Oasis Petroleum: Estimated Value Of $6.30 To $8.40 Per Share

| About: Oasis Petroleum (OAS)

Summary

Oasis's production is expected to decline 6% in 2016 as well as become gassier.

Oasis has also added nearly 80 million shares since early 2015 while only modestly reducing its debt.

It has invested significantly in midstream infrastructure, which could be worth over $1 billion after the Wild Basin project is completed.

This could reduce its debt by around 45%, but would also increase its costs.

I estimate Oasis's value at approximately $6.30 to $8.40 per share based on a longer-term outlook $55 to $60 oil.

I previously looked at Oasis Petroleum (NYSE:OAS) before it released its 2016 outlook and before it raised capital through an equity offering. Oasis's production is decreasing slightly in 2016 as well as becoming gassier as it limits drilling and completion capital expenditure so that it can build out its midstream infrastructure. Oasis is expected to have cash burn of $118 million during 2016, which is funded via its equity offering. Oasis can significantly reduce its debt by selling its midstream unit, but it now appears slightly overvalued as a result of the run up in its share price over the last couple months.

Modeling 2016 With $40 Oil And $2.50 Gas

Oasis's production is becoming slightly gassier as it focuses its activity in the Wild Basin. Therefore, I have modeled out Oasis's production at 84% oil, down from 85.5% in Q4 2015 and 87.3% in 2015. At $40 WTI oil and $2.50 Henry Hub natural gas, Oasis may be able to reach $547 million in oil and gas revenue at the midpoint (47,500 BOEPD) of its production guidance. Adding in hedge value and net well services and midstream revenues would bring Oasis up to $721 million in revenue during 2016.

Barrels/Mcf

$ Per Barrel/Mcf

$ Million

Oil

14,603,400

$36.00

$526

Natural Gas

16,689,600

$1.25

$21

Net Well Services And Midstream

$50

Hedge Value

$124

Total

$721

Click to enlarge

I had previously estimated that Oasis could maintain production in 2016 with $475 million in capital expenditures (including midstream capital expenditures). Oasis decided to go for a lower capital expenditure budget of $400 million, which would result in an estimated 6% decline in production. Approximately $200 million of this is drilling and completion related.

Oasis is therefore estimated to have cash burn of approximately $118 million in 2016 at $40 oil and $2.50 natural gas. Oasis did mention that it expected its cash flow to cover its capital expenditure plan at $35 WTI oil, but that excluded midstream capital expenditures.

$ Million

Lease Operating Expenses

$141

Marketing, Transportation and Gathering

$31

Production Taxes

$49

Cash G&A

$67

Cash Interest

$151

Capital Expenditures

$400

Total

$839

Click to enlarge

Long Term Breakeven Level

Oasis's long-term breakeven level is approximately $54 WTI oil including the effect of an estimated $70 million in net well services and midstream revenue. This is based on 46,000 BOEPD in production with an 83% oil split, reflecting estimated production levels at the end of 2016. Total revenues are approximately $773 million.

Barrels/Mcf

$ Per Barrel/Mcf

$ Million

Oil

13,935,700

$48.60

$677

Natural Gas

17,125,800

$1.50

$26

Net Well Services And Midstream

$70

Total

$773

Click to enlarge

Oasis will incur an estimated $325 million in capital expenditures to maintain 46,000 BOEPD production. This is lower than Oasis's current capital expenditure budget as this is just drilling and completion capital expenditures and it is assumed that there are no further midstream capital expenditures. Oasis mentioned in Oil and Gas Investor that its maintenance capital expenditures are around $300 million to $350 million.

$ Million

Lease Operating Expenses

$136

Marketing, Transportation and Gathering

$30

Production Taxes

$63

Cash G&A

$67

Cash Interest

$151

Capital Expenditures

$325

Total

$772

Click to enlarge

Valuation

Oasis is expected to end 2016 with approximately $2.3 billion in net debt. A sale of the midstream unit once the Wild Basin project is completed may bring $1.04 billion based on a 8x EBITDA valuation (with estimated 2018 EBITDA at $120 million to $140 million). This would lower Oasis's net debt to around $1.26 billion if Oasis's net debt doesn't increase in the interim. The 8x EBITDA valuation is a bit lower than the midstream average due to the currently limited customer diversification. Oasis accounted for approximately 77% of the midstream unit's revenue during 2015, with external customers accounting for the other 23%.

Click to enlarge

Source: Watson, Millican & Co

If Oasis sells its midstream unit, it may end up with around $400 million EBITDA at $55 oil. EBITDA is lowered due to a combination of foregone external revenue from the midstream unit and higher costs as a result of that sale as well. That would make Oasis worth approximately $6.30 per share at $55 long-term oil based on a 6x EV/EBITDA multiple. Each $5 change in the price of oil affects Oasis's value by approximately $2.10 per share.

Conclusion

Oasis has a large amount of debt for its production level, but may be able to significantly reduce its debt by selling its midstream unit. However this would come at a cost as Oasis would incur higher costs as well as forego some revenue from external customers. After calculating the potential effect of the transaction, I'd value Oasis at approximately $6.30 to $8.40 per share based on an outlook for $55 to $60 oil. This makes Oasis slightly overvalued now in my opinion, with the February 2016 dilution having a fairly significant effect on reducing the value per share.

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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a short position in OAS over the next 72 hours.

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.