America’s New Oil Haven, part two — Tiny Company Sitting on 3.8 Million Barrels

by Travis Johnson, Stock Gumshoe | June 10, 2010 1:42 pm

If you were with us yesterday for our trip down memory lane into the Bakken[1] Formation, then you’re ready for the followup — the folks at the Oxford Club[2] teased us about three companies that have acreage and/or production in the Williston Basin in and surrounding North Dakota, and I shared two of those with you.

If you didn’t catch that piece, you can just click here to catch up. It’s OK, we’ll wait.

You’re back? Great — did you do something to your hair, you look lovely! Hmm?

Ah, yes, the third “riches play.”

Here are the clues:

“Williston Basin Riches Play #3

“Tiny company sitting on 3.8 million barrels of oil[3]!

“This tiny energy company focuses on exploration, development, acquisition and production of crude oil.

“Right now, it’s sitting on estimated proven reserves of 3.8 million barrels of oil… and has an interest in approximately 55,000 gross acres in the Williston Basin.

“In 2009, it allocated the majority of its budget to drilling in North Dakota.

“But you don’t have to own land in North Dakota to get rich from the coming oil boom…

“The likes of Vanguard, John Hancock and American Century Funds have begun to accumulate shares of this $3 stock.

“We expect it to double, possibly triple, in the months ahead.”

So … I’m pretty sure I’ve got this one cornered, though the insitutiional holders don’t quite match. This looks to me like it must be …

Kodiak Oil & Gas (KOG — click for a free trend analysis from MarketClub, one of my advertising partners[4])

This is indeed a small oil and gas firm that’s focused primarily on the Bakken/Three Forks formation in the Williston Basin — and it does trade right around $3 per share, and report proven reserves of 3.8 million barrels of oil (plus a substantial amount of natural gas[5]), and Williston acres of about 55,000. The stock is at about $3.25 as I type, and you can see the other basics of the company that match the teaser in their investor presentation [pdf file][6], which does provide a good overview of the company and its holdings and strategy.

Kodiak is a producer, they have several wells that are active and either pumping or flowing, delivering oil to the surface to be sold — so that’s a positive. And they are focused on North Dakota with their drilling this year, their primary property right now is a big swath of Dunn County, ND, where they’re drilling 15 wells (they partner for most of them, so it’s 9.5 “net” wells), though they’re also drilling in a few other areas in the region. Capital expenditures are jumping significantly this year for that drilling, to about $60 million from $21 million last year, and they do have a credit line in place to help if needed, though they don’t report carrying any debt just yet. Analysts expect them to earn 11 cents this year after a loss last year, so that gives them a current year PE of about 30, and those same analysts predict dramatically higher earnings in 2010 for a forward PE of 9 — though there’s clearly some uncertainty, the analyst estimates for next year range from 19 cents to 59 cents, so taking the average of those isn’t necessarily terribly comforting.

They’ve also been pretty strategic, it appears, with natural gas production cutting in half this quarter (compared to a year ago) and oil production up by more than 350% in volume terms — no doubt at least in part because their realized price for oil more than doubled year over year ($30 to $70, roughly) … though to be fair, their natural gas prices improved substantially to, from under $3 to $5+ per mcf.

And no, American Funds[7] isn’t reported as one of the major institutional holders — Vanguard and John Hancock both have some invested, through their funds, and Wellington Management has a large stake, though institutional ownership has actually dropped over the last quarter and is quite low (35%). Insiders hold almost 10%, which is generally bullish for me but also quite common among small resource stocks (and to some extent, small cap stocks in general). Insiders have generally been selling over the last six months, not buying, but not at a particularly alarming rate (to me, at least) relative to the large insider holdings.

So that’s the basics on Kodiak — this year’s results will doubtless be quite dependent on their success in the concentrated leasehold area in Dunn County, though that’s not necessarily a bad thing, and they’re just becoming profitable which, if it sticks, is sometimes a very good time to get on board. This firm is substantially smaller than the stocks we looked at yesterday as Williston Basin plays[8], but it’s not the kind of absolutely teensy penny stock we see every now and then, they do have a market cap of better than $350 million. One more idea to throw on your Bakken pile, let us know what you think of the whole kerfuffle with a comment below.

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