What happened
Shares of Oasis Petroleum (OAS +0.00%) are getting pummeled today, down more than 15% as of 12:12 p.m. EST. That sell-off comes on the heels of the company's announcement that it would buy more than 20,000 acres in the Delaware Basin, which marks quite a shift for the Bakken Shale-focused driller.
So what
Oasis Petroleum will pay a total of $946 million for this acreage, consisting of $483 million in cash and 46 million shares of stock issued directly to the seller. The company expects to finance the cash portion by selling additional shares via a public offering, with the balance funded by its credit facility, though it plans to sell $500 million of non-core Bakken Shale assets later this year to pay down those borrowings. Oasis has already priced the stock offering, raising $305.6 million in cash through the sale of 32 million shares, though it could sell an additional 4.8 million shares if there's enough demand.
Image source: Getty Images.
Several factors are fueling investors' displeasure with this deal. First, Oasis will issue at least 78 million shares of freshly minted stock, which represents substantial dilution to existing investors considering that it only had about 233 million shares outstanding as of the end of the third quarter. In addition to that, the deal is a huge departure from its current Bakken-focused strategy. That introduces more risk, since the company only knows the Bakken. While Oasis hopes to transfer its expertise to this new region, that's easier said than done. Finally, not only did the company pay a high price in terms of dilution, but it paid a premium for that acreage at $46,660 apiece. While land values in the region were red-hot last year, they've cooled considerably this year. For example, Marathon Oil (MRO +0.00%) made two deals in the same region as Oasis this past March. In the first one Marathon Oil spent $1.1 billion for 70,000 net acres (or about $15,000 apiece), and in the second transaction, it paid $700 million for 21,000 net acres (roughly $33,333 an acre). Add it all up, and it's no surprise to see Oasis' stock sinking today.
Now what
While the Permian Basin is a world-class oil field, Oasis Petroleum is paying a high price to gain a toehold in the region. One the one hand, it's a move that could pay off over the long run, since the returns drillers can earn in the Permian tend to be higher than those in the Bakken. That said, the company is making quite a gamble that its diversification move pays off. It's a risk that's a bit too much for most investors, which is why today's sell-off doesn't look like a compelling opportunity to buy.
