Q1 2021 Oasis Petroleum Inc Earnings & Acquisition Of Williston Basin Assets Call
Okay.
Good day and welcome to the Oasis first quarter 2021 earnings conference call all participants will be in a listen only mode.
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I would now like to turn the conference over to Michael Lou CFO. Please go ahead.
Yeah.
Thank you Betsy and good morning, everyone. This is Michael Lou.
Today, we are going to discuss our first quarter 2021 for natural and operational results and our acquisition announcements for it.
Delighted to have you on our call.
I'm joined today by Danny Brown, Taylor Reid as well as other members of the team.
Please be advised that our remarks on both the Oasis 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 release 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 conference call, we will make reference to non-GAAP measures and.
<unk> to the applicable GAAP measures can be found in our earnings releases and on our website.
We may also reference our current Investor presentation, which you can also find on our website with that I'll turn the call over to Danny.
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 for the entire weightless team for being so welcoming to me and for all their hard work, which has 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. So 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 for 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 U S onshore operations.
And while I say I've spent most of my time on the operation side I've had a good amount of exposure to the finance side as well I manage through various business and commodity cycles and have obviously had a lot of experience working at the company with a unique mixture of upstream and midstream assets.
Plan to comment on our specific strategic initiatives in a moment, but as a general interest introductory thoughts I'd like to emphasize the absolutely Amazing progress. This company has made year to day as our board Chair noted last call Oasis is accomplishing things in months that it would take most years to do I expect to build upon the great work management and the board have accomplished so far and.
Continue to aggressively pursue additional value creation.
In the coming months Oasis will be attending numerous conferences and road shows and I look forward to meeting with you and engaging with you in a dialogue on our industry our business and on the actions we've taken thus far and I say this because I just want to emphasize that the management team here and I am personally very much value your feedback and as you've probably already noticed it's been very influential in setting our.
Strategy priority and plans, we put in place major initiatives to ensure alignment with shareholders with just one example, being our industry leading performance based management compensation program.
I took this role at Oasis is candidly I saw it as a great opportunity to lead a company not only with strong people strong assets, but importantly also one that was on the right path since joining on April 14th been thoroughly engaged with the teams and I'm very impressed by the quality of the people here and they're focused on making Oasis a better company I just wanted to take.
A minute and thank the employees again for all their hard work I know, it's been a long road and a lot of work over the past year, but you should be proud of what you've accomplished and understand oasis is in an excellent position to succeed going forward.
Given this is my first formal conference call with Oasis I want to spend a little longer this morning, but I normally would reviewing some key points on our strategy. The progress we've made and my vision for Oasis in the new energy paradigm, but before we do that I wanted to talk about the very exciting announcement, we made yesterday afternoon.
As you've no doubt noticed we've seen quite a few deals in the Bakken. This year. The base is maturing and we think it's likely to consolidate further as activity levels moderate in companies rationalize their portfolios. The transaction, we announced yesterday significantly increases our scale and is aligned with Oasis is a core strategy the company exercise capital discipline and prudent risk management with the purchase price.
Almost entirely based on PDP value with very little value attributed to the development of top tier inventory or potential synergies that's not to say that we don't see opportunities divest to invest in the strong inventory. This acquisition brings because we do and in fact, they compete favorably in our portfolio, but they played very little role and underpinning our price.
Italy, despite meaningful opportunity to improve operational efficiencies.
We assume no synergies in the evaluation of.
The transaction further decreases oasis as E&P cash G&A with our year end 2021 exit rate expected at approximately $1 25 to $1 35 per Boe and lowers our reinvestment rate to below 55%.
Financed the deal prudently using our strong balance sheet to drive accretion, while keeping leverage below our targeted levels and we see a clear path to delever further with our strong free cash flow expected from the pro forma business. So pro forma for the deal the combined asset base, resulting in even higher free cash generation supports an even lower reinvestment rate and puts oasis.
And an even stronger position to return capital to shareholders to that end. We've also announced that we plan to increase our fixed quarterly dividend by 33% to <unk> 50 per share after the acquisition closes.
You also mentioned that Oasis has a strong operating track record and we can tell you to demonstrate our commitment to our communities environment by running the acquired assets in a sustainable manner respectful of all of our stakeholders, including the three affiliated tribes on the Fort Berthold Indian reservation.
So with that exciting news I'd like to return to my comments on Oasis with strategy and my vision for the organization.
First financial security and flexibility will remain a key strategic objective for Oasis pro forma for the acquisition, we announced yesterday, we expect leverage to be at <unk> eight times.
Trend substantially lower as we used a portion of our cash flow to delever from that level.
Given the inherent volatility of oil prices, having a strong balance sheet helps protect the capital program and gives us flexibility.
Second our new business models returns focused for Frank we recognize that this industry has destroyed a lot of capital over the past decade, and investors are right to demand improvements here, our capital allocation Committee, which is led by the board oversees a new formal capital allocation process and has instituted a rigorous framework that test every dollar of capital spending.
The board is updated regularly on our progress and monitors returns on every project, we do at a corporate level. We expect strong returns driven by our peer leading reinvestment rate and stringent investment criteria.
Third following return on capital return of capital is a key pillar to our strategy as you've seen we've worked hard to institute a fixed dividend sooner than many expected and this quarter shared our plans to increase it after our announced acquisition closes we feel having a sustainable dividend is important as it demonstrates discipline and our commitment to shareholder returns and <unk>.
<unk> concurrent with our midstream simplification, we initiated a $100 million share repurchase program, which provides another avenue for Oasis to return cash to shareholders. Many of you have noted our free cash flow outlook at current pricing exceeds our dividend obligations and the repurchase authorization management and the board continue to assess our options here and we will continue to act in the best.
Interest of shareholders for.
Fourth alignment between management and shareholders is extremely important as you know at the beginning of the year Oasis instituted a peer leading compensation program with 75% of incentive compensation tied to returns for.
Frankly, our personal upside is extremely limited if shareholders don't make money.
Fifth.
<unk> remains a strong focus at Oasis and we thank each of these letters as important we're dedicated to producing a cleaner low cost barrel, while being engaged with local communities and conscious of stakeholder interest. So just a couple of things to highlight here on the environmental side Oasis continues its peer leading gas capture in the Williston Basin and we're also capturing essentially all.
Oil and water on pipeline as opposed to truck.
And while I mentioned, our leading governance structure earlier I think it is important to note that the board oversees our efforts here through the newly formed nominating environment, social and governance Committee Youre going to see us provide more disclosure around these important issues going forward and I'd be remiss, if I didn't share that we remain focused on the health and safety of our employees and communities in these unprecedented unprecedented.
And at times.
Six yes.
Net base here is very strong and our recent acquisition is a great complement to our existing base, but we know that strong assets in and of themselves are not enough. We have to be a leader on cost and we've made tremendous progress on that front oasis has dramatically reduced its capital operating and overhead cost structure and we expect we will see even more reduction through our work with a third party to achieve.
Substantial process optimizations, which has and will result in material savings pro forma for the recent purchase our E&P cash G&A rate is exceptionally strong.
Seven the organization has made important strides in improving enterprise risk identification and the systems and controls necessary can mitigate and manage these risks Oasis is codified in is implementing our risk management system to ensure organizational reliability and protect against possible events disruptions and challenges to our environment, our people our communities and our stakeholders.
Simply put Oasis has implemented new systems to more effectively manage processes and mitigate risks and.
And finally oasis remains differentiated versus many of our peers given our large ownership in our midstream company Oasis Midstream partners during the quarter. The company took the important step of simplifying its ownership by selling our remaining interest in the bobcat and Beartooth debt post the OMB the transaction was accretive to both companies and strength in Oasis is balanced.
While increasing its ownership in O N. P. This has resulted in a business that is now more transparent and understandable.
The Investor feedback we've received on this has been positive and we continue to evaluate additional actions we can take to unlock what we see is trapped value to shareholders.
In closing the energy industry is becoming more industrialized and given it's a commodity business, we need to strive towards increased scale to drive higher volumes over lower cost to enhance returns. We believe the opportunity set for consolidation is quite strong and oasis plans to participate where it makes sense.
We believe we're a logical consolidator in the basin given our extensive footprint our low cost structure, our operating track record, our midstream business and our deep understanding of the subsurface, but ultimately whatever action, we take will be guided by our desire to be prudent and maximize creation for shareholders.
So with that I'm going to turn it over to Taylor to give some operational color and talk a bit more about our recently acquired assets I've spent some time out late in outlining our recent progress and our strategic priorities going forward and I hope I've made it clear that we are strongly aligned with you the shareholder and we will continue to pursue strategies to unlock value sales.
Sure.
Thanks Danny.
As Danny mentioned, we are focused on reducing cost and driving efficiencies and the impact of showing up across our business and improved cost structure.
On the oil cost side, we've made tremendous progress over the past couple of years.
In the Bakken our typical wells now 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 AFP 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.
Looking forward, we're not seeing significant pressures on well costs with the exception of.
Of a tighter steel market Fortunately, we've locked in steel pricing for the remainder of the year.
Not expecting significant impacts of 21 capital budget at this time.
Turning to our recent Williston acquisition, we're really excited about the opportunity to add scale in an accretive manner for our shareholders.
New assets included about 95000 net acres have a current production rate of about 27000 barrels equivalent per day.
The acreage is largely held by production with an average working interest of around 84%.
For.
For two main operating areas on the acreage versus south Antelope field in Fort Berthold.
In addition to the producing assets we've added about two to three years of drilling inventory at our current pace in the Williston and this inventory meets our return threshold of a 15% rate of return loaded with G&A at or below a $45 <unk> price.
As you can see in our go forward guidance, we estimate the acquired areas have a similar cost structure to our legacy position.
And we do see some opportunity to optimize drive lease operating expense lower over time.
We also see opportunities for optimization on supply chain and marketing as well.
Oasis marketing team has consistently delivered.
Very strong results from all integrate the newly acquired production into our existing programs.
As we continue to focus on capital discipline, we plan.
Limited activity on the assets for the remainder of 2021.
We were deferring investment until the projects had been fully vetted. So that we can maximize returns and free cash flow.
The significant PDP component.
This acquisition provides us additional free cash flow and provides the opportunity to increase investment.
And Oasis legacy asset base, while keeping a low reinvestment ratio.
Allowing us to mitigate declines and support sustainable key.
Sustainable cash generation.
As we move forward on this exciting addition to our portfolio.
We look forward to working with the three affiliated tribes on.
Berthold Indian reservation.
And engage new employees, who currently operate these assets.
We've updated our 2021 guidance for the integration of the acquired assets, which for modeling purposes, we assume closes at the end of June.
We will adjust our quarter expectations based on when the deal actually closes.
We're currently running one rig and we expect to complete 23 to 25 gross wells most of which will come online in the second and third quarters.
As a reminder, 2021 activity is focused on some of our strongest areas Wild basin and Indian Hills.
And later in the year, we'll begin drilling our south <unk> project, which is adjacent to wild basin and is expected to generate similar well performance.
In the Permian, we have a program focused primarily on the bone Springs and Wolfcamp a.
We will bring on seven recently completed Ducks in June and we will initiate a drilling program later in the year.
We've made significant progress in lowering our cost structure and reducing cycle times.
And we've also optimized our well spacing and when you combine those two.
It really bodes well for returns and free cash flow.
As our guidance indicates second quarter production is expected to decline slightly from Q1 levels.
Reflecting limited Q1 activity with well completions loaded at the back end of the quarter as a result, third and fourth quarter volumes are expected to increase considerably.
Even before considering the effects of our acquisition.
Said another way pre acquisition volume guidance is unchanged from February.
We've updated volume guidance to reflect the impact of the acquisition beginning July 1st.
We have no planned incremental D&C capital expenditures for 2021.
And our full year capital budget is unchanged from February guidance other than in about $5 million to $10 million and workover costs related to the new assets.
To close we have made tremendous progress on the operation side, lowering our operating and capital costs, improving efficiencies and making ourselves a more competitive company.
Thanks to the Oasis team for all your hard work and dedication over the past 12 months.
We've made tremendous progress positioning the company for success keep up the great work.
With that I'll now turn the call over to Michael.
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.
<unk> borrowings under our underfunded $500 million borrowing base and a $500 million bridge.
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.
A&P L O, we 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% to $12 million.
As Danny mentioned E&P cash G&A per Boe.
As 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 influence our strong gas realizations, but normalizing for that pricing was still solid in March.
E&P cash 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.
<unk> received cash and additional limited partner units from RMP in exchange for its remaining interest in the Bobcat and Beartooth <unk> as well as ADR interest.
Our weighted to ownership and LNP increased to approximately 77% as a result of this transaction.
Going forward essentially all midstream cash flows to oasis.
It can be accounted for through the distributions from OMB, which we're currently projecting over $20 million per quarter.
And those distributions from LP.
The simplification was a great first step in illuminating the value of our midstream business and the Optionality it brings to a waste to shareholders.
Additionally, Oasis declared its first quarter dividend of 37, five cents per share in 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 37, five cents per quarter to <unk> 50 per quarter or 33% increase.
The oil Oasis team is excited to announce this transaction as it supports our.
Our strategy.
Building more scale increase 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.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the keys.
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Our first question comes from Derrick Whitfield with Stifel. Please go ahead.
Good morning, all and congrats on the transaction and Danny Congrats on your new role as well.
Thank you 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.
Clearly asked the latter with the understanding that it was underwritten on PDP without synergies as noted in your prepared remarks.
Yeah. Thanks, Thanks, Derik 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.
For the inventories quite.
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 as the year goes on.
But from that perspective, that's kind of how we're viewing it at this point that that may change over time as we get more specific on our 2020 plans, but likely may be a slight acceleration in the oasis existing area with the folding this inventory and over time with respect to two 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 the 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 them to the new acquired assets and hopefully see some some low <unk>.
Slash 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.
Great and as my follow up perhaps for Taylor with the undeveloped upside largely residing in the FBI or could you speak to your comfort in operating on the reservation.
Okay.
Yes, Derek as you mentioned.
There are some nice inventory on Fort Berthold.
We're excited about.
GAAP operating on the reservation.
As you know.
We've always had a big focus on community involvement and we think that all the work we do on on that side of our business from a operation is going to just naturally translate into a great relationship with the affiliated tribes.
Actually.
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 in doing that again.
Alright, great update guys and congrats again on the transaction.
Thank you Derek.
As a reminder, if you have a question. Please press star then one to be joining the queue.
Our next question comes from Scott Hanold with RBC capital markets. Please go ahead.
Thanks, Hey, good morning, and <unk>.
Congrats on the debt.
The acquisition and all that you've done so far this year.
Maybe to drive in a little bit in terms of like what you see of waste is doing going forward, obviously, you're going to take this asset and then.
Assumed blee theres going to be very I guess, a little differentiation between old asset new asset type of conversation so.
Without spending any capital on the acquired assets I would assume that burns down to somewhere in the low twenties 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.
So as we thanks for the question Scott as we as we look moving forward and fold the new assets and I think you can think about sort of that reinvestment rate sort of being than the level, we need pro forma to kind of keep production flat moving for between the legacy Oasis assets plus the new acquisition and so if you think about.
Just from a sort of a production standpoint, moving moving that production base up by about a third then you can think about kind of moving that capital up by about a third to to hold everything flat moving forward and so that should translate over to about that 55% reinvestment rate, which is going to hold us hold as essentially flat ish from a production standpoint out into the future.
<unk>.
Okay, Okay, so thats somewhere rough rounds, but 70 $580 million. When you include this asset so that sounds about like 10 wells I guess on the margin is that right my ballpark closer that's right Scott Yes.
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.
Thats, where youre getting kind of debt third uplift and so as you mentioned our capex today is call it $2 40 ish.
A third of that would be net $80 million neighborhood that youre talking about what I would 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.
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.
Well I think this year.
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 trapped value in that frankly.
And we're looking at a host of different options to try and make sure that the oasis shareholders get a full read through value. There. So we're exploring those I think will be.
We're leaning into that to looking and exploring those different options. So the simplification was an important step, but but step one.
Yes, I mean do you could you describe just in general with some of those other steps may look like or until like what are some of the options Youre looking at.
Thank you can look I mean really it's the whole universe of different options, we could we could look at.
Things as simple as as monetizing some of the shares we could look at sort of full divestitures of net of debt position, we could look at consolidation with with under other entities to get us below sort of that 50% threshold and deconsolidation, which we think would be helpful. So we're exploring all of these things.
Okay got it and then if I could just sneak one more quickly.
So you made the acquisition it sounds like you see the importance of gaining some scale there may be some more opportunities like can you frame the picture of both like for them from this point on given that there have been a number of transactions like what's left there appear to be.
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.
Well I think we've got.
There continue to remain opportunities and 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 we'll be mindful of.
Where we are at sort of organizationally and how we've onboard the new assets and where we sit from a from a leverage standpoint, we've got to look at the inherent value of whatever acquisition target may be out there and does that is that value inherently attractive we've got to look at.
How that how that adds to to US do we get synergies out of it and ultimately does it make us a better company I think our focus here is to try and make ourselves a better company not necessarily a bigger company and so it's got to fit it's got to hit those and then we'll take we'll take actions sort of based on on those and probably other factors frankly.
So we do see additional opportunity, but we're going to we're going to move about those things prudently and and ultimately whatever decisions. We make are really going to be focused on making sure we maximize value for shareholders, whether it be whether it be actions.
Within within Bakken, where Permian.
Thank you.
Pardon me. This concludes our question and answer session I would like to turn the conference back over to Daniel Brown for any closing remarks.
Yeah.
Thanks Betsy.
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.
Thank you for joining our call.
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