Oasis Petroleum: Cost Reductions Increase Value To $8 To $10 Per Share

| About: Oasis Petroleum (OAS)

Summary

Oasis has reduced well costs and operational costs, leading to an upward revision in its production guidance and a downward revision in its lease operating expense guidance.

Oasis' estimated breakeven point is now approximately $50 to $51 WTI oil.

Due to improved EBITDA expectations with the higher production and lowered costs, Oasis' value is now estimated at $8 to $10 per share.

Cash flow situation is set to improve as the Wild Basin project is completed.

This will allow the midstream unit to generate cash instead of using it (due to capital expenditure requirements).

Oasis Petroleum (NYSE:OAS) reported its Q2 2016 earnings last week and the results appear to be quite good. Oasis has managed to moderate its production decline while staying within its original capital expenditure budget and has also indicated that its production costs should continue to come in below guidance. As a result, Oasis's estimated long-term breakeven point has improved to approximately $50 to $51 WTI oil, while its estimated value has increased to a range of $8 to $10 per share (up from $6.30 to $8.40 before).

Improved Breakeven Point

Oasis increased its production guidance from a range of 46,000 BOEPD to 49,000 BOEPD to a range of 48,500 BOEPD to 49,500 BOEPD. That results in my estimate of its 2016 exit rate increasing from 46,000 BOEPD to 47,500 BOEPD. However, Oasis' strong production results appear to be driven by natural gas (up 7% quarter-over-quarter) while oil was down 3% quarter-over-quarter. Thus I have reduced the year-end oil split in my model to 82% from 83% (Q2 2016's split was 83.2%).

The increased production combined with cost reductions result in Oasis' estimated long-term breakeven point falling from $54 WTI oil to $50 to $51 WTI oil. Oasis is estimated to deliver around $755 million in annual revenue at 47,500 BOEPD and breakeven oil prices.

Barrels/Mcf

$ Per Barrel/Mcf

$ Million

Oil

14,216,750

$45.50

$647

Natural Gas

18,724,500

$2.05

$38

Net Well Services And Midstream

$70

Total

$755

Click to enlarge

Oasis reduced its lease operating expense to $7 per BOE in Q2 2016, significantly lower than Q2 2015's $8.26 per BOE and its guidance range for $7.75 to $8.50 per BOE in 2016. It also indicated that much of this cost reduction is sustainable as it is now capturing nearly 85% of its water volumes on its saltwater disposal system, up from around 40% last year.

I am now using $7.25 per BOE as Oasis' future lease operating expense in my model. This assumes a slight increase from Q2 2016 levels as vendor-related costs may go up with higher oil prices again compared to the mid-$40s average during Q2 2016. This is within Oasis' updated $6.75 to $7.50 guidance range for 2016 as well.

$ Million

Lease Operating Expenses

$126

Marketing, Transportation and Gathering

$28

Production Taxes

$62

Cash G&A

$67

Cash Interest

$148

Capital Expenditures

$325

Total

$756

Click to enlarge

Oasis has also reduced its high intensity well cost down to $5.9 million from the $6.5 million mentioned in its Q1 2016 update. However, I have kept my maintenance capital expenditure number at $325 million for now. This is mainly due to the potential for well costs to go up with sustained higher oil prices similar to what I mentioned for lease operating expense.

Updated Valuation

Oasis' improved trajectory for production and its cost reduction efforts have resulted in its estimated valuation increasing to a range of $8 to $10 per share. This valuation does significantly depend on the value of Oasis' midstream unit though, with its long-term value (post-Wild Basin project completion) estimated at $1.04 billion. If Oasis sells its midstream unit (or a portion of it) for an amount that is significantly different from this valuation, it would have a corresponding effect on Oasis' estimated share price. The midstream unit contributes approximately 35% to 40% of Oasis' total value.

Notes On Cash Flow

Oasis' cash flow situation should improve in 2017 as it gains the benefits from the Wild Basin project. The Wild Basin infrastructure is expected to be running at near full capacity by the end of 2017. At the same time, Oasis' capital expenditures will go down significantly as the Wild Basin project is completed. Thus I believe that even if oil averages $40 in 2017, Oasis' cash flow situation appears quite manageable. The midstream unit's shift from cash using (including capital expenditures) to cash generating should allow Oasis to reach breakeven cash flow (in combination with its partial hedges) without sacrificing too much production.

Conclusion

Oasis' situation has improved through cost reductions that have allowed it to moderate its production decline with its current capital expenditure budget as well as improve the margins on its existing production. It appears to be getting through its most challenging period for cash flow, and 2017 and beyond should be better with its midstream unit generating cash instead of using it. Oasis' long-term breakeven point is estimated at $50 to $51 oil now, while its value is estimated at $8 to $10 per share.

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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.