Oasis Petroleum: 15% Production Growth At $55 Oil

| About: Oasis Petroleum (OAS)

Summary

Oasis' exit rate is expected to grow by around 16% in 2017 and 15% in 2018 while spending within cash flow.

Oil production growth is expected to be a couple percent lower, but still strong.

Oil differentials should narrow due to the completion of the Dakota Access Pipeline.

Strong Wild Basin performance allows Oasis to be a lower-cost producer.

Value estimate increases by $1 to $14 to $18 per share.

Oasis Petroleum's (OAS) 2017 guidance shows a company with positive momentum as the strong performance of its Wild Basin wells helps it raise its projected 2017 exit rate from 70,000 BOEPD to 72,000 BOEPD and its projected 2018 exit rate from over 80,000 BOEPD to over 83,000 BOEPD. This production growth is expected to be achieved with neutral to positive cash flow at current strip prices. As well, Oasis expects to benefit from the completion of the Dakota Access Pipeline, resulting in its oil differential decreasing from $4.76 per barrel in 2016 to around $3 to $4 in 2017 and perhaps $3 or under in 2018. I have bumped up my estimate of Oasis's value by a dollar, putting it now at $14 to 18 per share.

Oasis's Projected 2017 Results

The midpoint of Oasis' 2017 guidance is for 68,000 BOEPD in production while it mentioned that 78% of that production should be oil. Oasis' oil percentage is slowly decreasing as it adds Wild Basin wells, which have excellent results but are closer to 71% oil.

Oasis should end up with an estimated $1.126 billion in revenue at current strip prices (roughly $54.50 oil and $3 natural gas) including the net contribution from Oasis Well Services and Oasis Midstream Services. Oasis' hedges have currently negative value in 2017 since it has 19,000 barrels per day in oil swaps at $49 to $50 per barrel.

Oasis expects that its oil differential will fall to around $3 to $4 per barrel due to the assumption that the Dakota Access Pipeline will come online later in 2017. Oasis is a two-stream reporting company, so NGLs get lumped in with natural gas, and with NGL prices improving plus the effect of its Wild Basin infrastructure, I expect Oasis's natural gas differentials to be improved from 2016.

Barrels/Mcf

$ Per Barrel/Mcf

$ Million

Oil

19,359,600

$51.00

$987

Natural Gas

32,762,400

$3.25

$106

Net Well Services And Midstream

$65

Hedge Value

$-32

Total

$1,126

Based on Oasis' cost guidance, it should have roughly $1.125 billion in cash expenditures in 2017, including $590 million in capital expenditures (I've included an estimated $15 million in capitalized interest under interest instead). Thus Oasis should be roughly cash flow neutral at current strip prices.

$ Million

Lease Operating Expenses

$180

Marketing, Transportation and Gathering

$51

Production Taxes

$97

Cash G&A

$68

Interest

$139

Capital Expenditures

$590

Total

$1,125

Oasis in 2018

For 2018, Oasis has increased its estimated exit rate to over 83,000 BOEPD (from a previous estimate of over 80,000 BOEPD). This should allow Oasis to produce around 78,000 BOEPD on average while I estimate that its oil percentage may decrease slightly to 76%. This would result in Oasis generating around $1.341 billion in revenue at current strip prices. Oasis' oil differential is likely to narrow a little more, while some modest continued improvements in NGL prices may offset lower natural gas prices to bring Oasis' realized price for natural gas to the same level as in 2017.

Barrels/Mcf

$ Per Barrel/Mcf

$ Million

Oil

21,637,200

$52.00

$1,125

Natural Gas

40,996,800

$3.25

$133

Net Well Services And Midstream

$85

Hedge Value

-$2

Total

$1,341

Oasis' capital expenditure plans for 2018 are currently unknown except that it is aiming for roughly 15% production growth and that it expects to generate positive cash flow at current strip prices while doing so. This indicates that Oasis' capital expenditure budget (including capitalized interest) should be at or under $750 million.

$ Million

Lease Operating Expenses

$206

Marketing, Transportation and Gathering

$60

Production Taxes

$119

Cash G&A

$75

Cash Interest

$139

Total Before CapEx

$599

Conclusion

The increased production growth (while spending within cash flow) and the narrowing oil differentials are serving to boost Oasis' value. I estimate that Oasis' value should be approximately $14 to $18 per share now, up from my previous $13 to $17 estimate. Oasis' high-quality Wild Basin inventory makes it a fairly low cost player, allowing it to do well even if oil prices decrease. While I am wary about effect of rising US production on oil prices, I believe that Oasis at under $14 per share is a reasonable value.

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Disclosure: I am/we are long OAS,.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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