Oasis Petroluem (OAS) is a name we've followed since just before the IPO in June 2010, and we've owned it since its first day as a public company. We're not going to rehash the basic story here, but wanted to make a few comments about relative valuation, as the name has been "running to stand still" along with many of its Bakken Player peers. We think, like a coiled spring, the stock can only ignore the fundamentals of rising production and EBITDA for so long before, well, springing.
The stock very much looks like a tightening base pattern, but with less of a decline in volume than often seen before a breakout. We're not technicians by any stretch, and only bring up this technical comment because as the share price has tread water, the name has become increasingly cheap on a TEV/BOEpd basis. Additionally, growth in production and EBITDA over this period have repeatedly beat guidance and Street expectations.
So let's look at some items of interest:
1) Oasis has not diluted us since going public. Roughly 92 mm shares in the beginning and 92 mm shares now.
2) Production since the stock "stopped moving up" has gone from 8,090 BOEpd (1Q11 average) to 24,257 BOEpd as of 3Q12. Quarterly EBITDA advanced from $41 mm to $139 mm during this same period. EBITDA margins are holding north of $60/BOE, which is nearly best in show in the E&P universe, and in-line with pure play Bakken peers Kodiak Oil & Gas (KOG) and non-operated Northern Oil & Gas (NOG).
3) Given the lack of movement in the stock price, market valuation per flowing BOE -- as reflected by TEV/BOEpd -- has never been cheaper. When companies are small and growing quickly, we expect higher than M&A type prices for this metric. As a company matures, we expect the multiple to contract. So far, so good. But it has fallen to the point that Oasis could be bought within a few quarters for the value of its production, putting only a token value on the 333,000 net acre largely core Williston Basin position, which seems too low, given the fact that at even at OAS' 2013 expected accelerated rate of 120 net wells per year, the inventory would still take a decade to drill through.
4) Note that given the expected growth in EBITDA this year, we should see a marked reduction in the rate of net debt growth in 2013. Maybe Oasis balances its prior debt issuance with an equity offering, but we would think that's not something we see without an acquisition attached to it. Oasis could simply fill its funding gap with cash on the balance sheet and raise no further senior debt or equity in 2013, if we are correct on the budget being about the same size as this year's (although due to recent well cost declines and drilling efficiencies, Oasis will get more wells drilled for the money).
Look for management to release official guidance for 2013 in January. Our sense is that the name will get more attention for the noticeable net debt growth deceleration and still rapid-volume growth, potentially adding a multiple to its forward TEV/EBITDA and augering for price targets to move towards the low- to mid- $40s. We continue to own Core and Trading positions in the ZLT. For more of the back story here, please visit zmansenergybrain.com.