Investors Should Sell Oasis Petroleum And Buy Whiting Petroleum

Includes: OAS, WLL
by: HiddenValueInvestor

Oasis Petroleum has decided to drill within cash flow in 2019.  The company is projecting flat production growth between the fourth quarter of 2018 to the fourth quarter of 2019.

Whiting Petroleum is already drilling within cash flow.  Whiting is projecting 11% production growth in 2019 versus 2018 while continuing to drill within cash flow.

Whiting has a lot more daily barrels of oil equivalent production than Oasis has, yet both companies have a similar amount of debt at just under $2.8 billion.

Investors in Oasis Petroleum (OAS) should sell their shares and consider buying shares of Whiting Petroleum (WLL). Oasis and Whiting both have similar debt profiles. However, Whiting has substantially more daily production than Oasis has. Most importantly, both companies plan to keep their capital expenditures within cash flow in 2019. Oasis is projecting no fourth quarter 2018 to 2019 production growth while drilling within cash flow. However, Whiting is projecting 11% overall production growth from 2018 to 2019 while drilling within cash flow.

The fourth quarter earnings press release from Oasis Petroleum details the company's drilling plans. CEO Thomas B. Nusz talked about the company's 2019 capital expenditure plan and stated "Oasis constructed its 2019 plan based on being free cash flow positive at $50 WTI. In order to achieve this objective, the total E&P and Other CapEx plan has been reduced by approximately 40% year over year and is expected to range between $540 million and $560 million." Effectively, the company plans to drill within its cash flow, and in so doing, does not expect to see average 2019 daily production to differ materially from the fourth quarter 2018 daily production levels.

Additional information on expected production growth is found in Oasis corporate presentation. Look at the second bullet point in the slide below:

Next to the capital-efficient production growth bullet point Oasis states they "expect to keep 4Q19 volumes roughly flat with Q418 despite a 44% reduction in E&P spending in 2019." What this shows is that Oasis cannot achieve organic growth at current oil prices. They need to raise additional capital in order to fund growth at current oil prices. The company produced 88,500 Boe per day in the fourth quarter of 2018 and expects to exit 2019 with production between 86,000 and 91,000 Boe per day.

Now compare this to the situation Whiting Petroleum finds itself in. The company's fourth quarter press release has the following quote from CEO Bradley J. Holly "In 2019, we plan to build on our success and have adopted a right-sized capital budget forecast to deliver 11% growth from our core asset with capital efficiency similar to 2018. We have also added senior leadership in key positions, which should further enhance our results in 2019. In summary, we remain steadfast in our commitment to pursue a program that can deliver growth from our core asset while maximizing returns and optimizing free cash flow at the corporate level.” Effectively, Whiting believes it can grow production by 11% in 2019 while also drilling within its free cash flow. Whiting ended 2018 with 130,000 Boe per day in production.

Both Oasis and Whiting are primarily Bakken drillers. Both companies have a commitment to stay within cash flow with their capital expenditure budgets. Both companies have just under $2.8 billion in debt. Yet only one company can achieve organic growth in the current oil price environment. The bottom line is Whiting can grow at current oil prices and Oasis needs higher oil prices to achieve organic growth.

Oasis is producing 88,500 Boe per day, whereas Whiting is producing 130,000 Boe per day. This means Whiting has 47% more daily production of Boe than Oasis has. Currently, Oasis has an enterprise value of $4.6 billion and Whiting has an enterprise value of $5 billion.

For an acquirer, Whiting Petroleum is valued at only 10% more than Oasis Petroleum. Yet Whiting has 47% more daily production and is able to grow organically at current oil prices. This means Whiting is either a better operator than Oasis, or is sitting on better acreage than Oasis is sitting on. Or potentially is both and better operator with better acreage. So if a major oil company decides to make an acquisition in the Bakken, then they probably would first try to kick the tires on Whiting Petroleum.

At this time Whiting Petroleum offers both better value and more growth than Oasis Petroleum offers. Investors holding Oasis Petroleum that want to have exposure to Bakken oil should consider selling their shares in Oasis and instead turn around and buy shares of Whiting Petroleum instead. Investors need to do their own due diligence before making any investment decision.

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.