Q2 2021 Oasis Petroleum Inc Earnings Call
Good morning, everyone and welcome to the Oasis second quarter earnings results Conference call.
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At this time I'd like to turn the conference call over to Michael Lou CFO. Sir. Please go ahead.
Thank you Jamie good morning, everyone.
We are reporting our second quarter 2021 financial and operational results. 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.
Please be advised that our remarks on both the Oasis petroleum and Oasis petroleum 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 conference call.
We'll 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 find on our website with that I'll turn the call over to Danny.
Thank you Michael good morning to all and thanks for joining our call. We sincerely appreciate your interest today before I get started I'd also like to thank the entire waste. This team for their continued hard work and dedication to our organization I've gotten to know the company and our people better over the past few months and I couldn't be more impressed I know, we've all been very busy executing on our operational and strategic.
Objectives, and you should all be very proud of what we've accomplished we are in a great position to succeed going forward.
Turning back to our call since I joined Oasis in mid April I've had the opportunity to Reacquaint myself with many of you on the investment community on enjoyed our conversation and want to emphasize that your feedback on its value and its been influential in how we thought about setting strategy priorities and plans I look forward to continuing the dialogue.
Now before I hand, it over to Taylor to discuss our operational highlights let me give a few high level thoughts.
First oasis delivered another solid quarter with volume exceeding expectations and cost below plan, even with all the strategic activity, we announced during the second quarter. Our second half plan is essentially unchanged other than the great news that our full year capital is expected to be below our original expectations also during the quarter. The company determined it is eligible under <unk>.
Section 382 of the internal revenue code to use its net operating loss position to offset taxable income in 2021 and be on Michael will spend more time discussing this later in the call, but the main takeaway is we expect significant cash tax savings versus our prior expectations.
We closed the Permian divestiture at the end of June and expect our Williston acquisition that we announced in May to close sometimes sometime late in the third quarter. While this is a little later than we originally model. The delay is just due to scheduling challenges early on the approval process. All parties are aligned we don't see any issues with the close and the purchase price will be adjusted downward with the cash flow.
Generating by the asset since the effective date.
Third we continue to adhere to our strategic objectives that we think differentiate the oasis story and are beneficial to all stakeholders because I spoke about these at length last quarter and there are significant details included in our IR material I'll keep my comments brief. So in summary, we are focused on maintaining a strong balance sheet returns on and of capital.
Alignment with management and shareholders ESG leadership effective risk management and enhancing the value of our assets.
And speaking of ESG, we've mentioned before that Oasis is dedicated to producing a cleaner low cost barrel, while being engage with local communities and conscious of stakeholder interest importantly, we are also committed to providing increased transparency on our efforts and to that end I am pleased to announce that we've completed our first sustainability report we.
Spec to have a formal press release soon and report will be available on our website I would encourage everyone to read through it as it does a really nice job presenting oasis as core values, our history of being a responsible corporate citizen and different initiatives, we have in place to improve our performance going forward.
While Oasis has always been dedicated to environmental social and governance issues, we aim to be more proactive in providing disclosure around these topics going forward.
I also wanted to touch briefly on our midstream ownership in light of the strategic actions, we've taken year to date.
<unk> remains differentiated versus many of our peers given the large ownership in our midstream company Oasis Midstream partners in March Oasis took the important step of simplifying our midstream ownership, which was accretive to both oasis and on P increased transparency of our midstream ownership and strengthened oasis as balance sheet following the simplification transaction.
In June we sold down approximately $3.6 million units and declared a special dividend of $4 per share twice the shareholders. Our midstream ownership is now represented by our holding of approximately $33.8 million on P. Units importantly, we continue to evaluate additional actions we can take to unlock what we see is trapped value per the OE.
A shareholder.
Finally, we have some new slides on our investor deck that highlight our inventory and capital plan through 2025, I'll ask Taylor to speak in more detail on these items, but at a high level I want to emphasize the strength of our inventory position, which supports a low reinvestment rate and a compelling amount of free cash flow for years to come as we evaluate possible uses for this free cash flow.
We will continue to take shareholder friendly approaches so far this year, you've seen Oasis Institute, our first fixed dividend and announced our intention to increase at 33% upon closing the Williston acquisition. Additionally, we paid the special dividend mentioned above and instituting a share repurchase program and will continue to be active on that front provided we see a disconnect between share pre.
And intrinsic value.
I'm going to turn it over to Taylor to give some operational color Phil.
Thanks Danny.
Oasis saw a strong performance across volumes capital and operating cost.
In the second quarter, we completed 18 gross wells with 11 in the Williston and 7 in the Delaware.
Our focus on cost reductions well design and operating efficiencies has resulted in strong base and capital performance and sustainable free cash flow for years to come.
On the well cost side, we have made tremendous progress over the past couple of years.
In the Bakken, we have recently seen wells on the low $6 million range down about 20% from early 2020.
While we have seen inflationary pressure on select area such as steel.
We've been finding offsets in other areas, which is kept overall well costs in check.
For example, during the second quarter, we had record Frac efficiencies in Wild basin, where we set a record per pump time in a day.
On steel as a reminder, we have locked in pricing for most of the remainder of the year.
Overall costs are trending below budget, which allowed us to cut our capital expenditure guidance by 7% for 2021.
Let me touch on our recent Williston acquisition.
During the second quarter, the operator brought on 4 new wells on the disco pad in the Fort Berthold area.
<unk> were strong and validate our view of over 40 top tier locations of similar quality across the acquired assets.
We expect the acquisition to close late in the third quarter as a reminder, our third quarter volume guidance does not include any acquisition volumes.
We plan to let the acquired assets declined in the second half of the year and into early 2022 before stabilizing overall company volumes at maintenance capital levels.
Our fourth quarter average production guidance of 76000 barrels equivalent per day.
Includes a full quarter of the acquisition.
I would like to reiterate our excitement with this accretive acquisition, we continue to be focused on the communities in which we operate and will dedicate the resources for the new assets that we operate in a sustainable manner.
We are especially excited about establishing operations on the Fort Berthold Indian reservation.
And look forward to working with the 3 affiliated tribes.
We recently received travel approvals and are now working with the Bureau of Indian Affairs to complete the approval process and expect to close by the end of the third quarter on.
Our operations group has been engaged with the various teams on the new assets and we look forward to integrating the properties and will welcome our new employees later this year.
We are currently running 1 rig and expect to complete between 11 and 13 wells in the back half of the year, most of which will come on line in October.
This sets us up for a strong fourth quarter average of 76000 equivalents per day.
As we look to 2022, we would expect a similar volume trajectory as compared to 2021 with production expected to decline from the fourth quarter into the beginning of the year before increasing in the second half of the year as we step up completions.
Full year average production for 2022 is expected to approximately approximate 72000 equivalents per day.
2 thirds oil with E&P capital of about 300 billion.
As a reminder, we will be picking up our second rig in South Indian Hills in the fourth quarter and plan to keep it running along with the first rig for all of 2022.
I would like to pivot now to a discussion of our inventory.
We've expanded our disclosure in our investor presentation to better illuminate the quality of our assets and our free cash flow generation at the assets in our organization can support on a sustained basis we've.
We've identified approximately 670 locations.
Its support strong returns that oil price price is below $50 per barrel and most of that substantially below that number.
These locations about 140 or 3 mile laterals and our team is working on increasing that number over time.
In 2022, the current plan calls.
From approximately 300 million on E&P capex to support volume levels of about 72000 equivalents per day.
We would expect to generate approximately $250 million to $300 million of after tax free cash flow in 2022 at $55 oil and $2.75 gas, including the impact of our current hedge book.
Using current prices free cash flow would be substantially higher.
In terms of specific projects will finish up drilling wild basin, South Nesson in North Indian Hills.
In 2022.
And C C. The program in 2023 and beyond.
We will include a substantial contribution from painted woods, South Indian Hills, the city of Williston Alger, the Fort Berthold Indian reservation and Hebron.
Economics are strong across the program with the average well in our roughly 670 locations deliver an IRR.
46% at 55 and $2.75.
As you can see on slide 14, our decline rates become quite shallow relative to recent history and.
And given that our program is fairly modest we expect the PDP decline profile to remain relatively flat.
This is important as low as low decline support free cash generation and the capital intensity you to keep volumes flat is much lower than when volumes were growing quickly.
Also as I noted earlier, our well costs have come down substantially over the past few years.
Some of the the decrease relates to service cost concessions.
While others are more structural in nature, resulting from high efficiencies and cycle times to improve well design and savings gain from our intense focus on cost structure across our business. This year.
Well spacing is increased as well we are now planning 5 to 6 wells per <unk> versus.
Versus 8 to 10 in recent years.
The wider spacing is improved capital efficiency and should result in shallower declines over the life of a well.
Additionally, approximately 20% of our 670, well inventories are expected to be 3 mile laterals.
For our near term program over the next 4 years that number increases to 40%.
The based on has seen a steady increase in 3 mile laterals over the past several years and there are extensive analogs to evaluate as we engineer our program to.
The improved results were compelling as a 3 mile lateral allows for an approximate 50% increase in oil EUR with only 25% more capital.
Our blocky acreage position works well for re spacing from 2 to 3 mile lateral laterals and should yield increasing number of opportunities to add more of these to the inventory as we move forward.
To close operationally, we executed well on the second quarter.
Our legacy asset base is performing well and we're on track to close the Wilson acquisition in the third quarter.
Team has done a tremendous job across the board leading to impressive performance and project inventory project returns.
And free cash generation, all of which allow us to return significant cash back to our shareholders.
With that I'll now turn the call over to Michael to discuss some financial highlights.
Thanks, Taylor as Taylor mentioned, we're expecting to close the Wilson acquisition at the end of the third quarter.
We provided third quarter guidance update which excludes any impact from the acquisition, while fourth quarter guidance includes a full quarter of performance from the acquired assets.
Operationally guidance implies volumes are in line with what we expected in may while cost and gifts are a bit better on capital spending is less than expected.
As a reminder, the effective date of the transaction was April 1 so the purchase consideration will be reduced by free cash flow generated from the asset from April 1st through closing.
Additionally, in the second quarter Oasis put down on the positive approximately $75 million.
With the original purchase price of $745 million.
As of June 30th Awakening had approximately $779 million in cash and $400 million of debt outstanding related to the high yield offering in may.
Currently Oasis has zero drawn on under the borrowing base with elected commitments of $450 million and upon closing of the acquisition. Our borrowing base is expected to increase to $650 million with our elected commitment staying at $450 million.
Oasis continues to do a good job managing LOE and minimizing downtime E&P LOE averaged $10.21 per Boe for the second quarter below the low end of our guidance and we expect per unit LOE to decrease into the back half of the year as volumes increase.
E&P cash G&A expense was $11 million, including a $3 million.
Unexpected, but non recurring items.
E&P cash G&A per BOE guidance for the fourth quarter of 'twenty, 1 remains unchanged.
Both crude and gas realizations were strong in the quarter as our marketing team continues to do a fabulous job oil realizations were particularly strong as market conditions were quite tight in the quarter.
E&P Capex was approximately $52.4 million in the second quarter below expectations. As Taylor noted, we had record frac efficiency during the quarter. The remainder of the difference versus guidance can be explained by timing higher partner interest in Oasis wells and other items, we lowered our full year capital spending guidance.
By 7%.
The reduction in Capex expectations.
It's unrelated to acquisition closure timing.
On the volume side Oasis remains on track to meet the fourth quarter volume guidance outlined in May which includes our first full quarter of the acquired asset base.
During the quarter, we determined that oasis qualifies for an exception to the limitation on its NOL carryforwards under IRC section 382, which reduces our cash taxes to zero in the second quarter and for the full year of 2021, a savings of over $50 million versus on.
Original guidance by.
Year end 'twenty, 1 oasis estimates, an NOL balance ranging from $400 million to $500 million, which could be used to reduce the company's future income tax obligations.
Additionally, we implemented a tax benefits preservation plan, which is designed to protect the availability of our Nols and other tax attributes. This plan will go away upon the earlier of 3 years or when the NOL is used.
We will also be putting this up for shareholder vote at our next shareholder meeting.
Also during the second quarter Oasis sold down approximately $3.6 million or M. P units for $24 per unit. This transaction is not expected to be taxable given the Nols I just discussed.
Proceeds from the unit sale were used to fund a $4 special dividend.
Hey.
On July 21.
Separately Oasis declared a second quarter dividend of <unk> 37, 5 cents per share the third fixed dividend we've declared this year.
Upon closing of our Williston acquisition. The company continues to expect to raise its normal fixed quarterly dividend from 37, 5% to 50 cents per share per quarter or 33% increase.
Additionally, our $100 million share repurchase program remains in place, we've repurchased $14.6 million of common stock to date.
In closing we look forward.
We look forward the business is in an enviable position to generate substantial and sustainable free cash flow for the foreseeable future and we'll continue to take a balanced approach to investing capital and returning cash to shareholders. I would also like to thank the team for.
For its hard work on the operating side as well as the significant progress on key corporate strategic objectives with that I'll hand, the call back over to Jamie for questions.
Ladies and gentlemen at this time well begin the question and answer session to ask a question you May Press Star and then 1 using a touch tone telephone.
Withdraw your question you May press Star and 2.
If you are using a speaker phone, we do ask that you. Please pick up the handset before pressing the numbers to ensure the best sound quality.
Once again that is star and then 1 to ask a question.
We will pause momentarily to assemble the roster.
Our first question today comes from Scott Hanold from RBC capital markets. Please go ahead with your question.
Hey, good morning, guys.
Congrats on the quarter.
I think I wanted to start out maybe you know Taylor you, obviously, you talked a little bit about the shape of activity into next year.
And obviously it sounds like Youre thinking about.
See you on letting the acquired assets declined a little bit before you reinvested. So so as we kind of think about big picture Oasis together Youre on.
Adding that second rig in and I would assume all of those rigs are going to be on the legacy of ways. This asset so.
Is the the structural shape of this youre going to kind of dip down 1 and maybe the first quarter second quarter, and then kind of bounced above that 72 average for the year is that sort of the right way to think about sort of the shape and how many well completions does that contemplate.
Yes, Scott so yes good question.
Adding the second rig in October just because of cycle times.
Naturally going to push.
Push those completions out a bit into 2022.
Same because of the.
We're going to be entering south nascent and start drilling or in Indian Hills right now we're going to start fracking those in October.
October as well so the south in essence is going to start up about win.
The new rig comes in and starts drilling and South Indian Hills. So both of those end up getting pushed in terms of completions kind of <unk> like you talked about so we'll dip into <unk>, probably a bit into <unk> and then rebound from there and then in terms of overall well completions, it's kind of I don't know timing kind of 40.
Or so completions could be a little above that but.
Obviously, a pickup from what we did this year just based on that increased activity and with that.
We as you said, we will let the QEP assets come down a bit we go on from 76000 equivalents a day.
Fourth quarter of this year with the combined assets and then it will level off more around 72000 next year.
Okay, and just to clarify those 40 plus completions those are on legacy Oasis properties that right correct, yes.
Got it okay, Okay, and then I.
I guess my next question is is a little bit on on.
How you think about like shareholder return strategies going forward. Obviously, you guys have used a pretty good portfolio of things and <unk> been pretty assertive about.
Give them money back in different forms and.
Where does things like variable dividends play into the equation is that something that's also a consideration or at this point in time do you all feel comfortable with kind of continuing to increase the fixed dividend.
And using the buybacks and maybe opportunistic special dividends.
Thanks for the question Scott. This is Danny so I think sort of our guiding principle on these things is really going to be around creating value for shareholders. So that's at the end of the day. That's what we're trying to accomplish but we recognize that that returning cash is a big component of that so hopefully our actions to date, where we've done that in several different forms are dead.
Constrain our commitment today to that concept I think we all will be balanced in our approach you've seen a sort of taken all of the above approach so far with the with fixed with a special with a when the share repurchase program, we're discussing the possibility of.
How does how would a variable dividend should we want to do that how would how would that look.
So we'll continue to think through all these different concepts.
But at the end of the day, what's going to guide our guide our actions is how do we create the most value for our shareholders.
I appreciate it thank you.
Once again, if you would like to ask a question. Please press Star and then 1 our next question comes from Derrick Whitfield from Stifel.
Good morning, all and congrats on your update.
Thank you Eric.
With my first question I wanted to focus on the tax ruling and more specifically does the ruling change your strategic view on how best to crystallize value that is inherent in your portfolio, but really not reflected in your stock price today.
Yes, Eric.
Question look there's a lot of work that was done around kind of the tax.
The tax ruling and how we think about that obviously with the sale of the Permian asset it created.
On a large tax loss for us as well.
So thats kind of an update from the beginning of the year.
There.
We're kind of the higher oil prices.
Publication work along with the on P unit sale, we had over 200 million of kind of taxable income this year.
With this election, we can actually shield, which is fantastic.
About over $50 million of cash taxes that will save this year and on top of that we will we will continue to hold a large NOL position going forward.
$500 million range and as you mentioned.
That's a considerable asset that can be used in.
<unk>.
In shielding kind of future tax taxable transactions, whether it's.
<unk>.
It's additional monetization.
Assets or.
Or just with strong pricing in.
Cash flow coming back to the company.
Taxable income from that perspective, so it's a great position to be in for the company to continue to drive higher free cash flow.
As Danny mentioned kind of gives us a lot of decisions to make in terms of returning that capital to shareholders and the best way to create shareholder value.
Makes sense and perhaps from my follow up I'll focus the question with Taylor.
Referencing the painted woods case study on page 15.
I wanted to see if you could offer any commentary on how this area was 3 mile laterals competes on your portfolio.
When do you plan to pursue the first 3 mile lateral well and if you think there is an opportunity to improve the well performance beyond the analog set that you evaluated.
Yes, so so derik. Good question you know as you look across.
I'd say painted woods, and then really in general the whole set.
Net of inventory, especially as we look forward over this next 4 year plan that we've been talking about.
Some some important factors here 1 spacing we went from from.
From 8 to 10 wells to 5 to 6 wells and Thats, improving capital efficiencies on a per well EUR has talked a lot about being able to bring down bring.
Bring down capital costs.
Capital efficiency improvements.
And then along with that the decline profiles.
We expect to be shallower as these wells produce over time, so all those things helped.
The overall profile in terms of.
When we drilled the first 3 mile laterals were actually.
On a drill.
8 wells in.
Later this year in South Indian Hills, and then the first 3 mile Wells in painted woods will happen next year.
And those.
Those will be preferentially done as we move into <unk> into the painted woods position and just for.
For note over 40%.
Of our.
Our wells in painted woods is close to 45 will be 3 mile laterals and when you look at the program over the next 4 years.
40% of that or all 3 mile lateral so.
Nice.
Nice increase in <unk>.
The economics Youre only spend then.
About a 25% increase in capital, but seeing up to a 50% uplift in reserves and so really really nice.
Nice increase in economics in doing those projects.
Great very helpful. Thanks for your time.
Sure.
Our next question is a follow up from Scott Arnold from RBC Capital markets. Please go ahead with your follow up.
I'm just kind of curious if you could elaborate a little bit more on how you think about O M. P. Going forward do you guys have done a pretty good job of really simplifying that in a quick manner, but I think there's probably more work to be done, but can you give us your thoughts on the various options available for you.
You all and is there a timeframe you guys are targeting at kind of bringing that.
To fruition to get it to the final kind of position you wanted in.
Yes. This is Dan I appreciate the question Scott I think when we look at Oasis shares and how we train we continue to see as some other parts discount and the Oasis.
Shares and so we are we are evaluating as you know our options on how do we how do we go about illuminating that value for the Oasis shareholder I'd say, we're doing that with with haste.
Doing that with the with diligence and I would.
Expect that we have more to share on this in the near future I think whatever whatever path, we decided to go down it's going to going to impact our timing a little bit and so.
I don't want to commit to a specific timing on it but do you know that we are we are actively looking at that internally.
Back to share more with you in the future.
It is ultimately the goal to effectively find the weighted deconsolidation is it too you know.
The plan and so you'd be would you be willing to still own some.
Some of them on P and some structure as long as you're able to deconsolidation does that sort of the NGO.
Thank deconsolidation is a.
I don't know if I would say deconsolidation as of the end goal. The end goal is to make sure there's read through value of the weighted to shareholder on the value we got within OSP and so we think 1 on 1 of the steps toward that as likely deconsolidation, where we don't sort of confuse the issue with those holdings.
For our share base. So so I think thats part of it but not necessarily the Angola, Ingalls really about getting value seen by the way for shareholders.
Okay understood and also on another question too you know operationally you guys have obviously identified.
The greater inventory certainly at a price that's kind of closer to where commodities are right now in your development plan over the next few years are those incremental locations.
What I'm, referring to the difference between what you guys are valued at $40 versus the 60 or $65 or are any of those in the inventory or is that 1 of those things more for demonstration purposes of you know that the.
The size of the assets Holistically.
Yes, so so.
Really as you look at the inventory in this in this plan period.
The same set of inventory we're talking about.
Previously and so.
We're focused early on on.
On a much lower price environment talking about a $45 deck and whats.
What's economic at that level and just as a reminder that included.
Wild Basin, South Ness in Indian Hills Fort Berthold.
City Wilson painted woods.
And north Alger so the.
On the incremental inventory to get to the 60.70 that we're talking about.
Currently very.
Here being at $70 oil with outlook anodes.
Let's go from 45 to 55 and talk about this robust set of inventory and the additions there were.
Painted woods West Montana.
Red Bank and Dublin.
Bit of our Fort Berthold to the South and East and then.
South Cottonwood.
Robust economics in those areas same day.
And at the same things is what we did in the other areas up spaced really pushed capital costs down and then an emphasis on 3 mile laterals Big Big chunk of those and so we're not going to get to those projects until you get 4 or 5 years out but.
But just thought it was important to highlight those and let people know look we've got a.
Super resilient set of inventory that goes out 12 years that the pace of drilling will be doing next year.
Understood Thanks for that.
Our next question comes from Phillips Johnston from capital 1. Please go ahead with your question.
Hey, guys. Thank you just 1 question from me and it's really just a follow up on Scott's earlier question regarding return of capital.
So if we run $45 oil on 250 gas held flat forever in our model. We've shown the leverage ratio remains well below half a turn sort of indefinitely in a free cash flow yield would still be <unk>.
Somewhere in sort of in the 5% to 10% range over the next several years.
You guys have been fairly aggressive so far about returning cash.
Cash to shareholders, but my question is given that backdrop.
Is there any reason you wouldnt gravitate towards.
A more formalized thanks.
Fixed plus variable dividend policy were taken even more aggressive approach around.
Share buybacks I guess I guess my question is do you guys see any drawbacks or or downside in either of those options that might give you guys pause.
Thanks for the question.
Philip This is this is Danny I think as we think about return return on capital again I appreciate that.
Comments in hand, and we have been we have been pretty forward leaning in this and tried to make sure that we've sort of attack. This from multiple different fronts, we're continuing to discuss that both both as a management group.
And with our board on what does how do we best structure, our return on capital program, what role Mike variable dividends play within such a within such a framework and so I would say that our thoughts around this are ongoing.
We are the guiding principle, though is really about creating.
Creating the most value we can for shareholders and again, we think returning capital is a big component of that and we're continuing to we will continuing to we believe that firmly and we're going to continue to evaluate those those programs in our on our actions around this.
As our thoughts develop.
Sounds good thank you Danny.
Okay.
And ladies and gentlemen at this time, we will end today's question and answer session I would like to turn the floor back over to management for any closing remarks.
Thanks, Jamie.
Thank you everyone for your time today on.
Proud of the accomplishments we've made this year, but continue to believe the enterprise is undervalued and we're going to be working hard to drive our strategic initiatives and operational performance for the benefit of our shareholders simultaneously as you will see in our sustainability report, we intend to remain true to our values and continue to operate responsibly for the benefit of all of our stakeholders. Thank you very much for joining our call.
Ladies and gentlemen, with that we'll conclude today's conference. We do thank you for attending you may now disconnect your lines.