Saturday, January 3, 2015

Why the Selloff in Oasis Petroleum Shares May Be Overdone

This article was first published by TheStreet on December 16, 2014
By Sarfaraz A. Khan
NEW YORK (TheStreet) - With oil below $55 a barrel, Oasis Petroleum (OAS) hasn't seen these kind of prices since it went public in mid-2010, but that doesn't mean the Houston-based company that operates in North Dakota and Montana's Bakken shale-oil formation can't withstand the downturn.
During the last few years, when crude prices were mostly between $70 and $110 a barrel, Oasis increased its production from about 8,000 barrels of oil equivalents a day in 2011 to about 45,400 barrels a day, its target for this year. It's understandable, therefore, that investors are concerned about the company's ability to survive plunging oil prices. The company's shares have fallen by about 70% to around $13.50 this year.

Gabriele Sorbara, an analyst at Topeka Capital Markets who has a buy rating on the stock, explained that current prices make Bakken an uneconomical region to drill for oil and gas, as opposed to Texas's Permian Basin and Eagle Ford that he said "are the lowest cost domestic resource plays".
If prices remain below $60 for a while, that could be bad news for Bakken producers such asWhiting Petroleum (WLL) , Continental Resources (CLR) and Marathon Oil (MRO) as well as for Oasis. 
But Sorbara said that Oasis can weather a downturn, at least through 2015, because it has "a few years of highly economic inventory in the Bakken" and has hedged more than half of its 2015 production at a floor price of $89.13 a barrel.
Moreover, Oasis has reduced its spending plans for next year which, Sorbara said, is a "prudent move" because it will allow the company to spend closer to its cash flow while still increasing its production. The company will also focus on developing its low-cost properties at Bakken that break even at $50 a barrel, according to Sorbara's estimates.
Last week, Oasis said that it will reduce its capital spending for next year to between $750 million and $850 million, lower than this year's budget of $1.4 billion. The company is eyeing production growth of between 5% and 10%, as opposed to the third quarter of this year when it increased its daily production by 38.7%.
The good news for Oasis Petroleum's investors is that oil staying below $60 a barrel is a worst-case scenario, which might not happen.
In a report on Dec. 9, Citigroup analysts, including Edward Morse, the head of commodities research, wrote that the onus of balancing oil markets has shifted to the U.S. shale producers following failure by the Organization of Petroleum Exporting Countries to agree on production cuts during its November meeting. Consequently, some of the U.S. oil and gas producers, such as ConocoPhillips (COP) , Halcon Resources (HK) and Oasis, have already announced reductions in their capital-expenditure plans for 2015 while others are expected to follow suit.
The reduce capital spending will slow down shale oil and gas production, which could lead to an increase in crude prices to $70 a barrel, Morse predicted. Similarly, Goldman Sachs' Brian Singer wrote in a Dec. 14 report that although prices might remain low during the next few months, they will likely average around $74 a barrel next year.
Oasis Petroleum didn't respond to email and phone messages seeking comment.