but you get the idea.

Source: Kodiak Oil & Gas

Well, Kodiak Oil & Gas (NYSE: KOG) reported its earnings after the market close. And wouldn't you know it, the numbers it released did not meet the expectations of the market. Sure, the company grew revenue by 167% year-over-year and increased EBITDA 140% year-over-year, but apparently that wasn't enough to satisfy the markets expectations. To put up numbers like that and still not make Wall Street's grade can only mean one thing: Wall St. is expecting too much from this company.

Are You Not Entertained?!?

When you go up and down the operational performance for Kodiak, it is hard to find a major flaw that would have caused the company to miss an earnings target. The production was up 12,200 barrels per day from last quarter, a 53% jump. Compare that with other strong Bakken producers like Whiting Petroleum (WLL), which had a strong quarter by increasing volumes by 12% year-over-year. The other major benefit for Kodiak was the company realized a price of $91.97 per barrel of oil equivalent, which was also much stronger than Whiting's price realization of $81.21.

Granted, these numbers should be taken completely in a vacuum because Whiting also has production in other regions such as the Permian Basin and the Niobrara formation, so it's not a pure apples to apples comparison. If you want a more direct comparison for Kodiak, then wait until Nov. 7 when Oasis Petroleum (OAS) reports its earnings for the quarter. The two companies had very similar production for the second quarter--23,200 barrels per day for Kodiak, 30,000 barrels per day for Oasis--and they are both Bakken pure plays. Still, over 70% of Whitings production comes from the Bakken, so it does give some context of how Kodiak is performing in the region.

If selling, do it for the right reasons
Based on the results Kodiak recently posted, it's awfully hard to make a case to sell shares in the company. Sure, it didn't meet Wall Street's expected numbers, but Kodiak production is still growing at a compounded annual growth rate of 168% over the past 3 years and expects to have production for next quarter to be north of 40,000 barrels per day. So if your investment thesis for this company is based on growth, then these numbers are very hard to beat, and a slight earnings miss is not something you should sweat.

If there was a reason to be apprehensive on Kodiak, then it has more to do with its financial position than anything else. The Company's capital expenditure budget is expected to be greater than its revenue for the entire year, which has led the company to take on a pretty sizable debt position.

Source: S&P Capital IQ

As long as Kodiak can continue this staggering growth, then its debt position should not be too much of an issue. With companies like Whiting unearthing new methods to make wells more economical every day, it makes this issue even less pressing. If there were to be any hiccups in the company's operational performance or if oil prices were to drop, though, it could put the brakes on Kodiak's performance very fast.  

What a Fool Believes
As an investor, be sure to look beyond the Wall Street estimates and projections, because they could lead you astray from great companies. There is an awful lot to like about what Kodiak is doing right now despite what Wall Street may think about this past quarter. Over the past 5 years, investors in Kodiak have enjoyed an astounding 1,500% return. Based on the company's current production and its 15 year drilling backlog, there is lots of room left to run for Kodiak as long as it can keep its financial house in order.