Oasis Petroleum: Growth Plans Remain On Track

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About: Oasis Petroleum Inc. (OAS)
by: Elephant Analytics

Summary

Oasis's near term production is being affected by delayed completions as it waits for the Wild Basin II plant to begin gas processing.

Its expected 2018 and 2019 exit rate production remains unchanged though.

Most of its production (close to 90% at the end of 2019) will continue to be from the Williston Basin.

The Delaware Basin is expected to account for around 35% of exit rate production growth (from 2018 to 2019) though.

Oasis may see its oil hedging losses reduced by $150 million in 2019 at mid-$60s oil.

Oasis Petroleum (OAS) remains largely on track with its production growth plans. Its Q3 2018 production was affected a bit by gas plant outages, while its Q4 2018 production guidance has been trimmed as it adjusts completion timing to wait for the new Wild Basin II plant to start processing gas.

However, Oasis's longer-term outlook remains unchanged. It is on track to reach over 90,000 BOEPD by year-end and is aiming for 105,000+ BOEPD by the end of 2019, while its cash flow should be much improved by reduced hedging losses.

Production And Gas Processing

Oasis noted that its Q4 2018 production guidance was being reduced due to adjustments in completion timing for its Williston Basin wells. Oasis Midstream Partners recently completed its Wild Basin II plant that will add 200 million cubic feet per day in natural gas processing capacity and is expected to start processing gas in November. By adjusting completion timing so that production starts when the plant is ready, Oasis can minimise gas flaring.

North Dakota reported 2.4 billion cubic feet per day in natural gas production in July 2018, exceeding the gas processing capacity at the time. Oasis Midstream Partners expects to have the plant at around full capacity by late 2019 or 2020 due to significant third-party interest.

The Wild Basin II plant should also allow Oasis to remain ahead of North Dakota's gas capture target (which is now 88% and is scheduled to rise to 91% in November 2020).

Source: Oasis Petroleum

The delay in completions has resulted in Oasis's Q4 2018 production guidance being reduced to 87,500 to 90,000 BOEPD (from 91,000 to 94,000 BOEPD), although it still expects production to reach 91,000 to 94,000 BOEPD by year end, and Oasis's 2019 production expectations remain the same.

This also means that Oasis's full year production will likely fall slightly below its earlier guidance for 83,000 to 84,500 BOEPD. Based on the Q4 2018 guidance range, its full year production may end up around 82,325 to 82,950 BOEPD now, although the oil percentage is likely to end up marginally higher than its 75% to 76% expectation.

Future Growth Plans

Oasis expects to grow exit rate production by close to 14,000 BOEPD from the end of 2018 to the end of 2019. This will still be driven primarily by its Williston Basin assets, as it is planning on adding a fifth rig there in December. Oasis is currently running two rigs in the Delaware Basin and plans to add a third rig in mid-2019.

Source: Oasis Petroleum

For 2019, it appears that over 90% of Oasis's production will continue to come from the Williston Basin. The Delaware Basin will contribute more to production growth though, with approximately 35% of the exit rate growth expected to come from there (going from around 6,000 BOEPD to 11,000 BOEPD).

Hedging

Oasis should benefit substantially from its oil hedges starting to diminish after 2018. It paid $60.4 million in oil derivative settlements in Q2 2018 and $65.6 million in oil derivative settlements in Q3 2018.

Source: Oasis Petroleum

Oasis's quantity of hedges is reduced in 2019, while its average ceiling price is higher. This decreases Oasis's expected oil hedging losses for its oil to a bit under $14 million per quarter at $65 NYMEX oil and a bit over $20 million per quarter at $70 oil. The below table shows Oasis's estimated oil hedging losses (in $ millions) per quarter at various oil prices.

Oil Price Q4 2018 Q1 2019 Q2 2019 Q3 2019 Q4 2019
$60 -$22.1 -$7.6 -$7.7 -$7.8 -$7.8
$65 -$43.9 -$13.5 -$13.6 -$13.8 -$13.8
$70 -$65.0 -$20.0 -$20.3 -$21.6 -$21.6

If oil averages around the same in 2019 as it is expected to average in 2018, Oasis will have close to $150 million less in oil hedging losses.

Conclusion

Oasis looks on track to meet its longer-term production goals, although near-term production is being affected by delayed completions as Oasis waits for the Wild Basin II plant to start processing gas. Most of its production will continue to come from the Williston Basin, although the Delaware Basin will likely account for a significant amount (35%) of production growth during 2019.

Oasis should benefit from an improved hedging situation in 2019, as its hedging losses were quite large during the last couple quarters. If oil averages in the mid-$60s, its hedging losses may be around $150 million less in 2019.

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.