Paulson, Griffin Buying Into Bakken's Freshest Face

 | Aug 29, 2013 | 9:00 AM EDT  | Comments
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Kodiak Oil and Gas (KOG), the diversified oil and natural gas E&P, has found some well-heeled suitors in the market as of late. The stock is up a little more than 11% in the past three months, and a couple of prominent hedge fund managers substantially increased their positions in Kodiak during the second quarter.

In case you didn't know, we at Insider Monkey track quarterly 13F filings from the hedge fund industry's "elite" and other notable investors, which can be useful in developing investment strategies. We've found that the most popular small-cap stocks from this space can generate an excess return of 18 percentage points per year.

Paulson & Griffin

In the latest round of 13F data from the second quarter, John Paulson's Paulson & Co. initiated a position in Kodiak of 14.95 million shares with a market value of $132.98 million. The stake represents the 29th largest position in Paulson's equity portfolio, and was the only pure energy play he established a new holding in during the period.  

Citadel Investment Group, headed by Ken Griffin, increased its position in Kodiak by 5.25 million shares during the second quarter, for a total of 16.31 million shares with a market value of $145 million. Considering the fact that Citadel's equity portfolio contains almost $58 billion in assets, a top-50 position isn't too shabby in this E&P's case.

Why Be Bullish on Kodiak?

First and foremost, Kodiak is expanding its operational scope by entering the Bakken oil region. The company reported in July it acquired approximately 42,000 net leasehold acres and net production of approximately 5,600 barrels of oil equivalent per day in McKenzie and Williams Counties, N.D. Kodiak now has total lease holdings in the Williston Basin of around 196,000 acres. The leasehold interests were acquired for $660 million.

In 2012, the company spent around $810 million in capital expenditures for drilling and completing new wells, including surface facilities and pipeline connections. Overall, Kodiak had estimated total proved reserves at the end of 2012 of approximately 94.8 million barrels of oil, compared with 39.8 million barrels at the end of 2011. The discounted future cash flows for the reserves is $1.9 billion, versus $850.7 million for 2011.

So, in layman's terms, Kodiak is showing solid growth in its tangible asset base, which may be driving Griffin and Paulson's bullishness. Revenue trends are also promising.

In the second quarter, the company had revenue of $173.5 million, an increase of 102% from $85.8 million for the prior year's quarter, and 5% growth quarter-over-quarter. Kodiak further reported an adjusted EDITDA income of $131.1 million, versus $67.7 million in the prior year quarter -- a 94% increase.

What Else?

It's worth pointing out that while last quarter's net income was just $44.3 million (down from $93.1 million year-over-year), this number includes an unrealized gain of $20.9 million from mark to market derivatives used for commodities hedging operations. What's more, Kodiak also recently completed a private offering of $400 million in aggregate principal amount of senior notes due 2022.

With a price-to-earnings ratio of 25.34 and a forward P/E of 9.49, there's clear value here to boot. While a debt-to-capital ratio of 56.6% might be a concern to some, Kodiak is incurring a substantial amount of debt in the expansion of its operations and leaseholds -- an acceptable model in domestic energy's current macro environment.

Let's Get Technical

The issue is whether individual investors can profit by following Paulson and Citadel by mimicking their investments. Shares of Kodiak are up 11.30% year to date, and the stock's price just broke through its 20-day simple moving average. The current trading range is well above its 50 and 200-day SMAs, a second bullish indicator.

Volume has generally been trending downward since mid-July, with an average daily volume of 6.27 million shares. The stock had 42 million shares being sold short as of July 31, for a moderate short float of 16.17% and a short ratio of 6.17. Unless the FINRA data reaches the 25% to 30% level, we wouldn't be too worried about short sellers any time soon.

Final Thoughts

With a number of bullish signs at its door, Kodiak's stock may be on the way up. Ken Griffin and John Paulson are two of the most-watched hedge fund managers on the markets today, and their favoritism of this E&P shouldn't be overlooked.

Although debt levels have increased to fund the expansion of leaseholds and production, revenues are also showing strong growth, and at its current valuation, dare we mention a GARP play as a possibility? It's worth doing further research on, that's for sure. 

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