Oasis Petroleum Inc.
Q1 2021 Earnings Call Transcript

Published: 6 May 2021

[Operator:]

Good day, and welcome to the Oasis First Quarter 2021 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note, this event is being recorded. I would now like to turn the conference over to Michael Lou, CFO. Please go ahead.

[Michael Lou:]

Thank you, Betsy. Good morning, everyone. This is Michael Lou. Today, we are going to discuss our first quarter 2021 financial and operational results and our acquisition announcement. We're delighted to have you on our call. I'm joined today by Danny Brown, Taylor Reid as well as other members of the team.

[Danny Brown:]

Thank you, Michael. Good morning to all, and thank you for joining our call. I'm Danny Brown, Chief Executive Officer for Oasis Petroleum. We sincerely appreciate your interest today and I think we have some exciting news to share. But before we start, I want to voice my appreciation to the entire Oasis team for being so welcoming to me, and for all their hard work, which is culminated in the news that we're sharing today. Thank you. I also want to pass on our appreciation for those of us here – from those of us here at Oasis to all the first responders, health care providers and leaders that have been working around the world to assist with the COVID-19 pandemic. You have our appreciation and support. Also, to our teams and vendors, we thank you for the same reasons. So, quickly a brief intro. I've met many of you through my prior roles, where I had a lot of opportunity to engage with the investor community. For those, who may not be familiar with me just some quick background. I've been in the oil and gas industry for over 23 years, with much of that time at Anadarko Petroleum, where I was most recently Executive Vice President of US Onshore Operations. And while I say, I've spent most of my time on the operations side, I've had a good amount of exposure to the finance side as well. I've managed through various business and commodity cycles and have obviously had a lot of experience working as a company with a unique mixture of upstream and midstream assets.

[Taylor Reid:]

Thanks, Danny. As Danny mentioned, we are focused on reducing cost and driving efficiencies and the impact is showing up across our business and improved cost structure. On the well cost side, we've made tremendous progress over the past couple of years. In the Bakken our typical well is now AFE-ed in the mid $6 million range down about 17% from early 2020. And in the Delaware, we've made even more progress with our current AFE of about $7 million down about 20% since early last year. Service concessions have obviously helped here, but various improvements in engineering design have helped as well.

[Michael Lou:]

Thanks, Taylor. As you read in our press release and we discussed earlier in this call, Oasis has agreed to acquire certain Williston Basin assets for total cash consideration of approximately $745 million pursuant to a purchase and sale agreement and subject to customary purchase price adjustments. The acquisition will be funded with cash on hand of approximately $106 million revolver borrowings under our unfunded $500 million borrowing base and a $500 million bridge to a high-yield offering. We expect closing of the acquisition to be in the third quarter. Oasis continues to do a good job managing LOE and minimizing downtime. E&P LOE averaged $9.92 per BOE for the first quarter, below expectations. E&P cash G&A expense was $14 million. However, adjusted for severance, as part of the company's cost reduction initiative and fresh start accounting costs, E&P cash G&A approximated $9.2 million, below guidance of $11 million to $12 million. As Danny mentioned, E&P cash G&A per BOE is expected to exit 2021 at $1.25 to $1.35 per BOE, so very strong progress there. Both crude and gas realizations were strong in the quarter as our marketing team continues to do a phenomenal job, maximizing revenues by getting our molecules to the best markets. Severe winter weather obviously influenced our strong gas realizations, but normalizing for that pricing was still solid in March. E&P CapEx was approximately $29 million in the first quarter, spending was a little below our original expectations as a portion spilled into the beginning of the second quarter. Our second quarter E&P CapEx expectation is $75 million to $90 million. During the second quarter, Oasis and Oasis Midstream Partners completed the simplification transaction, which was an accretive deal that improved the financial condition of both companies. Oasis received cash and additional limited partner units from OMP in exchange for its remaining interest in the Bobcat and Beartooth DevCos as well as IDR interest. Oasis ownership in OMP increased to approximately 77% as a result of this transaction. Going forward essentially all midstream cash flows to Oasis can be accounted for through the distributions from OMP, which we're currently projecting over $20 million per quarter in those distributions from OMP. The simplification was a great first step in illuminating the value of our midstream business and optionality it brings Oasis' shareholders. Additionally, Oasis declared its first quarter dividend of $0.375 per share and annual implied dividend of $1.50 per share. Based on the announced acquisition we expect significant accretion to cash flow per share and free cash flow per share. And we're highly focused on being great stewards of capital and return on and return of capital. Upon closing of the transaction, we expect to raise our normal fixed quarterly dividend from $0.375 per quarter to $0.50 per quarter or a 33% increase. The Oasis team is excited to announce this transaction as it supports our strategy of building more scale, increased free cash flow generation and returns to shareholders. To sum things up, it was an eventful start to the year at Oasis where you saw progress across a variety of our strategic initiatives and an accretive acquisition, which improves the go-forward outlook. With that I'll hand the call back over to Betsy for questions.

[Operator:]

We will now begin the question-and-answer session. Our first question comes from Derrick Whitfield with Stifel. Please go ahead.

[Derrick Whitfield:]

Good morning. Congrats on the transaction. And Danny, congrats on your new role as well.

[Danny Brown:]

Thank you.

[Derrick Whitfield:]

Starting with the acquisition while clearly early in the process, how do you envision integrating it into your 2022 development program? And could you help frame the potential for synergies as you see it today? I clearly asked the latter with the understanding that it was underwritten on PDP without synergies as noted in your prepared remarks?

[Danny Brown:]

Yes. Thanks Derrick. Appreciate the question. With respect to how it fits into our 2022 plans, we're still looking and evaluating how that will fold in. For -- the inventory is quite competitive within the portfolio. We like it a lot. We do recognize that it's going to take a bit of development planning and surface planning to get that to actually be able to drill on it. And so as a result of that we may accelerate slightly into the existing Oasis area. We're just going to have to work that out as the year goes on. But from that perspective, that's kind of how we're viewing it at this point. That may change over time as we get more specific on our 2020 plans, but likely maybe a slight acceleration in the Oasis existing area with folding this inventory in over time. With respect to synergies, we've done a lot of work both internally and with an external third party about how do we improve our operating efficiency. So we think we can probably bring some of those things to bear. Clearly, that from a more corporate level, won't be a lot of incremental -- essentially de minimis incremental overhead associated with this. But we hope to take some of the lessons we've learned internally and apply it into the new acquired assets and hopefully see some LOE/operational-type improvements there as well. So we're bullish on that front. But again as you noted none of that was factored into the valuation.

[Derrick Whitfield:]

Great. And as my follow-up, perhaps for Taylor with the undeveloped upside largely residing in the FBIR, could you speak to your comfort in operating on the reservation?

[Taylor Reid:]

Yes. Derrick, as you mentioned, there's some nice inventory on Fort Berthold and we're excited about operating on the reservation. And I think as you know, we've always had a big focus on community involvement and we think that all the work we do on that side of our business on our operation is going to just naturally translate into a great relationship with the affiliated tribes. We actually have -- historically we have operated on the reservation in the past. We sold some properties. That was a good experience. And we look forward to engaging and doing that again.

[Derrick Whitfield:]

All right. Great update guys, and congrats again on the transaction.

[Danny Brown:]

Thank you, Derrick.

[Operator:]

Our next question comes from Scott Hanold with RBC Capital Markets. Please go ahead.

[Scott Hanold:]

Thanks. Good morning and yeah congrats on the acquisition all that you've done so far this year. Maybe to drive in a little bit in terms of like what you see Oasis doing going forward. Obviously, you're going to take this asset in and assumably there's going to be very I guess little differentiation between old asset new asset type of kind of conversation. So without spending any capital on the acquired assets, I would assume that burns down to somewhere in the low 20s by year-end. And from there, I guess going forward with the point for Oasis as an entity as a whole is to keep production relatively flat. And if that's the case what's going to be the incremental amount of wells and capital needed to do that with this acquisition now included?

[Danny Brown:]

So as we -- thanks for the question, Scott. As we look moving forward and fold the new assets in I think you can think about sort of our -- that reinvestment rate sort of being the level we need pro forma to kind of keep production flat moving forward between the legacy Oasis assets plus the new acquisition. And so if you think about just from a sort of a production standpoint moving that production base up by about one-third then you can think about kind of moving that capital up by about one-third too to hold everything flat moving forward. And so that should translate over to about that 55% reinvestment rate which is going to hold us essentially flattish from a production standpoint out into the future.

[Scott Hanold:]

Okay. Okay. So that's somewhere up around what $75 million $80 million when you include this asset. So that sounds about like 10 wells I guess on the margin. Is that right? Is my ballpark close?

[Michael Lou:]

That's right, Scott. As Danny mentioned kind of if you think about our current asset at around $60 a day and like you said this asset will decline a bit to call it around $20 million. That's where you're getting kind of that one-third uplift. And so as you mentioned our CapEx today is call it 240-ish, so one-third of that would be in that $80 million neighborhood that you're talking about. What I'd note is that the current decline rate of these assets probably a little bit under our current decline rate, but by the end of the year they'll actually be a little bit less. And so maybe we'll see some slight improvements on that, but that's kind of generic -- generally kind of how to think about it.

[Scott Hanold:]

Got it. Understood. And then moving to the midstream. Obviously, the simplification took a big step forward to increase the -- I guess the transparency and just obviously the structure of that entity. Can you give a sense of the long-term plan there? I mean, is this the first of other steps to come? What is the long-term plan with the midstream? And what would you like to see going forward with that?

[Danny Brown:]

Well I think this -- your phrasing of is it the first step. I think it is the first step. We continue -- as I mentioned in the prepared remarks, we see track value in that frankly. And we're looking at a host of different options to try and make sure that the Oasis shareholders get the full read-through value there. So we're exploring those. I think we'll be -- we're leaning into that to looking and exploring those different options. So the simplification was an important step but step one.

[Scott Hanold:]

Yes. I mean, could you describe just in general, what some of those other steps may look like or entail? Like what are some of the options you're looking at?

[Danny Brown:]

I think you can look -- I mean really, it's the whole universe of different options. We could look at things as simple as monetizing some of the shares. We could look at sort of full divestitures of that position. We can look at consolidation with other entities to give us below sort of that 50% threshold and deconsolidate, which we think would be helpful. So we're exploring all these things.

[Scott Hanold:]

Okay. Got it. And then if I could just sneak one more quickly. And I mean obviously, you made the acquisition, it sounds like you see the importance of gaining some scale and there maybe some more opportunities. Like, can you frame the picture of us like from this point on given that there have been a number of transactions? Like what's left there to be? What's left in the Bakken at this point? And would that be your focus, or could you also look to be a consolidator in the Permian?

[Danny Brown:]

Well, I think we've got -- there continue to remain opportunities in the Bakken and we're going to have to look at those sort of on a case-by-case basis and see whether or not those opportunities make sense for us. And so, we'll be mindful of where we are at sort of organizationally and how we've onboarded the new assets and where we sit from a leverage standpoint. We've got to look at the inherent value of whatever acquisition target may be out there and is that value inherently attractive. We've got to look at how that adds to us, do we get synergies out of it. And ultimately, does it make us a better company. I think we -- our focus here is to try and make ourselves a better company, not necessarily a bigger company. And so, it's got to fit those and then we'll take actions sort of based on those and probably other factors frankly. So, we do see additional opportunity, but we're going to move about those things prudently. And ultimately, whatever decisions we make are really going to be focused on making sure we maximize value for shareholders, whether it’d be actions within Bakken or Permian.

[Scott Hanold:]

Thank you.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Daniel Brown for any closing remarks.

[Danny Brown:]

Thanks, Betsy. Well I'd like to thank everybody for their time today. Management and the Board have been strongly engaged and have delivered a series of items this year, which put us in a great position to succeed going forward. Rest assured, while we've made tremendous progress to date, we're going to keep an aggressive stance, with a focus on delivering additional value. Thank you for joining our call.

[Operator:]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.