Oasis Petroleum (OAS) appears to have been unduly punished for outspending cash flow. However, with the expectation of becoming cash flow positive in the second half of the year, a reserve value that far outweighs its market capitalization, and other indications of a bargain, energy investors looking for capital appreciation should consider this Bakken-primary company, particularly as it delivers on oil-weighted production. Additionally, it gains some operational heft via its majority interest in a midstream partnership.
Note that its liability-to-asset ratio is 50%. As of mid-August, shorted shares were 19% of floated shares. The company’s presence in the Delaware is fairly miniscule, and as a consequence, it risks overspending there.
The company does not pay a dividend.
Throughout the report I will describe the producing areas as Bakken – some also use Williston – and Delaware or Permian.
Brief Company Summary
Oasis Petroleum is headquartered in Houston, Texas, with field offices in Williston, North Dakota and Midland, Texas. The company employs over 700 people full-time. It was founded in 2007.
At a September 20th, 2019 closing price of $3.96/share, its market capitalization is $1.275 billion.
WTI oil prices, credit: Macronet, left-hand axis is $/bbl
Oil Prices, Production, and Differentials
The September 20th closing oil price was $58.09 per barrel for West Texas Intermediate (WTI) crude oil, lower than at other times of the year, but higher on the news of the drone attacks on Saudi Arabian facilities taking out 5.7 million barrels per day (BPD) of oil production, uncertainty about the time for which they will be offline as evidenced by Saudi Arabia’s call for oil imports for its own refineries, increased sanctions on Iran, and uncertainty about the length and size of refining and transportation outages on the Gulf Coast due to flooding from tropical depression Imelda.
The Energy Information Administration (EIA) prepared and released a comprehensive report on the Saudi situation, including storage levels of crude and products. Of note is that Saudi Arabia is not currently able to supply the preferred Saudi Light crude quality at this point.
For example, the graphs below shows the level of crude oil stocks and the level of imports of crude from Saudi Arabia compared to total U.S. crude imports. Other than our own supply, the country supplying the U.S. the most crude oil is Canada.
Although the release date for this 5-95 price graph from the EIA is September 10, 2019 — before the attacks on Saudi Arabia bumped the price up about $5/barrel — it is useful to see the size of the uncertainty even six months out.
The WTI futures market for crude oil is backwardated, with January 2020 prices slightly lower than current, and December 2020 prices lower than current by about $5.50/barrel. Despite the Saudi outage, supply restoration there is expected relatively quickly, and more oil is due to come on next year from the U.S., Norway, Brazil, and Canada, according to the IEA.
The Bakken crude oil price (measured at Clearfork, Minnesota) is typically less than the WTI price due to differences in transportation and markets. For example, a prime Bakken crude market, the 335,000 Philadelphia Energy Solutions refinery, is now shut down after a large fire there.
A one-day snapshot on September 18, 2019 showed Bakken at $8.58/barrel less than WTI, or $49.50/bbl.
For the week ending September 13, 2019, current US oil production was 12.4 million barrels per day (MMBPD), a touch below the recent highest level ever of 12.5 MMBPD. In October 2019, Permian (West Texas-Eastern New Mexico) crude oil production is projected to rise to 4.5 MMBPD and Bakken oil production to 1.5 MMBPD.
In the second quarter of 2019, Oasis produced 84,500 barrels of oil equivalent (BOE) per day, a 6.3% year-over-year increase. Of this, 61,224 BPD, or 75%, were oil.
Oasis is relatively new to the Permian, and it shows. By basin, 78,300 BOE/D, or an enormous 93% of its second-quarter production came from the Bakken and only 6,200 BOE/d came from the Permian.
The company’s average oil price for the quarter was $58.87/barrels and its average natural gas price was $2.29/thousand cubic feet (MCF).
Oasis’ second-quarter net income was $42.7 million, or $0.14/share; its six-month 2019 result was a net loss of -$72.1 million or -$0.23/share. This includes an $83 million loss on derivatives and $367 million in non-cash depreciation, depletion, and amortization.
For the first half of the year, the company was cash flow-negative, earning $389 million from operations and making $528 million of capital expenditures.
Oasis Petroleum’s Bakken and Delaware Reserves
As of December 30, 2018, Oasis had 320.5 million barrels of oil equivalent (BOEs) of reserves. Of this, 71% was oil and condensate.
The SEC PV-10 value of the reserves was $3.6 billion for proved developed and $1.1 billion for proved undeveloped, totaling $4.7 billion.
Oasis’ competitors in the Delaware sub-basin are extremely numerous and include private companies such as Admiral Permian, very large public companies like Chevron (CVX) and Exxon Mobil (XOM), and small to medium-sized companies such as Callon Petroleum (CPE) and Parsley Energy (PE). Competition extends throughout its business, from hiring executives and expert professionals, to competing for service contractors and takeaway capacity, to selling oil and gas.
Oasis Midstream Partners LP (OMP) is a $561 million market cap partnership that operates in conjunction with Oasis but trades separately. Oasis Petroleum is the majority owner of Oasis Midstream Partners.
At July 29, 2019, Institutional Shareholder Services ranks Oasis Petroleum’s overall governance as a 6, with sub-scores of audit (5), board (5), shareholder rights (6), and compensation (5). In this measurement, a score of 1 represents lower governance risk and a score of 10 represents higher governance risk.
Insiders own about 2% of the stock.
At mid-August 2019, 19% of the floated stock was shorted. This could cap upside movement unless shorts unwound some positions during last week’s oil price increase.
Strategy, Capital Expenditures and Growth Prospects
Per CEO Thomas Nusz, Oasis’ plan is to harvest Bakken free cash flow to fund growth in the Delaware. It has 414,000 net acres in the Bakken and 23,000 net acres in the Delaware. Throughout 2019, it will be operating 2-3 rigs in the Bakken and 2 in the Delaware and expects to end the year at 87,000-90,000 BOE/D.
It’s also worth observing that North Dakota has increasingly strict guidelines on capturing gas production and Oasis has been able to capture 10% more gas than average for operators in North Dakota.
Bakken production remains key, so it is positive that the company expects the price differential of its crude to benchmark WTI to narrow slightly from $1.50-$3.50/barrel to $1.50-$3.00/barrel.
In 2019, Oasis plans to make capital expenditures of $620-$800 million. Since it has already made over $520 million of expenditures in the first half of the year, it may be on track to become free cash flow positive in the last half of the year, a goal it has described in the second quarter report that it will accomplish.
Financial and Stock Highlights
Oasis’ market capitalization is $1.275 billion at a September 20, 2019 stock closing price of $3.96 per share.
Trailing twelve months’ earnings per share was $0.68, giving it a 4.0% return on assets, a 6.35% return on equity and a trailing price-earnings ratio of 5.9.
As second-quarter results show, the company is still coming out of cash outspend mode: while its trailing twelve months operating cash flow was $853 million, its levered cash flow was -$521 million.
The average of analysts’ estimated 2020 earnings per share is $0.04, with a wide range of -$0.61 to $2.28.
At June 30, 2019, the company had $3.84 billion in liabilities and $7.71 billion in assets giving Oasis a moderate liability-to-asset ratio of 50%. Its ratio of current assets divided by current liabilities is 0.85, a bit less than the desirable minimum of 1.0.
Oasis’ 52-week price range is $2.41-$14.57 per share, so its September 20th, 2019 closing price of $3.96 is a fractional 27% of its one-year high. The company’s one-year target price is $5.43/share putting its September 20th closing price at 73% of that level.
Like many other small exploration and production companies, Oasis does not pay a dividend.
The company’s mean analyst rating is a 2.0, or “buy,” from the thirty-two analysts who follow it. The five most recent changes have been three downgrades and two initiations.
At June 29, 2019, the seven largest institutional holders, some of which represent index fund investments that match the overall market, were BlackRock (11.25%), Vanguard (9.5%), Dimensional Fund Advisors (7.6%), Encap Energy Capital Fund VIII (6.3%), State Street (5.35%), Millennium Management (4.4%), and Citadel Advisors (4.0%).
Oasis Petroleum’s beta is 2.19, representing much more volatility than the overall market but in line with the variability of the small-to-mid-sized oil and gas sector.
Notes on Valuation
The company’s book value per share of $11.42 is almost triple its market price, implying very negative sentiment.
With an enterprise value of $4.3 billion, the enterprise value/EBITDA ratio is a bargain-level 2.9.
The market capitalization to production ratio tells a similar story: a quite-low-to-peers $15,100/flowing BOE.
And note again, the company’s reserve value – even from ten months ago – far outweighs its current market capitalization, another positive.
Positive and Negative Risks
Potential investors should consider their oil price expectations overall and expected differential between Bakken and WTI benchmark crude as the factors most likely to affect Oasis.
Recommendations for Oasis Petroleum
Oasis Petroleum does not have critical mass in the Permian and thus may wind up with outsized well and G&A costs. Additionally, it still has a substantial amount of debt. Shorts are a non-trivial 19% of the floated stock which could cap stock price appreciation.
Oasis does not pay a dividend and so is not recommended to dividend-seeking investors.
The company’s current stock price is 73% of its one-year target but only 27% of its one-year high. Like others in the sector, Oasis has dropped due to global supply exceeding demand and specifically for outspending cash flow in prior quarters.
Nonetheless, Oasis is handling the gas removal and commercialization issue ahead of its peers. Moreover, Bakken light — like all U.S. light crude oil — may continue to see uplift for a while in view of Saudi Arabia’s loss not only of production but also of the ability to process (including removing sulfur from sour crude) a hefty chunk of the crude oil it exports.
The company is producing 84,500 BOE/D, expects to be cash flow positive in the second half of the year, and has an operationally- and financially-useful ownership in a midstream partnership. Its reserves, with an SEC value of $3.6 billion for proved developed and $4.7 billion for total developed, outweigh its current market capitalization of $1.275 billion.
Risk-savvy investors looking for capital appreciation in the energy sector may want to take a much closer look at Oasis.
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Disclosure: I am/we are long CVX, CPE, EOG, PE, WPX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.