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Wells Fargo & Company (NYSE:WFC) today upgraded Kodiak Oil & Gas Corp. (NYSE:KOG) to outperform, based on the company’s impressive operations in the Bakken shale field, and various other factors. Below is a summary followed by the full report.

  • Summary: Extensive Bakken tour with Mr. Lynn Peterson, CEO of Kodiak Oil and Gas. We walk away with new appreciation for the Bakken, particularly as it relates to the massive size of the play. Also walk away impressed with Kodiak’s operations and game plan, and we expect KOG to post impressive growth over the next few years. Remains a favorite pick in our E&P universe.
  • Bakken: Everything You’ve Heard Is Understated. We walk away impressed by the massive aerial extent of the play, the staggering levels of rigactivity, the endless streams of trucks, the man-camps, the packed restaurants, etc. Doing some back of the math envelope, we see at least $20B of E&P capital in 2012, excluding money which we be spent on midstream, rail terminals, and in local business. Don’t believe play is slowing down anytime soon.
  • KOG: Set To Ramp. We come away impressed with Kodiak’s operations. Company now has 6 rigs running and with recent acquisitions, we expect tremendous growth over the next few years. As we have already seen from all Bakken players, including Kodiak, there will likely continue to be some growing pains over the next few years. But ultimately, we believe that those who believe in Kodiak would do well to avoid a myopic view of watching week-to-week operations and focus on the long-term potential of this company/play. In our view, any share price weakness on near-term temporary issues should be viewed as a good opportunity to add to positions.
  • WTI: Brent Spread … What If? We ran some scenario analysis to determine what KOG would be worth when the WTI vs. Brent spread eventually narrows. Using Brent strip less transport beginning in 2013, KOG’s NAV increases to $14.20/share vs. our current NAV of $12.34/share estimate and would put KOG shares at 3.4x 2013E EBITDA.

Valuation Range: $12.00 to $14.00
Our valuation range is based on our NAV estimate, which includes value for both proven and unproven reserves, as well as other net assets and liabilities. Our NAV estimate for KOG is $12.34 per share. Risks to our range include commodity price volatility, minimal diversification, access to capital, and tight services and midstream infrastructure in the Williston Basin.

Investment Thesis:
KOG offers concentrated exposure to extensive crude oil resource in the Williston Basin of North Dakota. With an impressive growth outlook and attractive valuation, shares look inexpensive relative to peers, in our view.

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