Oasis Petroleum And Whiting Petroleum Head Towards Their Merger

May 26, 2022 10:02 PM ETChord Energy Corporation (CHRD)8 Comments

Summary

  • Oasis and Whiting are both holding a special meeting of shareholders on June 28 to vote on the deal.
  • The merger will create one of the largest Williston Basin operators.
  • The combined company is expected to generate over $1.5 billion in positive cash flow in 2022, despite over $1.2 billion in projected hedging losses.
  • The combined company should end 2022 with around zero net debt after potentially paying out over $1 billion in dividends and cash payments in 2H 2022 (including merger consideration).
  • Whiting's stock appears to be slightly better value than Oasis's currently, although the difference is fairly small.
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Oasis Petroleum (OAS) and Whiting Petroleum (WLL) are expecting their merger to close in Q3 2022. Both companies are holding a special meeting of stockholders on June 28 to vote on the deal.

The combined company will end up as one of the largest Williston Basin operators, both in terms of net acreage and production.

Williston Basin Position

Williston Basin Position (whitingpetroleum.com)

Whiting's stock appears to be a slightly better deal than Oasis's stock at the moment, although the expected returns are pretty close (within two percent) between the two.

Merger Details

Whiting shareholders will receive 0.5774 shares of Oasis stock and $6.25 in cash for each Whiting share they own. Oasis shareholders will receive a $15 per share special dividend.

Transaction Details

Transaction Details (whitingpetroleum.com)

Based on the outstanding shares of May 18, Oasis may issue 22.7 million shares to Whiting shareholders, resulting in 42.3 million outstanding Oasis shares. Oasis's special dividend will result in approximately $295 million in payments, while the $6.25 per Whiting share payment will result in another $245 million cash outlay.

It also appears that there will be 2.8 million Series A warrants (transferred over from Whiting) with an exercise price of $116.37 and 1.4 million Series B warrants (also transferred over from Whiting) with an exercise price of $133.70 post-merger.

Whiting's Warrants

Whiting's Warrants (whitingpetroleum.com)

In addition, at last report, Oasis had 1.2 million warrants outstanding that should have an exercise price of $75.57 post-merger.

Combined 2022 Outlook

Both Whiting and Oasis have maintained their guidance for 2022, although the severe winter weather in April will negatively affect Q2 2022 results and potentially push full year numbers towards the lower end of its guidance range.

Combined Guidance

Combined Guidance (whitingpetroleum.com)

At current strip of $105 WTI oil in 2022, the combined company may generate around $4.662 billion in oil and gas revenue. This is based on guidance midpoint, so there may be a bit of downside potential if the Q2 2022 shortfall isn't made up in other quarters.

The combined company has a projected hedging loss of $1.234 billion for 2022 at current strip prices.

BOE $ Per BOE $ Million
Oil 35,405,000 $103.00 $3,647
Natural Gas and NGLs 25,367,500 $40.00 $1,015
Hedge Value -$1,234
Total $3,428

The combined company is thus expected to end up with $1.511 billion in positive cash flow in 2022 before dividends and Crestwood distributions. The Crestwood distributions would boost this to around $1.565 billion in positive cash flow.

$ Million
Lease Operating Expenses $553
Marketing, Transportation and Gathering $179
Production Taxes $333
Cash G&A $91
Cash Interest $36
CapEx $675
Cash Taxes $50
Total $1,917

Projected Cash

At the end of Q1 2022, Oasis had $10 million in net cash, while Whiting had $50 million in net debt. The combined company may now end 2022 with approximately $500 million in net cash, before the impact of any post-closing dividends or share repurchases. This includes the effect of merger transaction costs and executive severance payments.

The combined company is committed to returning 60% of free cash flow to shareholders post-closing in 2H 2022, so that would leave it near a neutral position with regards to net cash after putting that 60% towards variable dividends, base dividends and share repurchases.

Combined Company 2H 2022 FCF

2H 2022 FCF (whitingpetroleum.com)

Notes On Valuation

I estimate that the combined company will be worth approximately $147 per share in early 2023 based on long-term (after 2022) $70 WTI oil and $3.50 NYMEX gas. This assumes that the combined company can achieve the $65 million per year in administrative and operational cost savings that it was targeting.

Thus the total value for Oasis shareholders from now until early 2023 is estimated at $175.94. This is around a 15% total return from Oasis's current price. This is based on the estimated $147 per share value of Oasis's stock, plus the $2.94 per share variable dividend payable to shareholders of record as of June 1, plus a potential for approximately $11 per share in 2H 2022 dividends and the $15 per share special dividend.

OAS WLL
Est. Share Value (2023) $147.00 $84.88
Cash Payment $0.00 $6.25
1H 2022 Dividends $2.94 $0.00
2H 2022 Dividends $11.00 $6.35
Special Dividends $15.00 $0.00
Total Value $175.94 $97.48

The total value for Whiting shareholders from now until early 2023 is estimated at $97.48 per Whiting share. This is based on 0.5774 Oasis shares (per Whiting share) at $147 per share plus the $6.25 cash payment plus $6.35 per share in 2H 2022 dividends based on $11 per share in total dividends times 0.5774.

This adds up to around a 17% total return from Whiting's current price. Thus Whiting appears to be a slightly better value than Oasis at the current time.

A $5 increase in long-term oil prices combined with a $0.25 increase in long-term gas prices would increase the combined company's value by approximately $12. Thus the combined company would be worth an estimated $159 per share by early 2023 based on long-term $75 WTI oil.

Conclusion

Oasis and Whiting are planning on merging, and the combined company may be able to generate over $1.5 billion in positive cash flow in 2022 before merger transaction costs and severance payment. This is despite projections for over $1.2 billion in 2022 hedging losses. The hedging losses should be reduced in 2023 due to lower hedged volumes.

Overall, it appears that there is the potential for 15% to 17% returns by early 2023 based on a long-term (after 2022) $70 WTI oil scenario. The returns would mostly take the form of dividends and cash payments, and investing in the merger through Whiting stock appears to be slightly better than Oasis at the moment (although the expected returns are pretty close for both).

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