By
Braden
Holt
:
If you've bought
Kodiak's
(
KOG
) stock in 2012, there's no doubt you've paid a premium. Outside of
a few earlier stage companies, there are not many independent U.S.
E&P companies that trade on multiples as high as Kodiak. This
doesn't necessarily mean you overpaid or that the company is
overvalued, because with reserve and production growth of more than
500% and 400%, respectively, it has been growing faster than Barry
Bonds' nose during the past year (year and half for reserves).
Just how highly valued is Kodiak?
Well, the company is trading at an enterprise value to
trailing-twelve months' production (EV/TTM Production) of $1,027
per BOE ($374,773 per flowing barrel) and EV to reserves of $46.05
per proven reserve. These multiples represent a 105% and 33%
premium, respectively, to the peer averages in the chart below.
For KOG to receive a valuation on its production equivalent to
that of the peer group below, it would need to produce at a TTM
Production rate of 6,452 thousand barrels of oil equivalent
((MBOE)) or 17.7 MBOEPD, which is 105% more than the company's TTM
production at June 30, 2012. While this number is significantly
more than the company's TTM number, it's not much more than the
company's current production rate. In its second quarter (Q2'12)
conference call, KOG revealed that it produced at a rate of 17,000
BOEPD during July, and if the company keeps this rate flat for the
next year, its TTM production will be 6,205 BOEPD, nearly the same
rate as the peer group multiple implies. Furthermore, the company
expects to exit 2012 producing at a rate of 27,000 BOEPD, so one
could easily argue that KOG's current production will outgrow the
peer group production multiple below within the next year.
Kodiak Peer Multiples
(click to enlarge)
The peer group reserve multiple above of $34.59 per BOE implies
that the market expects KOG's reserves should be valued 33% higher
than the peer group, meaning the market believes KOG is turning
unproven reserves to proven reserves at a relatively higher rate.
There's plenty of reason to agree with the market's assessment, as
KOG has grown reserves more than 500% during the past two years and
more than 36% so far this year. While growth as a percentage may
slow down moving forward, the fact is the company has only
completed 82 of its 807 net potential well locations in the Bakken,
meaning it has plenty of acreage to prove up and grow reserves.
Of these 807 potential locations, 564 of them lie in the
company's Dunn County, Koala, Smokey and Polar prospects where its
completions have been strong. Where the company may run into
trouble with its margins in the Bakken are with its Grizzly and
Wildrose prospects, which comprise 244 or 30% of its net locations.
The Grizzly prospect wells have been smaller to date, and the
company attributes this to lower pressure in the Western portion of
the North Dakota Bakken. Its most recent completions in the
prospect have had 30-day IP rates of 328, 248 and 394 BOEPD, which
is approximately 1/3 of the rates it has achieved in its Koala
prospect. KOG does anticipate these wells having shallower
declines, but it remains to be seen how economic they will be.
The company has shelved drilling in its Wildrose prospect (this
acreage is HBP) for the balance of 2012 after completing two wells
there. It does expect to earn 20% IRRs across this acreage, but
believes the economics there are not as strong as in its other
acreage. While this bodes well for economics in its other acreage,
the Wildrose wells came in below expectations (one came in at 225
BOEPD) and this combined with the company's plans to shelve the
acreage for now doesn't speak highly of it.
Kodiak's Metrics
(click to enlarge)
Financially, Kodiak is in decent shape with respect to its
peers. Average LOE and G&A costs per BOE without HK (HK was
included in this analysis for its valuation multiples) total $14.03
and $7.58, respectively, meaning KOG could improve its valuation by
operating more efficiently. The company should pare down expenses
as it matures as an operator and increases scalability. CLR does
bring down the costs in this analysis, but note it's a more mature
company that is very well run. I'm comfortable with KOG's current
debt level; however, it's getting close to debt levels that the
market could deem excessive at its current size. The company's
interest coverage ratio is low, particularly with respect to its
Bakken peers (CLR and OAS). While it only recorded interest expense
of $8.2 million during the six-months ended June 30, 2011, it
actually paid an additional $25.0 million in interest expense, but
this amount was capitalized.
KOG has been a serial issuer of equity capital during the past
few years and has begun to issue debt as of late. While the company
has succeeded in putting this capital to work, its financial
condition will be in a lot better shape once it grows production to
the point where it can spend within cash flows. Operating cash
flows for the first six-months were only $90 million and while this
figure will improve substantially during the balance of the year,
the company will have spent an estimated $650 million on capital
expenditures by the end of 2012 and I doubt it slows down spending
anytime soon. I'm not raising the red flag on KOG, but there's
certainly a chance it goes to market to fund its 2013 capital
expenditures and its debt levels (while manageable at this point)
deserve monitoring moving forward, particularly if oil prices take
a dive.
There's a lot of reasons to like Kodiak. It has a strong asset
base with more than 100k premium Bakken acres giving it plenty of
room for future growth. In addition, these guys are great operators
who run an efficient company which will only become more efficient
as it grows. Where it runs into trouble is that it's trying to grow
faster than its balance sheet can handle and its liquidity issues
will start to compound if it continues to sell debt. KOG is
constantly mentioned in acquisition talks these days, and for good
reason as I believe it needs someone to take it to the next level.
To that point, it's worth noting that Brigham was bought by
Statoil
(
STO
) in 2011 at a 36% premium, while GeoResources (who did own some
Eagle Ford) was bought by
Halcon
(
HK
) last spring at a 24% premium (I'd expect something closer to
Brigham's premium for KOG). If management chooses not to sell,
investors should be prepared to be diluted again sometime within
the next six-months. I would buy this stock at its current
valuations, but I wouldn't pay much more.
Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.
See also
Weekly Performance Update On 6 Foreign Oil And Gas
Stocks
on seekingalpha.com