Oasis Petroleum To Generate Free Cash Flows At $45 Oil

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About: Oasis Petroleum Inc. (OAS), Includes: WLL
by: Todd Akin
Summary

Oasis is cutting CapEx for 2019 but still expects production to grow, especially in the Permian.

The company can now operate in sub $45 oil-price environment because of advanced completions techniques that are unlocking new Tier 1 territory.

As a result, I remain long E&Ps like Oasis through sector ETFs due to their ability to control costs and survive oil price downturns.

Oasis Petroleum (OAS) is growing production in the Delaware Basin by 50% in 2019 through cash flow generated from their assets in the Williston Basin. The company slashed its E&P capital plan by 40% from 2018 levels, which included dropping three rigs and two completion crews for 2019. But, they expect to offset lower spending levels with more efficiencies gained and reduced costs coming in 2019.

Even though 75% of CapEx will be geared towards the Williston, where production growth is expected to be modest, seeing the excess cash flow deployed into the Delaware where production will grow 50% is a positive development, indeed, for Oasis. The production jump is coming from a small base I’d imagine, but the company has to start somewhere with respect to their move into the Permian.

In addition, the company plans to be cash flow positive at $45 oil prices, and is using advanced completions technology to unlock new Tier 1 acreage. This is a rather large development for OAS and peers in the area, as it brings in new growth opportunities and staying power to the sector.

Therefore, top E&Ps like OAS should be applauded for their premier asset bases and ability to generate strong cash flows in a weak oil price environment, and I remain long the sector.

OAS Free Cash Flow At 45 WTI

OAS plans to generate free cash flow at $45 per barrel using certain completions strategies that are not only lowering break-evens, but are also allowing formerly Tier 2 areas to now be called Tier 1 acreage.

The strategies involve plug and perfs and high-intensity fracs using slick water designs. Slick water designs are now the preferred method of most E&Ps because, for a much cheaper price than gel-based fracs, they allow for a large surface area of rock to be contacted.

Whiting Petroleum (WLL), a competitor in the region, has their new generation 4.0 and generation 5.0 completion methods that are allowing them to upgrade previously deemed Tier 2 acreage to Tier 1 acreage in the Williston.

The way WLL describes this phenomenon is that the outer halo of the company’s operations expanded through using the completions strategies listed above. Therefore, it comes as no surprise that OAS is involved in some of the same methods since both E&Ps have operations in the Williston.

Oasis has identified 1,385 Tier 1 locations now that support $45 break-evens in the Williston for the next 20 years (if drilling at current pace continues). Source: Oasis Petroleum

For example, certain stepout areas like Painted Woods, South Cottonwood, and Montana are now viable for Oasis at $45 WTI. As investors can see below, Oasis already had success with a few wells in Painted Woods back in 2018.

Source: Oasis Petroleum

In addition to proving that formerly uneconomic wells can now generate positive cash flow at $45 with advanced completions, Oasis feels that an advantage lies in the fact that their new, extensive inventory has no drilling obligations.

This subtle, yet significant detail will most likely improve margins and flexibility, some, for OAS, which helps offset margin erosion from other issues like widening differentials and lower oil prices.

The Delaware Basin operations that Oasis has now added to their arsenal increased total operating inventory, and is also expected to generate free cash flow at $45 WTI, especially in the Wolfcamp area (seen below).

Source: Oasis Petroleum

The company has identified 600 to 700 gross locations to operate from that are considered Tier 1 land as well, which should equate to between 5-10 years of viable drilling activity for Oasis at today’s pace.

Williston Funding Permian Activity

Oasis plans to focus roughly 75% of their CapEx on the Williston Basin, focusing on areas like Wild Basin, Indian Hills, Alger, Red Bank, as well as on the newer stepout areas listed above, like Painted Hills.

Production in the Williston area is supposedly increasing only modestly compared to 2018 levels. But, these efforts will provide enough cash flow to be generated that will allow for production to grow in the Permian, over 50% in fact.

The company plans to exit the year at 8,000 Boes to 9,000 Boes per day in the Permian, and this number should improve as understanding of the geology and completions strategies needed in the area increases.

Financial Profile Improving

Cutting its spending in an environment where efficiencies, cost-cutting, and advanced completions techniques can make up for the lack of spend is a prudent move by Oasis. This seems to be the theme with many top E&Ps.

In fact, net debt to EBITDA stood at 2.7x, which is not terribly levered compared to E&Ps debt levels pre-2014. I assume this number will come down further as more cash flow is generated in a plus $45 WTI world.

The company also has a borrowing base of $1.6 billion with only $468 million drawn on its revolver, which leaves OAS plenty of flexibility to fund operations should they need it.

For the record, Oasis reported fourth quarter, adjusted EBITDA of $214.1 million that was negatively impacted by poor weather, lower oil prices, hedges, and widening differentials.

But, these issues are transitory and should be resolved in time once more takeaway capacity comes to North America, and oil prices recover from improved trade talks with China.

Risks

Besides having the obvious risks of lower oil prices from a slowing economy and skyrocketing differentials from a lack of takeaway capacity, which should be alleviated once new pipelines come online in 2019, OAS has to deal with losses from hedging as a risk, too.

Some companies like Continental Resources (CLR) completely removed their hedges in 2018, so the risk of losses from hedging programs went away for them.

However, I assume that OAS taking some losses from hedging, $24 million in the fourth quarter to be exact, is better than losing their shirts from having no downside protection at all from a fall in oil prices.

Therefore, having 60% of their oil production hedged through collar strategies for 2019 is another prudent move by the company, and should soften the blow if another correction in oil prices ensues.

Conclusion

Oasis Petroleum is cutting CapEx, but still plans to generate free cash flows at $45 WTI and also plans to grow production in the Permian by 50%.

Higher-intensity fracs that are unlocking new Tier 1 land is the reason Oasis is able to survive in a low oil price environment while growing production.

Oasis's recent selloff in its stock price is, therefore, providing investors the opportunity to buy a quality E&P at a historically depressed price, and I am staying long the sector as a result.

Disclosure: I am/we are long GUSH. 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.