Even Without Wall Street's Love, This Oil Producer Still Has Plenty to Give

With more than 500,000 net acres in the prolific Bakken, Oasis Petroleum is betting the bank on the shale revolution.

Mar 13, 2014 at 6:49PM

Through an aggressive land grab, Oasis Petroleum (NYSE:OAS) has been able to acquire 515,314 net acres in the Bakken. With a drilling inventory of 17 years, Oasis Petroleum will have no problem finding new drilling locations.

From the first quarter of 2013 to the fourth quarter, average production climbed from 30,200 barrels of oil equivalent per day to 42,100 boe/d. Guidance for the upcoming quarter continues to look upbeat, with management forecasting output between 41,000 boe/d and 45,000 boe/d.

To put this into better perspective, average daily output was 33,900 boe/d in 2013. Oasis Petroleum's management team, led by CEO Thomas Nusz, wants to boost that to somewhere between 46,000 boe/d and 50,000 boe/d this year.

Even as Oasis continues to push output northward, Wall Street has begun to shun the company. Over the past six months, Oasis has risen 5% while the S&P 500 index has gone up by 13%. It's time for Wall Street to once again embrace Oasis Petroleum as a Bakken/Three-Forks success story. 

Reserves lead the way
In order to accomplish its ambitious growth guidance and win back Wall Street's favor, Oasis Petroleum needs to have a large reserve base to tap into. Through several splashy purchases and the utilization of better drilling techniques, Oasis Petroleum has grown its proven reserve portfolio to 227.9 million barrels of oil equivalent, up 59% over 2012 and almost three times 2011 levels.

To further enhance Oasis' balance sheet and allow it to have full control over its operations, the company is going to divest $333 million of non-operated assets. The intended purpose of the asset sale is to pay down debt and fund general corporate purposes.

Helping out the shareholders
With the additional cash, Oasis Petroleum can focus on truly improving shareholder value, which in part is going to be created through downspacing projects. Downspacing is where oil and gas producers, like Oasis, bring more wells online per unit by drilling them closer together. Out of the 22 downspacing tests Oasis Petroleum had planned for 2013, 16 are up and running with each posting promising results. 

The biggest Bakken operator, Continental Resources (NYSE:CLR), can also testify to the potential of downspacing. In Continental Resources' latest quarterly update, its management had this to say about the Hawkinson downspacing test:

Based on the first 120 days of production, 12 of the 14 wells on the Hawkinson unit are performing very well and average production is trending 50% above the [c]ompany's 603,000 Boe estimated ultimate recovery ("EUR") model for a typical North Dakota Bakken well.  The two exception wells are in the TF3 zone and were recently put on pump. They are producing on trend just below the 603,000 Boe EUR model, but improving.  Given the limited amount of production history, these trends could change over time.

If more than half of Continental Resources' wells are outperforming the typical Bakken well, why can't Oasis Petroleum replicate similar results with its own downspacing tests? Horizontal drilling and hydraulic fracturing were the first phase of the shale revolution, but downspacing utilization will truly launch America into a new age of energy dominance.

Not a one-trick pony
Beyond downspacing, 2014 will see 90% of Oasis' wells completed on multi-well pads, and out of those pads 80% will house at least three wells. Investors should be delighted to know that multi-well pad drilling reduces average well completion costs by around 5% to 10%. 

During the first half of 2012, Oasis Petroleum's average well completion cost was $10.5 million. By the end of 2013, Oasis lowered that to $7.9 million. That's $7.5 million if you include the cost savings from Oasis Well Services. Over the next 10 months, Oasis hopes to continue to lower costs, with a goal to reduce well- completion costs to $7.3 million after factoring in savings from OWS. Within just two years, if guidance holds true, Oasis Petroleum will have been able to lower well-completion costs by more than 30%!

High levels of double-digit production growth and significant cost savings are what shareholders should expect from Oasis Petroleum. I can't think of a better combination to reward long-term shareholders. Oasis Petroleum's stock performance may have been lackluster over the past few months, but Wall Street can only ignore amazing growth for so long. 

King cash flow
To be an investment worth putting money into, corporations must have a viable plan to turn revenue growth into cash. Last year saw Oasis Petroleum grow its revenue by 66% to approximately $1.1 billion, while adjusted earnings before interest, taxes, depreciation, and amortization grew by 60% to $821.9 million. Net income grew by a hefty sum as well; in just one year, Oasis grew its net income by 49% to $228 million.

Foolish conclusion
Looking past Oasis Petroleum's sorry stock performance over the past few months, this still is a company with plenty to give. Long-term shareholders shouldn't focus on how past earnings-per-share estimates stacked up against Wall Street expectations and should instead look out into the future to try and figure out how Oasis Petroleum will keep chugging on upward. 2014 will see several major improvements across the board that will surely win over the hearts of investors once more.

Downspacing alone offers the most upside for shale players like Oasis Petroleum and Continental Resources, but there is plenty more going on than just that. Better transportation infrastructure will allow Oasis Petroleum and Continental Resources to fetch better prices for their crude, while widespread pad-drilling usage will continue to ease well-completion costs. All while that's going on, output (that is mostly oil) from both Oasis Petroleum and Continental Resources will continue to escalate upward, and those who get in early will be happily rewarded in the future.

Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

 

Callum Turcan owns shares of Oasis Petroleum. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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