Earlier this month the 12-member group of nations belonging to the Organization of the Petroleum Exporting Countries (OPEC) opted to keep oil production quotas at their current level, a disappointment to many drivers who were hoping for some relief at the pump but a potential opportunity for oil and gas exploration and production companies like Kodiak Oil and Gas Corporation (AMEX: KOG) who could now find greater demand for their services. Of course even with an established demand for domestic oil companies like KOG still need to produce the mighty barrel and that can be harder than convincing OPEC to drop prices.
It has been a volatile few months for KOG as they climbed to a 52-week high of 7.70 back on March 1, 2011 but then tumbled down to 5.51 just two weeks later. Shares then pushed their way up to 7.44 on April 27 only to fall once more down to 5.75 by mid-May. By the end of May they had reached a high of 6.94 as the anticipation over the OPEC decision gained momentum yet even with a favorable decision KOG has slumped to a six-month low of 5.20 on Monday with the current trading standing around the 5.28 – 5.35 range, well below the 50-day moving average of 6.36 as well as the 200-day moving average of 5.60.
Without question KOG has earned high marks for their growth potential and their recent expansion in the Bakken region of Montana and North Dakota should help foster that growth. That expansion came about following news that they were acquiring 25,000 net acres in McKenzie County, N.D., close to its Koala, Smokey and Grizzly project area, along with a contract for a new drilling rig, for just under $90 million. This pushes their acreage in the Williston Basin, located in North Dakota and Montana, to roughly 95,000 net acres.
Given the fact that the Bakken region offers considerable resources along with continued support from the U.S. government to endorse domestic production as a means of alleviating foreign dependence it would appear that KOG is in a favorable position. Of course with a manageable price per share and recognizable potential there has also been plenty of talk placing KOG as the target of a buyout from a company like ConocoPhillips (NYSE: COP).
Putting the buyout talk aside KOG has given every indication that they are committed to moving forward as a company, increasing their capital expenditure program by nearly 15% to $230 million. Their recent acquisition also increased their operated rigs to five and one non-operated rig, a noticeable bump from their two-rig drilling program in the Williston Basin that they had at the end of the first quarter this year. According to their most recent operations update KOG is now operating a three-rig drilling program in the Williston Basin, “with the rigs drilling on multi-well pads in three of the Company’s core projects areas: Dunn County, N.D., and Koala and Smokey in McKenzie County, N.D.” A fourth rig is now in position and a fifth operated rig is expected in the fourth quarter of 2011.
The operation update went on to note KOG had six gross (four net) operated wells waiting on completion with the wells being comprised of a two-well pad on the Koala block which is scheduled for completions “from late June and into July 2011” and a four-well pad in Dunn County “where completions are expected to commence during July and into August 2011.”
KOG is has also taken part in drilling four gross (two net) non-operated wells that are awaiting completions in its Dunn County core operating area with anticipated completion for late second quarter and early third quarter of 2011.The company stated that drilling operations continue on this non-operated block of acreage which they control a 40% to 50% working interest in the wells being drilled.
Providing KOG shareholders with some additional confidence regarding the company’s growth is the activity of other oil and gas exploration and production companies in the Bakken region. Both Brigham Exploration Corp. (NASDAQ: BEXP) and Oasis (NYSE: OAS) have marked aggressive plans for production and have increased their capital expenditure programs in the region. The favorable conditions surrounding KOG certainly helped encourage Global Hunter Securities to upgrade their position from “neutral” to “accumulate” earlier this month.
But as evidenced by the share slide not everything about KOG can be considered as a positive and just last week the company said it would be lowering its production target in the Williston Basin to a range of 4,500 to 5,000 barrels of oil equivalent a day, a dramatic drop off from earlier estimates suggesting 5,500 to 6,500 barrels. Unfortunately for KOG the cause of this is essentially out of their control, a cold and snowy winter that made conditions during the first quarter difficult at best. This is the reality of the region and with weather a consistent wildcard it is certainly tough for investors to exude a high level of confidence when such a factor is completely out of management’s hands.
That being said KOG continues to express confidence that they will hit their target of 9,000 barrels a day by the end of the year and estimates the second quarter sales volume will top the first quarter figures by 35%. The company has also revised earlier projections concerning the number of wells to be drilled during the year, anticipating 42 gross and 26 net wells compared to 38 gross and 23.4 net wells.
Even with KOG’s confidence the recent share slide is certainly disconcerting to say the least and its swing below the 200-day moving average has many shareholders worrying. For their part KOG has remained aggressive in acquiring land but that will only prove fruitful if they are able to actually generate revenue and turn that into profits for their investors. Opportunity is there for KOG as the Bakken region remains one of the most promising oil and gas plays and there will undoubtedly be support from the government as they continue to push for more stable, reliable, and affordable domestic outlets for oil and gas but KOG has to put their mark on 2011 and that may mean surpassing the target of 9,000 barrels a day.