Oasis Petroleum Oil Production Focuses On Efficiency

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If you believe the old stereotype, the U.S. oil business used to be a hit-and-miss proposition where some lucky rube would hit a gusher, get filthy rich and spend the rest of his life lighting cigars with $100 bills.

Regardless of how much stake you put in that, the 21st century reality is much different. For most U.S. oil producers, it takes a great deal of technology, science and efficiency to extract fuel from the ground and turn a profit from it.

That's especially true in shale formations that require advanced fracturing techniques. One of those formations, the Williston Basin, runs across parts of the Dakotas, Montana and Canada as part of the larger Bakken Shale Formation.


Oil and gas producers in the Williston, includingOasis Petroleum ( OAS ), use horizontal drilling techniques to get fuel out of the ground. After breaking through the oil-bearing rock, drillers fracture it by injecting water mixed with sand and chemicals in a process known as fracking.

Oasis is an independent exploration and production company whose primary projects are located in the Montana and North Dakota regions of the Williston Basin.

Leasehold Acres

As of Dec. 31, 2012, the company had 335,383 net leasehold acres in the Williston Basin and about 143 million barrels of oil equivalent of estimated net proved reserves.

Oasis earns high marks from analysts for its operational prowess and efficiency at getting the most out of its assets.

"They have a really solid management team focused on developing their assets in the most efficient manner," said Ronald Mills, analyst at Johnson Rice & Co. "They are not just interested in near-term value, but long-term value. They are managing assets as if they are going to develop the Bakken until the last drop is produced."

That mindset was established when the company was founded six years ago, he says.

"From day one, they have tested different drilling and completion techniques and different variables instead of just one," Mills said. "They try to determine the optimal spacing and drill their wells in a manner that allows them to develop different techniques."

The management team learned much of its operating philosophy at Burlington Resources, an oil and gas driller acquired byConocoPhillips ( COP ) in 2006.

Oasis Chief Executive Tommy Nusz is a former vice president at Burlington. So is Taylor Reid, Oasis' chief operating officer. In fact, almost all of Oasis' senior management team worked at Burlington.

"These are folks who came out of larger companies, so there's a high level of execution," said Curtis Trimble, analyst at Global Hunter Securities. "They are very good operators. They don't put a lot of well detail in their conference call statements because they don't have to. There are never any surprises. You don't see them missing estimates."

One result of this attention to detail is that Oasis has seen its business grow more than five-fold over the past couple of years.

In 2012, Oasis more than doubled its production for the second straight year, growing its annual production to 22,469 barrels of oil equivalent per day.

Revenue for the year also more than doubled, to $687 million. As recently as 2010, the company had less than $140 million in revenue.

During the 2012 fourth quarter, Oasis logged revenue of $214.3 million. That was up 83% from the prior year and above Wall Street estimates for $210.5 million.

Earnings gained 63% to 49 cents a share, topping views by a penny.

Oasis' average daily production climbed 81% during the quarter, while its average oil price, excluding derivatives impacts, rose 1.6%.

For the full year, net income gained 93% to $153.4 million, while adjusted EBITDA more than doubled to $512.3 million.

Analyst Mills points out that Oasis optimized its drilling techniques during 2012 and also benefited from falling service costs. As a result, average well costs fell to $8.8 million by year-end from an average of $10.5 million during the first half of 2012.

Well Costs

"As the shift to more developmental pad drilling occurs during 2013, the company expects well costs to continue to drop in to the low-$8 million range," Mills said.

Analysts polled by Thomson Reuters expect Oasis to grow annual earnings 59% this year and 39% in 2014.

The company's stock price touched a record high of 39.78 on March 14 and now trades near 38.

Meanwhile, all operators in the Bakken Shale should benefit from an expanded rail system that will connect producers to large oil refineries across the U.S.

According to one estimate, the number of cars filled with petroleum products has risen more than 40% over the past year. Much of that traffic begins in North Dakota, where more fuel is moved by rail than by pipeline.

"The expansion of rail transport capacity will allow accessibility to just about every refining market in the U.S.," Trimble said. "You now have the opportunity to ship Bakken crude to refineries on the West Coast, East Coast and Gulf Coast.

In addition to Oasis, other leading landholders in the Bakken Shale includeContinental Resources ( CLR ),Hess ( HES ),Whiting Petroleum ( WLL ),Marathon Oil (MRO) andStatoil (STO).



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: CLR , COP , HES , OAS , WLL

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