Q4 2020 Oasis Petroleum Inc Earnings Call
Good morning, My name is Kate and I will be your conference operator today at this time I'd like to welcome everyone to the fourth quarter 2020 earnings release and operations update for Oasis Petroleum all participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star keys.
Followed by zero.
After todays presentation, there will be an opportunity to ask questions. You ask the question you May Press Star then one on your Touchtone phone to withdraw your question. Please press Star then two please.
Please note. This event is being recorded I would now like to turn the call over to Michael Lou Oasis Petroleum CFO to begin the conference. Thank you you may begin your conference.
Thank you Kate good morning, everyone.
We are delighted the heavy on our call today I'm joined by Doug Brooks Taylor Reid as well as the other members of the team.
Please be advised that our remarks on both of which the petroleum and Oasis midstream partners, including the answers to your questions include statements that we believe to be forward looking statements within the meaning of the private Securities Litigation Reform Act.
These forward looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our earnings releases and conference calls those risks include among others matters that we have described in our earnings releases as well as in our filings with the securities.
And exchange Commission, including our annual report on form 10-K, and our quarterly reports on form 10-Q, we disclaim any obligation to update these forward looking statements.
During this call we may make reference to non-GAAP measures and reconciliations to the applicable GAAP measures can be found in our earnings releases and on our websites.
We may also reference our current Investor presentation, which you can find on our website with that I'll turn the call over to Doug.
Thank you Michael Thank you Kate Thanks team for being here today.
Good morning, and thanks to everyone for joining the call today I am Douglas Brooks on the Board Chair and Chief Executive Officer at Oasis and we do sincerely appreciate your interest today.
Before I start I would like to first of all thank our first responders health care providers.
All of the leaders that of works around the world to assist in this COVID-19 pandemic. We really appreciate all of the work that's been done and also to our teams and vendors.
For their work around the same reasons sincerely. Thank you.
So I know many of you from in nearly 40 years in the industry and today is an exciting day to get to engage with you regarding the oasis.
Over the last several months I've taken the opportunity along with our team to solicit feedback and listen to the topics at the ideas that each of you have suggested.
And I will let you know that the board is listen the team has listened and I think what we'll talk about today through our major initiatives, we've ensured alignment with shareholders, including the most recently announced which I consider industry, leading creative performance based management compensation program and we'll talk about that in a few minutes.
So many of you know me that I spent essentially my first 24 years with marathon oil company.
Through those years and several other public and private enterprises I've been exposed to and work successfully with the numerous business and commodity cycles.
When I started in mid November as Board chair.
We installed a day incredibly talented and engaged a series of board members.
And as I look at the combination of board members. The team in place I can tell you that I am fully committed as well as the team to the success of this company. However, as has been.
<unk> announced we.
We are under an active engaged a search for a CEO replacement for me.
And I'm happy to remain in this position as long as it takes.
Quite frankly from my perspective, having seen a number of things in my career.
This is truly one of the most interesting and opportunity filled ventures that I've seen.
The deeper that I the board and the team get into this the more excited we are about this incredibly strong organization with its really can do.
The results oriented and truly.
Value generating culture.
Through the last couple of months of the team has taken additional steps to further reduce cost structures. We've reorganized to further address how we will be competitive in this new business environment, and we will talk about those in a few minutes.
Many of you may have noticed that we've put in a new slogan, which we call of new today, New tomorrow today.
That is not simply a catchy slogan.
We've taken aggressive action to make business competitive moves today not wait for tomorrow quite simply put we've put in thoughtfully.
And they should thoughtful of initiatives that will bring near term value to accomplish our goals.
For example, I am pleased to announce that we put in a league leading new dividend program.
Based on the sustainability of our enterprise essentially at 37, five cents per share per quarter and at $55. It's effectively the of two 7% yield.
The dividend was announced last night and I think that this is a perfect example of how we're bringing the new today in our enterprise.
Given this is our first form of conference calls with the New Board installed in me in my position I wanted to talk about several initiatives. The progress we've made in the Oasis in the new energy paradigm.
First of all having emerged just in late November were.
We're benefited out of rate world.
In a industry leading.
The balance sheet debt to EBITDA, one six leverage and is trending lower.
Given the inherent oil prices and uncertain outlook in the future we view the <unk> balance sheet is critically important.
We will vigorously defend it.
Second our new business model as returns focused I call. This two way capital. This is return on capital and the return of capital.
We will ensure the this return based model continues in the that we put it together a capital allocation committee within the board.
It oversees a new system at the allocation of investment processes, we've institutionalized that through a rigorous framework, where every capital spend will be tested we've.
We view that this peer leading reinvestment rate going forward will be supported by continued high returns.
On this front, we've put together a fixed attainable dividend, which demonstrates the value to shareholders beyond that dividend, we continue to generate significant free cash flows, which we'll discuss further today. The ultimate winner in this to weigh capital race will be how people.
Manage capital and return capital to shareholders.
I've touched on the board and it's highly aligned initiatives with our shareholders, but we think it's extremely important to understand the management incentive program that we put in place.
Effectively 75% of our management incentive incentive program is tied to returns.
Just on a relative and absolute returns the strong alignment.
We've put together a strong ESG focus within the board and the company and we view this as not window dressing or of Fad.
It's an obligation to produce clean low cost barrels and also advanced the interests of our stakeholders. We've made key ESG initiatives part of this board process and integrated that within our teams for example at the board level, we've taken the nomination and governance Committee, we separated those those two terms and we've.
The installed environmental and social in the middle of that so we call our committee the N ESG Committee, it's truly integral to our company's success.
We think we already have a track record of good performance and in the environmental and social aspects, but we view that we have a better story to tell in the details that will disclose later this year.
But already we're at a peer leading gas capture positioning of the Williston basin, we have of legacy of being heavily involved in our communities of our stakeholders.
On the governance side, we have an independent diverse.
Board with two of our members being female and one being our lead independent director and we're very proud of this as I mentioned, we put an incentive program and pace that I think is league leading.
Next I'm happy to report that our asset base is strong we are capable of holding volumes relatively flat within the foreseeable future with a very low capital Intendency capital intensity the.
The combination of those two items put our company in a strong position to generate durable substantial free cash flow.
As part of that we have introduced a capital efficiency program in terms of lowering our costs in the field.
We have worked with third party vendors to help us look at optimizing our office and field activities, which will result in material savings and the will talk about over the next couple of weeks.
Next I'd like to report on our of our or our view of enterprise risk management.
We put in place and codified of system, where I view that as an early warning system that helps us protect against events and disruptions that will challenge our base business our environment, our people and our communities. So simply said, we take risk is a very important element of our business.
Finally.
One of the key feedback I've gotten from investors is the complexity associated with their midstream assets.
And the ability for us to demonstrate cash flows to you.
In terms of the transparency and the ability to understand those I think youll see in the investor deck that we the we put on our site last night there are several items in there the we'll call your attention to later today.
I'd like to talk about the outlook for 2001 very important for us.
As we look to 2001, our outlook will be essentially keeping production flat coming out of 2020, while spending about $225 million to $235 million of E&P and other capital.
And I'll point out at $50 and $2 50.
Per mcf that generates approximately $155 million to $175 million of free cash flow at strip prices of course, it only improves significantly.
Currently we have declared the fixed.
Fixed dividend as I mentioned at 37 of half cents per share per quarter and this truly is the spectacular achievement as we worked with our partner banks, our board, which truly validates our long term value generating business, just one quarter from emergence from the organization.
I get a lot of questions about consolidation and where we might fit in that enterprise and let me point out that given todays situation I view that the industry has started consolidation.
Basically underpinned by one premise our industry has evolved from an exploration shale resource to development resource and now we've truly become industrialized as we strive to produce more volumes over lower cost, we're effectively describing sale.
Effectively describing sale.
Scale excuse me Oasis has a strong footprint already in the Williston basin, and we see a number of opportunities for consolidation and in fact that some of the best opportunities I've seen and I think there is some of the most.
Welcoming behaviors by third parties about potential consolidation.
However, I will tell you we will look at acquisitions that are accretive that are value based debt.
All of the right size fit and shape of our enterprise and we will continue to protect the balance sheet.
The marriage between scale and two way capital as I described before will describe the winners in the future.
So.
One last comment before I turn it over to Taylor I hope you've seen that we've been extremely busy at the board level and at the team level over the last couple of months.
This is highlighted by the fact that we have strong assets of low cost called of low cost structure, a strong operating team and alignment with shareholders that provides a sustainable enterprise focused on strong returns and cash flow.
And we look forward to proving that to you over the next quarters.
So let me turn it over to Taylor.
Thanks, Doug.
As you just heard Oasis is in a strong position to succeed going forward.
While were happy to see improvements overall in the global health outlook as well as economic indicators.
The environment remains uncertain.
And we continue to prioritize the health and safety of our employees.
The team has done a tremendous job adjusting to the remote work environment brought on by COVID-19.
And we have executed successfully while maintaining the safety of our employees.
Our field operations have performed exceptionally well with our incident rates at or near record lows.
Needless to say 2020 was of truly extraordinary time for the world our industry and of.
<unk> specifically.
At Oasis, we took aggressive action on multiple fronts to put the company in the best possible position to succeed going forward.
On the operations front.
The power to an incredibly difficult spring taken actions to curtail volumes maximize cash flow and preserve asset value.
We were able to realized pure leading realizations and control cost while avoiding permanent damage to the reservoirs.
Looking forward, we see many of the cost reductions of structural in nature, which is positive for our margins and value maximization.
As Doug mentioned, we've been working with the consultant to accelerate adoption of best practices across capital.
Operating costs and the broader organization.
We understand this is of margin business.
And we'll continue to push costs lower.
If you look at slide 10 of our presentation. It provides color on our progress here.
We're seeing LOE decreased by 5% and G&A decreased by 25% compared to expectations in 2020.
On the capital front I am pleased to report we continue to make further strides in reducing well costs in each basin.
In the Bakken our typical wells now in the mid $6 million range, which is down approximately 17% from where we were budgeting a year ago.
In the Delaware, we've made even more progress as our current <unk> of about 7 million is down about 20% year over year.
Service concessions have obviously helped control cost, but various improvements on the engineering and operations side of helped as well.
Turning to the 2021 program, we expect to run of rig in the Bakken for most of the year, while completing 23 of 25 gross wells.
And we will commence drilling again in the Permian in the third quarter, while completing six to eight gross wells there this year.
The program has been designed for maximum capital efficiency.
We will deliver significant free cash flow, while keeping our average oil volumes around the levels, where we exited 2020.
In the Bakken.
We are focused on a highly capital efficient program in this cornerstone asset.
We expect activity to be focused in some of our strongest areas Wild basin and Indian Hills.
Then later in the year, we will begin drilling ourselves nascent project, which is adjacent to wild basin and is expected to generate similar type performance to that area.
In the Permian, we have of program focused primarily on the bone Springs and Wolfcamp a.
In 2020, we made significant progress lowering our cost structure and reducing cycle times.
Our last two mile lateral wells in the Permian were drilled in less than 25 days and we expect to make further improvements.
Additionally, our subsurface knowledge has grown as well.
And our 2021 wells will be spaced further apart and what we've done in the past it's base further away from legacy unbounded wells.
We expect 2021, well performance will be among our best yet with significantly lower cost, which bodes well for returns and free cash flow.
As our guidance indicates first quarter production is expected to decline a bit from Q4 levels, reflecting reduced activity throughout most of 2020 of.
Along with downtime related to bitter cold.
As you saw our fourth quarter capital was exceptionally light because we deferred activity to enhanced project returns and generate substantial free cash flow.
Q1 volume should approximate 54 to 57000 barrels of oil equivalent per day.
Capital is expected to be limited in the first quarter as well.
<unk> 20 per cent of the four year budget.
Completion activity is expected to pick up in the spring accelerating volumes in the back half of the year, we expect fourth quarter of 2020 oil volumes to be the highest of the year.
At 62 to 65000 barrels of equivalent per day.
To close 2020 was a historic year for the world and for Oasis.
We've made huge progress in reducing our cost structure, improving efficiencies and improving returns.
The team did a tremendous job in 2020.
It has carried that momentum into 2021.
The early impacts of this year are impressive and we will challenge ourselves to do even more as the year progresses.
With that I'll now turn the call over to Michael.
Thanks Taylor.
The impacts from the severe winter weather, we experienced last week led us to postpone announcing our audit of GAAP financials until March eight.
When we expect to file our 10-K this will keep my financial comments limited to the fourth quarter limited on the fourth quarter.
And 2020, and we will focus on 2021.
The waitress operations team continues its relentless focus on cost control across the entire organization 2020, Capex was down over 60% from the original budget.
In 2021 is expected to remain at modest levels with a highly efficient program.
Capital operating and overhead costs are down significantly from 2019 levels. Additionally.
Additionally, we have identified material savings beyond this progress, which will drive our margins higher and further increase free cash flow generation.
I wanted to give a couple of quick thoughts.
On Dakota access pipeline, we're obviously monitoring the situation and taking proactive measures to ensure access to market.
For the second and third quarters of this year of waitresses secured approximately one third of its oil volumes through.
Through a combination of forward sales and secured space on other pipelines out of the basin.
In the event Apple were to shut down we believe it'd be the orderly shutdown.
And rail capacity would would ramp up.
North Dakota oil production is down approximately 400000 barrels a day from its peaks of around one 5 million barrels a day.
The transport market can adapt as needed.
Regarding federal lands in matters related to recent governmental restrictions, we have no material impact there.
We exited the year with $260 million drawn on our $575 million.
<unk> with.
With cash.
And on hand of $15 million $6 8 million of Lcs Oasis had an estimated $323 million of liquidity as of year end.
At the beginning of the year, we made the commitment to the investors across multiple fronts, you can see our progress on our strategic initiatives on page five of our investor presentation.
In the near term, we're focused on self help such as driving down costs running an efficient capital program with a low reinvestment rate and returning capital to shareholders.
As far as our equity performance, we've had a strong run year to date, but we continue to believe that we are significantly undervalued versus peers and.
Dedicated to narrowing debt disconnect through any channel is available.
We will be very proactive on the investor engagement front and continue to increase our sell side coverage universe going forward.
Additionally, liquidity has been improving and should continue to get better.
And we continue to build as we continue to build upon the momentum that we've seen so far this year.
Additionally, we're committed to improving the transparency of our business and specifically getting recognition for our differential and valuable midstream assets, we prioritized debt in the near term in the meantime, we've provided guidance in our press release and on page 23 of our Investor presentation, which shows the.
The the sources and uses the voices of cash flow.
And the E&P business to the.
The E&P business and the midstream business.
It's been a lot of hard work, but we are really uniquely positioned and offer a compelling opportunity for investors our efficient asset base supports a low reinvestment rate and strong return of capital to shareholders. Our free cash flow yield is simply the best in the peer group and I would argue our ability to maintain.
This level of free cash flow is very underappreciated.
These advantages underpin of best in class balance sheet, which.
We can maintain while distributing a significant amount of capital.
As Doug mentioned of waste is proud to have instituted its first quarterly dividend of <unk> 37 in the half.
<unk> per share we took proactive steps to work with our bank group to allow for earlier than expected shareholder distributions.
And that was important for us to provide to our shareholders.
We wanted to set our initial fixed dividend of at a level that was sustainable even at very low prices.
And I should note that at $50 oil based on current guidance, we obviously have well in excess of $100 million of additional free cash flow.
On top of the dividend.
We will be thoughtful about the best use of this additional cash.
Going forward.
To sum things up the environment is improving but remains volatile and oasis continues to work diligently to aggressively reduce our cost structure improved returns and return cash to our shareholders.
With that I'll turn the call over to Kate for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speaker phone. Please pick up your handset before pressing the key to withdraw from the question queue. Please press Star then two.
Our first question comes from Derrick Whitfield of Stifel. Please go ahead.
Good morning oil and great update.
Thank you.
Perhaps for Michael of Douglas beginning with your final comments on free cash flow.
Your returns focused business model. How are you currently thinking about the allocation of incremental free cash flow above and beyond the fixed dividend.
So let me start and then I may turn it back over to Michael but.
So as the board was installed just last fall we've looked at all of those options, we really felt that to put in place a fixed dividends debt had a material return with step one we do see as pointed out we have material additional free cash flows.
Those can come in the form of.
Share repurchases.
The installment of perhaps the variable dividend, but I can tell you that the board is looking at all of those options and I think as we continue to run the business model through the near term there'll be more visibility on that.
But thank you for noticing I think it's an attribute that is unique to us.
Compared to peers.
Sure.
And.
As my follow up you provided a 2020 to outlay, noting flat to slightly higher volumes on similar capex.
Metrics are materially better than what was offered in your cleansing materials could you comment on where youre seeing the greatest gains in capital efficiency <unk> asset productivity.
Yes, so I'll start out.
Derek one of the things is.
Put this capital allocation committee together to really focus on investment and returns.
As we as we looked at the asset base of inventory we have made some.
Some big strides in terms of continuing to maximize the capital efficiency. So a combination of <unk>.
Driving cost down and then really.
Spacing.
Widely so that we're going to get.
The maximum returns the.
Inventory slides I think on here a good one the look at.
You look on page 13 in.
The 14 in and just in the Bakken alone you see we've got a.
The 10 year run rate runway of these highly capital efficient projects.
Between.
30, and 45 <unk> of 15% return and Thats loaded in.
And the majority of those were.
Below the $40 mark or so that's.
That's a big piece of it relative to I think what was probably a bit conservative.
The previously and the cleansing materials.
Okay.
Great that's really kind of the gun.
Yes.
Eric I would point out on the firm loaded the term loaded we use here Derek.
Is low to the G&A and I think in my of correct. Taylor that was loaded of $2 50, a barrel correct and I think were showing on one of our slides that's far above our current run rate.
So if there is additional margin in the.
Thanks, Douglas Great update guys.
Thanks Derek.
Okay.
Okay.
Hello, Philip is your phone line you were not able to hear you.
Hello.
Can you hear me now.
Yes.
Okay, sorry about that I didn't I didn't hear many of call it.
Thanks, guys just congrats on the dividend announcement and working with the banks just to allow that to happen earlier than expected I.
I guess just to follow up on the topic of what to do with the additional free cash flow.
You say, it's still early but.
But is your sense that.
The board would rather.
Steadily grow that base dividend over time or do you think there is really.
Serious appetite.
Just to maybe sort of keep that dividend kind of Senate, maybe move more towards the more of a fixed plus variable dividend policy like we are.
Turning to see from some of the larger names in the space.
Well, let me, let me add a third element and that Philip.
So I would direct you to I think slide 11 in the deck.
Couple of things as you allocate capital not only just.
Opportunities in field, but allocating capital back to investors, we've talked about the several there.
I would point out on slide 11 day.
I think we're trading at a very compelling valuation.
And I'm, not saying that over signaling or under signaling anything.
But I think share repurchases are value accretive today for us.
I think the option to slowly increase the dividend as you suggested is it being fixed as an option and then certainly I think there is a component of the various built option.
The dividends because of the nature of our business.
We have a revenue stream that could.
The increased significantly with commodity prices.
And we want to retain that option.
As that develops and so Michael anything it further like to amplify that I'd say essentially fill up we're looking at those options to be decided.
Okay.
Got it.
Are there any noticeable drawbacks of flaws in the variable dividend.
The structure that would maybe prevent you guys from moving in that direction.
So Phil just just thinking through that we were able to get a amendment with our banks to.
To be able to provide this fixed dividend for the next.
A couple of quarters, we do have a.
A limiter in our bank agreement for substantially more than that before 930, but after that it's it's open to free cash flow.
So we do have a little bit of time to think about how we want to best.
The return.
Capital to our shareholders and as Doug mentioned, we will look at a number of things of the great thing for us as debt, we've got an incredible amount of free cash flow generation.
This year, we think that only continues to progress as oil prices are have been strong.
We think that will will potentially continue to grow of we think that free cash flow yield is is highly durable.
Debt that allows us to do a number of different things.
And we will look for what are the kind of the best way to return the.
Shareholders.
Okay, Michael Thank you.
Thank you Taylor.
This concludes our question and the answer session I would like to turn the conference back over to John Brooks for closing remarks.
Thank you Kate and thanks for all of the participation today. So look you heard me emphasize that the underlying strength of Oasis of the board our leadership team our Oasis team our member banks, our investors our communities and our stakeholders and it is up to us to unlock that real value of these <unk>.
The board has been strongly engaged and we are very eager to deliver for these on these results you.
You will see that we will continue to engage in the energy transition currently underway.
And as we demonstrated today, we think we found a place in that transition.
Because we need to.
Energy suppliers today facilitate medicines comfort products food transportation clothing, and so many other things that benefit benefit the people of our world.
We're uniquely positioned with the best in class balance sheet of quality and sustainable long lived asset base and of new rigorous capital discipline and those will translate into long term value creation for all of US we look forward to delivering on those promises.
So with that I again, thank you for all your time and and diligence and patience with us over the last couple of months and that will conclude our call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.