Share price of Kodiak Oil & Gas (KOG) has risen by 72% over the past 12 months, significantly outpacing a 19% return for the S&P 500 index. In my view, the shares still offer great value at the this level as it appears the company's improving cash flow outlook is underappreciated by the market and the current stock price is trading below my intrinsic value estimate.
KOG has been a solid cash flow generator. Over the past 3 years, the company has managed to grow its operating cash flow margin from 45% in 2011 to 61% in 2013, primarily due to production growth and continued improvement in capital efficiency (i.e. cost per production). Given that most of KOG's acreage is currently held by production, it is expected that costs per well/production are expected to decline over time, while production will gain momentum. In my view, these dynamics should drive
One of the more persuasive pieces of Benjamin Graham's logic that I have encountered is the notion of buying stocks that are so attractively valued that, even if future growth is not particularly impressive, you can still achieve satisfactory returns. And if the future growth does conform to your expectations, well, you'll end up making a lot of money.
There are different ways that you can try to implement this strategy, but my preferred method is to follow the Peter Lynch approach of looking for companies that have a much better underlying economic reality than the prevailing reputation suggests. One such company that fits this criterion is BP (BP).
We all know the story of what happened with BP over the past few years. The oil giant had spent the 1990-2010 generation building a reputation as one of the no-brainer blue-chip investments, eventually becoming the source of 10% of the
Head Full of Steam
Kodiak Oil & Gas (KOG) began the year in an expansive mood, with capital expenditure waiting to be unrolled as the company initiated its own variation on the plug-n-perf methodology for successful fracking in its Polar well series, which saw their production numbers climb despite the introduction of 2 additional wells into the normal mixture of six they had traditionally drilled in each spacing, completion costs that were continuing to drop as completion times diminished into the 17-19 day range, and strengthening oil prices globally rose on the lack of Libyan production, closure of the gap between WTI and Brent, and the promise of a refinery and infrastructure shortfall for light sweet crude in the United States. The entirety of these forecast events has transpired for KOG, and the stock price has reached 52 week highs in the past months, only to be battered down sharply