Kodiak Oil & Gas (KOG)

[Med.rare]

Zacks.com
Buy Kodiak Oil & Gas Up to $5
Friday May 16, 1:22 pm ET
By Sheraz Mian


We are maintaining our Buy recommendation and raising our price objective for Kodiak Oil & Gas (AMEX: KOG - News) shares following its mixed quarterly results. The increased price objective is primarily a result of our higher commodity-price deck.

Although the development has been slow, the potential for reserve adds in Vermillion offer significant upside potential that has been too heavily discounted. The recent agreement with Devon Energy (NYSE: DVN - News) further improves the viability of the Vermillion play. Additionally, the company's growing Bakken exposure is valuable, particularly given the backdrop of continued oil strength.

Due to the complex nature of the Vermillion Basin and the unconventional extraction methods associated with it, we have created a modified sensitivity analysis to understand what the effect of delaying full scale production will have on valuation. Currently our valuation has priced in full scale production in Vermillion occurring in late 2009, this assumption gives a one year target price of $5.00.

Another important factor related to our NAV [net asset value] is regarding the two different sets of commodity-price decks used, i.e., Zacks estimates and NYMEX prices. Using these two price decks, our NAV per share estimates come to $5.00 (Zacks) and $9.70 (NYMEX). The NAV based on NYMEX prices, however, is listed mainly for reference.

For the Zacks price deck, we are using natural gas rates of $8.50 per Mcf [million cubic feet] for the remainder of 2008 and 2009. For oil we assume $95 per barrel for the remainder of 2008 and $90 during 2009. From 2010 to 2012, the Zacks gas/oil price assumptions are $7.75/$85. After 2012, the Zacks commodity price assumptions increase at 3% per year.