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Oasis Builds Bakken Oil Acreage As Wall Street Gushes

By: Investor's Business Daily
Posted: 10/15/2013 1:59:00 PM
Referenced Stocks: CLR;HES;OAS;WLL

Oasis Petroleum has sparked plenty of buzz on Wall Street in recent weeks after striking a deal that bulked up its acreage in the oil-rich Bakken Shale formation in a very big way.

The independent oil producer has acquired roughly 161,000 acres in the Williston Basin, which includes the Bakken formation, through four separate transactions. The acquisition lifted Oasis' total acreage 49% to 492,000 acres. That makesOasis ( OAS ) the seventh largest holder of Bakken acreage, according to Bloomberg data.

Oasis' prospects in the wake of the deal have revved up investor enthusiasm. There's also talk on the Street that Oasis could be a takeover play, given its added muscle. Oasis shares have surged around 36% since it announced the acquisition on Sept. 5.

Oasis paid a total of $1.515 billion for the acquisition, which closed in separate transactions in recent weeks. Oasis completed the acquisition of 136,000 acres in and around its position in North Dakota in its West Williston project area for nearly $1.48 billion on Oct. 1. It closed on a $65 million purchase of three assets in East Nesson totaling 25,000 acres on Sept. 26.

Oasis focuses on acquiring and developing unconventional oil and natural gas resources primarily in the Montana and North Dakota regions of the Williston Basin.

Wizard Of Williston

The company's acreage is one of the largest concentrated leasehold positions that is prospective in the Bakken and Three Forks formations. And much of its acreage is in areas of significant drilling activity by other exploration and production companies.

"Their goal is to be the 'best-in-class operator' for the play," said Raymond James analyst Andrew Coleman.

"That may entail being the best at production optimization or a fast-follower in terms of capturing/proving up additional resources in the Bakken/Three Forks."

The new assets brought to Oasis combined recent production of about 43,000 barrels of oil equivalent per day (Boepd). About 90% of that is oil, according to the company. The acreage is in the heart of the Bakken and Three Forks play, adding plenty of scale to its already big position in the Williston Basin.

The acquisition added two operating rigs to the 11 Oasis was already operating. Oasis expects to accelerate development across its overall combined position next year, increasing to 15 to 16 operated rigs by the end of 2014, said CEO Thomas Nusz in a statement announcing the acquisition.

"The acquisition boosted their drilling inventory by roughly 25% to 17 years," said Iberia Capital Partners analyst Eli Kantor. "By accelerating rig activity, the company will be able to increase the NPV (net present value) of the new assets."

With the rig count set to nearly double in the next year to 16, he says, production volumes should double to 60,000 Boepd by 2015.

An M&A Prospect?

Coleman raises the possibility that Oasis could be a takeover target.

"I see it as a takeover play," he said. "Every company is a takeover play that has high-quality acreage in the basin and a good operational track record. It's hard to imagine any of the big operators in the basin haven't been approached at some point. The question is what's going to ultimately induce Oasis management to accept a takeover bid?"

From a takeout standpoint, he says, a 20% premium in a sale is a "ballpark" starting point.

"But given how well they've been able to execute, it's hard to say the ultimate price," he adds.

Kantor says Oasis "fits the mold" in terms of having the right asset base many of its larger peers would like to acquire.

"One of the key characteristics in all M&A activity we've seen in the past is having a management team that is proactively looking for a buyer," he said. "It's hard to say what's going on in the boardroom. But I get the sense because of how big their opportunity is and how big their drilling inventory is, they're not really in a rush to sell the company."

Earnings Are Flowing

Meanwhile, Oasis has been enjoying a huge growth spurt on its own. Profits have risen by at least 63% in each of the past four quarters. In the most recent second quarter, earnings per share rose 97% to 65 cents. Revenue climbed 71% to $254.6 million.

Analysts polled by Thomson Reuters see full-year EPS surging 99% to $2.99. They see a 29% rise in 2014 and a 22% increase in 20 15.

The company increased daily production 48% from a year earlier to 30,171 Boepd.

Through pad drilling (when multiple wells are drilled from the same pad) and other operational efficiencies, it drove down operated well costs completed in the quarter to $8.2 million, excluding the impact of Oasis Well Services. It "picked up two additional drilling rigs for a total of 11 rigs operating to capitalize on the efficiencies of pad development and favorable weather conditions," Nusz said in statement.

The company's average price per barrel of oil, without derivatives, during the quarter was $91.15 vs. $82.36 a year earlier.

Engineering Efficiency

As a part of its growth strategy, on the engineering and development side, Oasis -- and most other Williston operators -- are all in the process of testing various "spacing densities," Kantor says.

"Prior to this year, the generally accepted spacing assumption by the investment community was 320-acre spacing for both the Middle Bakken (MB) and Three Forks (TFS) reservoirs," he said. "This equates to four MB and four TFS wells per spacing unit. Companies are now in the process of testing whether or not there is potential to drilling more than four wells per unit per reservoir."

Oasis, he adds, has a 22-well pilot program in place to test densities as tight as 180 acres per well or seven wells per section per reservoir.

Meanwhile, the Bakken is gushing with growth prospects. In April, the U.S. Geological Survey released an updated oil and gas resource assessment for the Bakken formation and a new assessment for the Three Forks formation in North Dakota, South Dakota and Montana. The assessments found that the formations contain an estimated mean of 7.4 billion barrels of undiscovered, technically recoverable oil. The updated assessment for the Bakken represents a twofold increase over what had previously been thought, said USGS in a press release.

Other top landholders in the Bakken includeContinental Resources ( CLR ),Hess ( HES ) andWhiting Petroleum ( WLL ).