Why There's Plenty to Like While Wall Street Hates

Sometimes I just don't get Wall Street. Great news comes out for a particular stock, yet the stock still gets hammered. Oasis Petroleum (NYSE: OAS  )  announced earlier this week that it was able to grow output by 50% last year and plans to keep growing like gangbusters, yet its stock fell 5% on the release.

In 2013, Oasis produced 33,900 boe/d, up from 22,500 boe/d in 2012. This year it gets even better, with average daily output guided to be between 46,000 boe/d and 50,000 boe/d, a 42% increase over last year.

So far
2013 was a great year for Oasis Petroleum: Average daily production increased 51%, the number of potential drilling locations jumped 78% to 3,590, and proven reserves grew 59%. Oasis Petroleum's reserves are 87% weighted toward oil, making those 227.9 million barrels all the more valuable.

Further value creation
To enhance shareholder value, Oasis Petroleum has aggressively lowered well completion costs to bring in more income for its investors. Including the impact from Oasis Well Services, Oasis Petroleum was able to lower well completion costs by a million bucks to $7.5 million in just one year.

This isn't only a testament to how Oasis Petroleum has been able to boost margins, but also to just how important Oasis Well Services (OWS) is to shareholders. OWS saves Oasis Petroleum $500,000 per well and generates an additional $200,000 in EBITDA. That is huge, especially when you consider Oasis Petroleum's plan to keep growing.

Oasis Petroleum is going to add two additional rigs to its fleet by the second half of the year. This, combined with cheaper and faster drilling techniques, will allow Oasis Petroleum to complete 155.5 net wells this year versus 106.1 net wells last year. The savings through OWS will make Oasis an extra ~$30 million in EBTDA (155.5 wells times $200,000) this year alone.

In order to add to its rig fleet Oasis Petroleum has to spend a little more. By increasing its capex to $1.425 billion from $1.02 billion last year, Oasis Petroleum can keep up the growth story.

Plenty of cash
To boost liquidity, Oasis Petroleum is going to sell its Sanish assets for $333 million. This is great news because very little production growth is coming out of the Sanish, depressing Oasis Petroleum's overall valuation. While Oasis will lose 3,000 boe/d in production, it will strengthen its $1.25 billion in liquidity.

If Oasis doesn't need to sell shares to bolster its balance sheet, then current investors won't have to worry about equity dilution. This means shareholders can sleep comfortably knowing that Oasis Petroleum doesn't need to issue out more shares to fund growth.

So why is there no love?
For a company projected to grow output by 42%, why doesn't Oasis Petroleum get more love from investors? Even though output growth doesn't explicitly translate into a bigger bottom line, boosting margins does. By adding a second frac crew to its OWS operations and drilling almost of all its new wells on pads, Oasis Petroleum can keep pushing down costs and boost the bottom line. Yet I guess this isn't good enough for investors, who have punished its share price over the past couple months.

Foolish conclusion
2014 is going to be the year when Oasis really puts the best drilling techniques to the test. By drilling roughly 90% of all its new wells on pads and investing further in the success of OWS, drilling costs will keep trending lower. With more wells coming online each year, Oasis is going to keep pushing deeper down into the Bakken/Three-Forks formation to boost its reserve portfolio.

A combination of cost efficiencies, reserve upside, and higher levels of output trading at just 17 times trailing earnings seems to be a good deal to me, but I guess Wall Street still needs some convincing.

A thorn in OPEC's side
Imagine a company that rents a very specific and valuable piece of machinery for $41,000... per hour (that's almost as much as the average American makes in a year!). And Warren Buffett is so confident in this company's can't-live-without-it business model, he just loaded up on 8.8 million shares. An exclusive, brand-new Motley Fool report reveals the company we're calling OPEC's Worst Nightmare. Just click HERE to uncover the name of this industry-leading stock... and join Buffett in his quest for a veritable LANDSLIDE of profits!

 


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 2826630, ~/Articles/ArticleHandler.aspx, 8/1/2014 9:26:42 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement