Q1 2021 Oasis Petroleum Inc Earnings & Acquisition Of Williston Basin Assets Call

Good day and welcome to the Oasis the first quarter 2021 earnings conference call all participants will be in a listen only mode.

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Please note this event is being recorded.

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 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 the other members of the team.

Please be advised that our remarks on both of the wages 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 and our earnings releases and conference calls.

Those risks include among others matters that we have described in our earnings release as well as and 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.

Reconciliations 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 to the entire waste his team for being so welcoming to me and for all of 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 of 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 of <unk> and support of.

Also to our teams and vendors we thank you for the same reasons.

So quickly from 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 of 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 operations side I've had a good amount of exposure to the finance side as well on managed through various business and commodity cycles and of obviously had a lot of experience working at the company with the unique mixture of upstream and midstream assets.

Plan to comment on our specific strategic initiatives and a moment, but as a general introductory thoughts I'd like to emphasize the absolutely Amazing progress. This company has made year to date as our board share noted last call Oasis is accomplishing things and months that it would take most years to do I expect to build upon the great work management and the board of accomplished so far and.

Continue to aggressively pursue additional value creation.

And the coming months Oasis will be attending numerous conferences and roadshows and I look forward to meeting with you and engaging with you and of 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 personally very much value your feedback and as you've probably already noticed it's been very influential and setting our.

Strategy priority and plans, we've put in place major initiatives to ensure alignment with shareholders with just one example, being our industry leading performance based management compensation program.

And I took this role at Oasis is candidly I saw it is of great opportunity to lead the company not only with strong people and 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 <unk> a better company I just want to take a minute and thank the employees again for all of 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 and an excellent position.

The succeed going forward.

Given this is my first formal conference call with the wages I want to spend a little longer this morning than I normally would reviewing some key points on our strategy. The progress we've made and my vision for Oasis and the new energy paradigm, but before we do that and 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 and the Bakken this year the basis of maturing and we think it's likely to consolidate further as activity levels moderate and companies rationalize their portfolios. The transaction, we announced yesterday significantly increases our scale and is aligned with <unk> 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 and the strong inventory of this acquisition brings because we do and in fact, they compete favorably and our portfolio, but they played very little role and underpinning our price.

Denali, despite meaningful opportunity to improve operational efficiencies.

We assume no synergies and the valuation.

The transaction further decreases Oasis 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%.

Finance the deal prudently using our strong balance sheet, the drive accretion, while keeping leverage below our targeted levels and we see a clear path of Delever further with the strong free cash flow expected from the pro forma business. So pro forma for the deal the combined asset base results and even higher free cash generation supports and even lower reinvestment rates and puts oasis.

And and even stronger position to return capital to shareholders to that and we have 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 and 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 of the strategy and my vision for the organization.

The 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 and the trend substantially lower as we use 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 to the Frank we recognize that this industry has destroyed a lot of capital over the past decade, and investors of right to demand improvements here, our capital allocation Committee, which led by the board oversees of new form of capital allocation process and has instituted a rigorous framework. The 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 of fixed dividend sooner than many expected and this quarter shared our plans to increase and 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 the $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 and the best.

Interest of shareholders.

Fourth alignment between management and shareholders is extremely important as you know at the beginning of the year Oasis instituted of peer leading compensation program with 75% of incentive compensation tied to returns.

Frankly, our personal upside is extremely limited if shareholders don't make money.

Fifth ESG 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 cash.

<unk>, essentially all oil and water on pipeline as opposed to truck.

And while I mentioned and our leading governance structure earlier I think it is important to note that the board overseas and 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 and these unprecedented unprecedented times.

Six of the asset base here is very strong and our recent acquisition is a great complement to our existing base, but we know the 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.

<unk> has dramatically reduced its capital operating and overhead cost structure and we expect we will see even more reduction through our work with the 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 of the organization has made important strides and improving enterprise risk identification and the systems and controls necessary can mitigate and manage these risks Oasis is codified and is implementing the risk management system to ensure organization on 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 and our midstream company Oasis Midstream partners during the quarter. The company took the important step of simplifying its ownership by selling our remaining interest and the bobcat and Beartooth dead posed to OMB and the transaction was accretive to both companies and strengthen the oasis is balance.

While increasing its ownership and OSP. 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.

And closing the energy industry is becoming more industrialized and given it is a commodity business, we need the 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.

And we believe were of logical consolidator in the base and 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 and 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 shareholders and we'll continue to pursue strategies to unlock value sales.

Sure.

Thanks Danny.

And as Danny mentioned, and we're focused on reducing cost and driving efficiencies and the impact of showing up across our business and improved cost structure on.

On the oil cost side, we've made tremendous progress over the past couple of years.

And the Bakken our typical wells now <unk> and the mid $6 million range down about 17% from early 2020.

And on the Delaware and we've made even more progress with our current AFC of about $7 million down about 20% of since early last year.

Service concessions of obviously helped here, but the various improvements and engineering design of health as well.

Looking forward, we're not seeing significant pressures on well costs with the exception of.

Of the tighter steel market Fortunately, we've locked in steel pricing for the remainder of the year and we are.

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 and and accretive manner for our shareholders.

New assets included about 95000 net acres of our current production rate of about 27000 barrels equivalent per day.

And the acreage is largely held by production with an average working interest of around 84%.

The two main operating areas on the acreage versus south Antelope field and Fort Berthold.

In addition to the producing assets we've added about two to three years of drilling inventory at our current pace and the Williston.

And this inventory meets our return threshold of the 15% rate of return loaded with G&A at or below of $45 of WTO price.

And as you can see on our go forward guidance, we estimate the required areas have the similar cost structure to our legacy position.

And we do see some opportunity to optimize the dry lease operating expense lower overtime.

We also see opportunities for optimization on supply chain and marketing as well.

<unk> marketing team has consistently delivered.

Very strong results from all integral growth the newly acquired production into our existing programs.

As we continue to focus on capital discipline, we plan really limited activity on the assets for the remainder of 2021.

We are deferring investment until the projects have been fully vetted. So that we can maximize returns and free cash flow.

The significant PDP component of the.

This acquisition provides us additional free cash flow and provides the opportunity to increase investment.

And Oasis legacy asset base, while keeping the low reinvestment ratio.

Allowing us to mitigate declines and support sustainable.

Sustainable cash generation.

And as we move forward on this exciting addition to our portfolio.

We look forward to working with the three of affiliated tribes on of the.

Berthold Indian reservation.

And engaged and 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 their 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 on line in the second and third quarters.

As a reminder, 2020 and.

'twenty one activity is focused on some of our strongest areas.

And while basin and Indian Hills.

And later in the year, we will begin drilling are south of <unk> project, which is adjacent to wild basin and is expected to generate some more well performance.

And the Permian we of the program focused primarily on the bone Springs and Wolfcamp a.

We will bring on seven recently completed Ducks and June and we will initiate a drilling program later in the year.

We've made significant progress on 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.

And as our guidance indicates second quarter production is expected to decline slightly from Q1 levels.

Reflecting limited Q1 activity with well completions loaded on 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.

And we've updated volume guidance to reflect the impact of the acquisition beginning July one.

We have no planned incremental D&C capital expenditures for 2021.

And our full year capital budget is unchanged from February guidance, other than and about $5 million to $10 million and workover costs related to the new assets.

To close we have made tremendous progress on the operations side, lowering our operating and capital costs, improving efficiencies and making ourselves and 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 and keep up the great work.

With that I'll now turn the call over to Michael.

Thanks Taylor.

As you read on our press release, and we discussed earlier on this call Oasis has agreed to acquire certain Williston basin assets for total cash consideration of approximately $745 million pursuant to the purchase and sale agreement and subject to customary purchase price adjustments.

The acquisition will be funded with cash on hand of approximately of $106 million.

All of our borrowings under our unfunded $500 million borrowing base and of $500 million.

Bridge to a high yield offering.

We expect closing of the acquisition to be and the third quarter.

And we just continues to do a good job managing low and minimizing downtime.

E&P low average $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 one.

$1 25 to $1 35 per Boe to.

So very strong progress there.

Both crude and gas realizations were strong and 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 the normalizing for that pricing was still solid and March.

E&P cash Capex was approximately $29 million and the first quarter spending was a little below our original expectations as the 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 improve the financial condition of both companies and.

<unk> received cash and additional limited partner units from RMP and exchange for its remaining interest and the bobcat and Beartooth <unk> as well as ADR interest.

And <unk> ownership and S&P increased to approximately 77% as the result of this transaction.

Going forward essentially all midstream cash flows to Oasis and <unk>.

And be accounted for through the distributions from <unk>, which we're currently projecting over $20 million per quarter.

And those distributions from <unk>.

The simplification was the great first step and illuminating the value of our midstream business and the Optionality It brings to a waste of shareholders.

Additionally, Oasis declared first quarter dividend of 37, five cents per share and annual implied dividend of $1 50 per share.

Based on the announced the 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 <unk> 37, five cents per quarter to <unk> 50 per quarter or of 33% increase.

And the Oasis team is excited to announce this transaction as it supports our.

Our strategy of 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.

The ask a question you May press Star then one on your Touchtone phone.

If youre using a speakerphone please pick up your handset before pressing the keys.

Is it any time your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.

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 and integrating it into your 2022 development program and could you help frame the potential for synergies as you see it today.

And clearly asked the latter with the understanding that it was underwritten on PDP without synergies as noted on your prepared remarks.

Yeah. Thanks, Thanks, Derik I appreciate the question.

With respect to how it fits into our 2022 plans, we're still looking and evaluating how that will fold in <unk>.

And for the inventories quite.

Quite competitive within the portfolio, we like and 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 the work that out as the as the year goes on.

But from that perspective, that's kind of how we're viewing and at this point that may change over time as we get more specific on our 2020 plans, but likely may be a slight acceleration and 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 the 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 of 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 <unk>.

My follow up perhaps for Taylor with the undeveloped upside largely residing in the FBI or could you speak to your comfort and operating on the reservation.

Okay.

Yes, Derek as you mentioned the nurse.

There are some nice inventory.

And on Fort Berthold and.

We're excited about.

The operating on the reservation and.

And I think as you know.

We've always had a big focus on community involvement and we think that all of the work we do on on that side of our business from the operation is going to just naturally translate into a great relationship.

With the affiliated tribes.

Actually of.

Historically, we have operated on the reservation in the past we sold from properties that was a good experience.

And we look forward to engaging and 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, Good morning, and yes.

Congrats on the the acquisition and all of that you've done so far this year.

Maybe the drive in a little bit in terms of like what you see of waste is doing going forward, obviously, you're going to take the SaaS it and and.

Assumed blee theres going to be very I guess, a little differentiation between the 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 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 thats. The case whats going to be the incremental amount of wells and capital needed to do that.

And 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 forward between the legacy Oasis assets, plus the new acquisition and so if you <unk>.

About just from a sort of of production standpoint, moving moving that production base up by about a third and 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 of production standpoint out to the.

Future.

Okay. Okay. So that's somewhere around $75 million to $80 million. When you include the SaaS. It so that sounds about like 10 wells I guess on the margin is that right.

Ballpark closer.

Thats right Scott.

As Danny mentioned and kind of if you think about our current asset at around 60 a day.

And like you said this asset will decline a bit too called around 20.

Thats, where youre getting kind of the third uplift and so as you mentioned our capex today is call it $2 40 ish.

The third of that would be net $80 million neighborhood that you are 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 that will actually be a little bit less and so maybe we will 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 visit the first step I think it is the first step.

We continue as I mentioned in the prepared remarks, we see trapped value and 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 will be.

We're leaning into that to looking and exploring those different options. So the simplification was an important step but.

Step one.

Yes.

You described just in general with some of those other steps may look like or until like what are some of the options Youre looking at.

I think 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 the of that position, we could look at consolidation with the with under other entities to give 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 if I could just sneak one more quickly and then obvious.

And you made the acquisition.

It sounds like you see the importance of gaining some scale and there may be some more opportunities like can you frame the picture of us.

From this point on given that there have been the number of transactions like what's left there appear to be.

Left and 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 the and 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 on boarded 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.

And 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 and not necessarily a bigger company and so it's kind of 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.

<unk>.

And 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.

The comp.

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.

Thanks, Betsy I'd like to thank everybody for their time today management and the board has been strongly engaged and to have delivered a series of items this year, which put us on a great position to succeed going forward. The rest assured while we've made tremendous progress to date, we're going to keep and aggressive stance with the focus on delivering additional value.

Thank you for joining our call.

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