Oasis Petroleum's Estimated Value Increases To $9 To $11

| About: Oasis Petroleum (OAS)

Summary

Oasis Petroleum is acquiring 55,000 net acres in the Williston Basin for $785 million. This will boost its production and core drilling locations by around 25%.

The acquisition is mostly going to be funded by equity, with credit facility debt likely accounting for around $200 million of the purchase price.

Oasis's unhedged breakeven point is estimated at $46 oil post-acquisition, with reduced interest and maintenance capex costs (per BOE) helping to lower its breakeven point.

Oasis's value is estimated at $9 to $11 and its leverage ratio is decreasing since the extra production is mostly funded via equity.

Oasis's share count has more than doubled since early 2015 though, reducing its ultimate upside.

Oasis Petroleum (NYSE:OAS) has conducted a couple of major recent moves including a sizable share offering and the acquisition of around 55,000 net acres in the Williston Basin. That acquisition may serve to boost Oasis's production to around 63,000 BOEPD by the end of 2016 as well as boosting its core acreage drilling locations significantly. However, Oasis's share count has more than doubled during the last two years, serving to slow the upside on its shares.

The Equity Offering

Oasis's equity offering is for 48 million shares at $10.80 per share, which is expected to generate gross proceeds of $518.4 million. There is also an option for the underwriters to purchase an additional 7.2 million shares, which would bring the gross proceeds up to approximately $596 million. Oasis's share count will reach approximately 236 million after the equity offering. Full conversion of its convertible notes would result in its share count reaching around 259 million. Oasis's outstanding share count is something to keep in mind when looking at its historical share price since its share count was only around 102 million in early 2015.

The Acquisition

The Williston Basin acquisition price is approximately $785 million, and appears to be funded by a combination of Oasis's equity offering and its revolver line of credit. The acquisition involves 55,000 net acres and is expected to increase Oasis's Q4 2016 production by approximately 12,400 BOEPD or around 26%. Oasis's core acreage gross operated drilling locations are also expected to increase by around 25% as a result of this transaction.

The general belief is that Oasis paid a fair to slightly rich price for these assets. However, I also believed that Oasis's stock was a bit overvalued, so primarily using slightly overvalued stock to pay a slight premium for assets balances out.

Updated Breakeven Point

Oasis also provided some Q3 2016 results and updated its 2016 guidance. The updated guidance raises 2016 production by 650 BOEPD at its midpoint before accounting for the acquisition. This is due to its Wild Basin gas processing plant becoming operational and a combination of reduced well costs and well production exceeding previous type curves. As a result, Q4 2016 production may average over 50,000 BOEPD without the acquisition. I have, therefore, modeled 2016's exit rate at 63,000 BOEPD including the acquisition, although the oil percentage has been lowered to 79.5%.

Oasis's unhedged breakeven point is now estimated at around $46 WTI oil and $3 Henry Hub natural gas, although natural gas only has a limited impact on its revenues. At those prices, Oasis may generate $882 million in revenue, including the net benefit from its well services and midstream operations.

Barrels/Mcf

$ Per Barrel/Mcf

$ Million

Oil

18,281,025

$41.50

$759

Natural Gas

28,283,850

$1.90

$54

Net Well Services And Midstream

$70

Total

$882

Click to enlarge

Lease operating expenses are estimated at $7.25 per BOE, in line with Oasis's current guidance, while I've added a bit to cash G&A due to its recent acquisition. Oasis's cash interest has declined slightly from earlier in the year due to its repurchase of higher interest notes and issuance of low interest 2.625% convertible notes. The acquisition may add nearly another $200 million in credit facility borrowings, but that would only have a modest impact on interest costs with the weighted interest rate on the credit facility estimated at around 2.3%.

Maintenance capital expenditures are estimated at $380 million now with Oasis's lowered well costs combined with its higher production levels post-acquisition. The lower interest costs and maintenance capital expenses (per BOE) combined with increased production has helped push Oasis's oil breakeven point down to $46 from around $50.

$ Million

$ Million

Lease Operating Expenses

$167

Marketing, Transportation and Gathering

$37

Production Taxes

$75

Cash G&A

$80

Cash Interest

$139

Capital Expenditures

$380

Total

$878

Click to enlarge

Valuation Post-Acquisition

I believe that Oasis's Williston Basin acquisition essentially has a neutral impact on its valuation. However, its increased total production combined with improvements in well productivity and well costs do serve to bump up my estimate of its valuation range to around $9 to $11.

On the other hand, Oasis's upside beyond $11 is going to be slowed by the large amount of shares it now has (over double its share count from early 2015) along with the potential additional dilution from its convertible notes if its share price increases significantly.

Conclusion

Oasis has managed to lower its estimated breakeven point to around $46 oil by increasing total production and well productivity while decreasing well costs and interest costs. Oasis's Williston Basin acquisition helps that out as well since the purchase price is mainly being funded by equity. The acquisition appears to come at a reasonable price and also helps Oasis's leverage ratio by increasing production levels by nearly 25% while increasing debt by less than 10%.

Despite those positives for Oasis, its ultimate upside is limited by the large amount of additional shares that it has added in the last couple of years.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.

Additional disclosure: I may initiate a neutral position in Oasis in the near future, selling OTM calls and puts.