Kodiak's Knockout Punch

When Warren Buffett was in India for the first time last March, among the first things he said regarding investments was nothing less than his famous philosophy: "My advice to anybody with a good business is to keep it." A piece of advice so simple, yet so difficult to follow. Going through the third-quarter results of Kodiak Oil & Gas (NYS: KOG) and its performance over the past 12 months, you get the impression that Buffet's advice applies to this company.

No stopping this company
Kodiak's total revenues shot up to $29.5 million for the third quarter compared with $8 million a year ago -- a phenomenal 263% jump. The Bakken reserves having been playing true to expectations. Income from core operations, excluding any hedging activities, grew an astounding 637% to nearly $12 million.

The last 12 months have seen steady growth in terms of production, and this is what I'm looking for. But the best part is that there's more to come in terms of growth. I'm impressed with the five wells completed (with a working interest of 50% in each) in the third quarter in Dunn County, which have yet to add to production. Initial 24-hour production tests on these wells indicate an additional 3,500 barrels of oil per day. In other words, if these wells perform as expected, they have the capacity to increase current production by up to 50%. Of these new wells, I'm particularly impressed with FBIR Bird 31X-19 and FBIR Stephen 31X-19, which have above-average well pressures.

Following examples
Mature Bakken players EOG Resources (NYS: EOG) and Continental Resources (NYS: CLR) have shown how increasing production is the key to success to expanding in this region. Considering how Continental's proved reserves increased 15% in a matter of six months, Kodiak's sweet-spot properties should serve the company pretty well.

A future laden with promise
Management expects to exit this year with production at 9,000 BOE/D from current levels of 7,500-8,000 BOE/D. But it doesn't end there. With management signing a new agreement with drilling major Halliburton (NYS: HAL) , the intentions to expand production are solid. Backing this up is a new line of credit facility drawn up with Wells Fargo (NYS: WFC) , which increases the maximum credit amount from $200 million to $750 million and the borrowing base from $110 million to $225 million. It's heartening to see major banks putting increased faith in this stock.

Foolish bottom line
As Foolish investors, we must realize the worth of such companies that have the potential to be hugely rewarding. Once in a while, good businesses do show up regardless of their recent stock movements. Echoing Buffett, the best thing to do is hold onto such stocks.

In the meantime, The Motley Fool can help you keep a track of this company for the latest news and analysis. All you need to do is add it to your watchlist. It's free.

At the time thisarticle was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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