This week, we focus on what is considered to be the largest shale oil formation in North America where an independent oil and gas producer has posted fantastic numbers during one of the most dramatic declines in oil prices in history. Oasis Petroleum (OAS), a producer of oil and gas focused in the Bakken Formation in North Dakota / Montana, posted $74.6 million in free cash flow in its most recent quarterly results. This comes at a time when many of its competitors are just happy to break-even, hoping they can wait out the current low-price oil environment. Oasis has masterfully reduced its per well costs and overall operating costs since the start of 2015. Well costs are down over 30% year to date thanks to the company’s election to use primarily high intensity wells which yield an astounding 30% to 50% higher than traditional well drilling methods. Operating costs have also come down 35% since 2014, from $33.61/boe (barrel of oil equivalent) to $21.78/boe. Tommy Nusz and Taylor Reid, the founders of Oasis, have brought their 30+ years of experience in North American oil production to create a lean competitor in the domestic oil market. Oil’s decline brings unique opportunities for investors. Oasis Petroleum’s 2019 and 2022 bonds are currently indicating a yield to maturity of about 8.8% and 9.8% respectively. Either would be an excellent addition for the savvy investor looking to increase portfolio return, and as such we have marked these as additions to our FX1 and FX2 portfolios.
About the Issuer
Oasis Petroleum Inc. is an independent exploration and production company. The Company is focused on the acquisition and development of unconventional oil and natural gas resources in the North Dakota and Montana regions of the Williston Basin. The Company’s core projects include Williston Basin, West Williston, and East Nesson. The Williston basin produces oil and natural gas from various producing horizons, including the Bakken, Three Forks, Madison and Red River formations. The Company also operates a well services business through Oasis Well Services LLC and a midstream services business through Oasis Midstream Services LLC.
DeGolyer and MacNaughton, Oasis Petroleum’s independent reserve engineers, estimated its net proved reserves to be 272.1 MMBoe as of December 31, 2014, of which 54% were classified as proved developed and of which 87% were oil. This figure increased by 19% over 2013 levels of 227.9 MMBoe.
Oil’s Recent Volatility
Over the past eighteen months, the volatility, and indeed the declines in oil prices have never been far from the news headlines. Today, WTI (West Texas Intermediate) crude oil is trading between $40 and $41 per barrel, down from a high of around $95 / barrel in June 2014. In spite of oil’s precipitous decline, Oasis Petroleum has performed admirably, significantly reducing its well costs and costs per barrel of oil, and increased production with nearly half of last years’ capital expenditures.
The U.S. Energy Information Administration is predicting the cost of WTI in 2016 will be $53.57 per barrel. With its recent aggressive cost reductions, Oasis looks to be cash flow positive with WTI at $50 per barrel. While crude oil prices may take longer than expected to rebound, Oasis will be perfectly positioned to reap maximum profits once prices begin to recover.
High Intensity Wells Help Increase Production
Oasis Petroleum’s work on high-intensity well completions in 2014 gave the company confidence to target completing approximately 60% of new wells with either slickwater or high volume proppant in 2015. Both enhanced completion techniques tend to increase the completion cost per well by $2.0 to $2.5 million. However, early results indicate that wells are benefiting from higher production from 30% to greater than 50%, and Oasis expects high-intensity completion wells to ultimately have higher recovery rates. Therefore, the overall return profile of its wells is increasing as it integrates these techniques into its drilling program. Fast forward to Q4 2015 – Oasis is estimating the percentage of all wells drilled in the second half of 2015 to be approximately 70% high intensity wells and this number will increase for 2016 to 80% of wells drilled.
Reducing Costs, Increasing Production
Oasis’ strategy of using mainly high intensity wells has yielded handsome dividends. As the company has become more efficient at completing high intensity wells, it has been able to reduce its costs per well. In Q1 2015, well costs for high intensity wells were $9.0 M. In Q2 2015, that cost dropped to $7.8M. Finally, in its latest reported quarter, Oasis has managed to decrease that cost even further, registering per well costs for high intensity wells at $7.4M, reflecting a decrease of nearly 18% year-to-date. In fact, well costs are down an impressive 30% since year-end 2014.
Oasis has also reduced its overall operating costs which is reflected in its costs per barrel in 2015. In its latest reported quarter (ended September 30, 2015), operating costs per barrel had decreased 35% since 2014, coming in at $21.78 / boe (barrel of oil equivalent) from $33.61/boe.
Impressively, even with the many reductions in cost, Oasis has increased production. In its latest reported quarter, the company actually exceeded production guidance range (which was set at 48,000 to 50,000 barrels of oil equivalent per day), and increased average daily production to 50,546 barrels of oil equivalent per day, a 10% increase over Q3 2014. The company has managed this with a 57% reduction in capital expenditures over 2014.
Oasis Midstream Services
Oasis Midstream Services (OMS) division has shown healthy growth since its establishment in 2013. Oasis projected this division would generate approximately $40 million in adjusted EBITDA for 2015. For Q3 2015, OMS delivered $20.5 million in adjusted EBITDA, with projections for 2015 now over $60 million, well in excess of Oasis’ original projections. Oasis is currently exploring avenues to monetize a portion of OMS, possibly within a joint venture whereby it maintains control of OMS. A competitor Exploration and Production oil company recently monetized part of its midstream operations in a joint venture, with proved to be very beneficial in terms of a large amount of cash influx to the company. A similar scenario could await Oasis for the right partnership.
Oasis surprised analysts in its most recent reported quarter ended September 30, 2015. Analysts had pegged the company to post earnings of $0.06 per share. The company surprised analysts, posting $0.09 per share in earnings.
In addition, Oasis generated free cash flow in Q3 2015 of $74.6 million, even though oil prices fell 20% during the same quarter. The company also posted free cash flow in the previous quarter.
Oasis has used hedging strategies in the past to help even out its profits relative to the volatility of oil prices. The company has continued its hedging strategy for 2016, with roughly half of its daily production hedged for the first half of 2016 at $54.85 per barrel and roughly 40% of its daily production hedged for the second half of 2016 at $52.96 per barrel. With predictions of oil remaining at or near the $50 per barrel mark, this strategy should provide additional cash flow to the company.
As of September 30, 2015, Oasis Petroleum had a total liquidity of $1.35 billion which provides ample room for the company to support operations in the event of additional commodity volatility.
The risk is Oasis Petroleum’s ability to perform. Oasis has an excellent management team that has done a fantastic job reengineering the company to be profitable even in the challenging environment that is the current oil industry. The company has reduced its well and per barrel operating costs this year and it has paid off with free cash flow and an earnings surprise in its most recent quarter.
Since Oasis receives most of its revenues from the sale of oil and to a lesser extent, the sale of natural gas, it is exposed to the volatility and fluctuations of the price of oil and gas on the open market. The company has successfully used a hedging strategy to reduce its exposure and has secured partial pricing hedged for 2016, and to a smaller extent, 2017 as well.
These short and medium terms bonds have similar maturities, yields, or risks to other bonds reviewed on Bond-Yields.com, such as the 8% Calumet Specialty Products, the 9.18% Parker Drilling, and the 8.5% Carrizo Oil and Gas.
Summary and Conclusion
As the low price oil environment continues, many of the largest oil companies in the world have been forced to reduce costs and have suffered losses. Oasis saw the writing on the wall and has been able to reduce its capital expenditures and operating costs, all while increasing daily production. With two consecutive quarters of free cash flow under its belt, the company has reinvented itself as a lean competitor amongst U.S. independent oil and gas producers. Low oil prices have not stopped Oasis from drilling and producing oil – they’ve just become better and more efficient at doing it. Tommy Nusz, CEO of Oasis Petroleum recently stated “High commodity prices hide a lot of inefficiencies in the system. Most companies will come out of this cycle stronger.” It does appear that Oasis is definitely a stronger company today. Oil’s decline has brought opportunity for investors as well. Both the 2019 and the 2023 bonds issued by Oasis, currently trading about 8.8% and 9.8% respectively, provide investors a healthy return, especially when compared to the “safe” alternative of U.S. Treasuries, which are yielding 1.27% to 1.75% for the 3-year and 5-year bonds respectively. Consequently, we have marked these notes for addition to our Fixed-Income1.com and Fixed-Income2.com high yield global income portfolios.
Issuer: Oasis Petroleum Corp.
Yield to Maturity: ~8.85%
Yield to Maturity: ~9.83%
About Durig Capital
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Disclosure: Durig Capital and certain clients may have positions in Oasis Petroleum’s 2019 and 2022 bonds.
Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. As a result of our institutional association, we frequently obtain better yield/price executions for our clients than is initially indicated in our reports. We welcome inquiries from other advisors that may also be interested in our work and the possibilities of achieving higher yields for retail clients.
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