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Oasis Petroleum (NYSE: OAS) offers pure-play exposure to the Bakken Shale and boasts about 320,000 net acres that are prospective for Bakken Shale and the Three Forks trend, the majority of which will be held by production by year-end. Crude oil accounts for about 82 percent of the company's reserves-a favorable mix with natural gas prices likely to remain depressed and volatile for at least the next two to three years.

Management estimates that the company has about 1,300 potential drilling locations in the Bakken Shale alone. Oasis Petroleum operates about 90 percent of these wells and has an average working interest of roughly 70 percent. As efforts to develop and prove the productivity of the Three Forks/Sanish formation progress, the firm could add another 928 low-risk drilling locations to its inventory.

Oasis Petroleum's test wells targeting the Three Forks formation in South Cottonwood have yielded results that were on par with or superior to similar wells targeting the Bakken Shale. Test wells in the firm's acreage in the Iron Hills region have flowed at rates equal to between 80 and 90 percent of a comparable well targeting the Bakken Shale. Management expects to report findings from tests in other areas when the firm releases third- and fourth-quarter earnings.

Plans to reduce the spacing between wells could also double the number of potential drilling sites. The company has sunk 35 new wells in the pilot area and continues to evaluate their interaction to ascertain whether upsizing the firm's drilling inventory to eight wells (four in the Bakken Shale and four in Three Forks) per 1,280 acres. If the results of this infill drilling prove encouraging, the stock price could receive a boost.

Meanwhile, the exploration and production company's ongoing development efforts enabled the firm to grow its second-quarter output to 20,353 barrels of oil equivalent per day, up 158 percent from a year ago and 15 percent sequentially. Management attributed this upsurge in production, which surpassed the firm's prior guidance, to a higher average working interest in the wells completed during the quarter. These impressive results prompted the company to revise its full-year production estimate to between 20.5 and 22.5 million barrels of oil equivalent per day from between 18 and 22 million barrels of oil equivalent per day.

During Oasis Petroleum's conference call to discuss second-quarter results, management once again highlighted how efforts to improve operational efficiency and price reductions for third-party services would enable the firm to lower its average cost per completed well by 10 percent before year-end.

Not only will the company's in-house fracturing teams transition to a full 24-hour cycle by the end of the year, but the firm's engineers also continue to hone its completion techniques to maximize recovery rates while reducing costs. To that end, Oasis Petroleum has cut the amount of proppant-a material that props open the hydraulic fracturing-induced cracks in the reservoir rock-in portions of the play where the pay-zone is thinner or areas that feature elevated levels of water saturation.

In particular, the company has sought to decrease the company's use of ceramic proppant, which tends to cost more than sand and doesn't necessarily produce superior results. Management estimates that a well with a 36-stage lateral that uses sand as a proppant costs about $0.8 million less to complete than a development than one that relies on a mix of sand and ceramic material. That being said, the firm continues to use a full load of proppant when targeting thicker formations that exhibit relatively low levels of water saturation.

In addition to using less proppant, Oasis Petroleum continues to transition to a drilling pad-based system that enables the firm to sink four wells from a single location, an approach that slashes the downtime between wells and the coast of relocating the rig from one site to the next. Oasis Petroleum plans to use this system on about 35 percent of the wells that the firm drills in 2012 and will move exclusively to pad drilling in 2013. Management expects this transition to cut completion costs by another 5 percent to 10 percent in the coming year.

I also like Oasis Petroleum's investments in its own saltwater disposal systems, a move that should further reduce expenses in 2013. By the end of 2012, management expects about 80 percent of this water will flow through the firm's own pipelines. At the end of the first quarter of 2013, 60 percent of this water will flow into company-operated disposal wells.

Although logistical constraints have weighed on operators' returns in the Bakken Shale, management notes that roughly 800,000 barrels per day of takeaway capacity is in the works. This construction boom, coupled with the gradual improvement of production techniques in the Bakken Shale, bodes well for future price realizations and Oasis Petroleum's growth.

Mergers and acquisitions activity has slowed in the upstream space-this year, much of the deal flow in the energy sector has been concentrated in the midstream segment-but Oasis Petroleum's oil-heavy production profile and high-quality assets make it a potential takeover target.

Source: Oasis Petroleum: Transition To Drilling Pad-Based System Contributing To Growth Story