Oasis Petroleum (ticker: OAS) announced first quarter results today, showing net earnings of $0.6 million, or less than $0.01 per share. This is below the $23.8 million the company recorded in Q1 2017, mostly due to derivative effects. After adjusting for these and other special charges, Oasis earned $30.2 million in Q1 2018, compared to a loss of $11.5 million in Q1 2017.
This is the first quarter Oasis has held its Permian properties, as it closed on its acquisition in February. The assets added about 3.6 MBOEPD of production and 22,000 net undeveloped acres, and gave a production uplift to Oasis’ results.
The company produced 76.8 MBOEPD in Q1, representing 22% growth year-over-year and 5% growth sequentially. Strong results have led the company to boost its production guidance, and is now predicting full year production of about 82.5 MBOEPD, 25% yearly growth.
Oasis completed and placed on production 17 gross wells this quarter, including the company’s first operated well in the Delaware Basin. Operations will continue to focus on the Williston, and the company expects to complete a total of about 105 wells in the Williston and seven in the Permian this year.
New type curve targets rapid payout
Oasis has redesigned its Bakken completions, making a decision seen in many basins in the past few years. Oasis’s new design forgoes high total production for more rapid output. Wells in the company’s best acreage are now expected to produce 1,500 MBOE, compared to the previous design which could produce 1,550 MBOE. However, the new wells will have an IRR of 96%, compared to the old design’s 75%. Other core areas see a similar change, producing higher rates of return out of lower total production.
In addition to the standard appeal of high IRR, this design may be more favorable in the modern era of uncertain commodity prices. With WTI flirting with $70/bbl companies may be motivated to gear completions to take advantage of this opportunity, producing quickly to take advantage of oil prices.
Midland differential not yet a concern
Like most other companies with Permian operations, Oasis netbacks are imperiled by the severe Midland-Cushing WTI differential. However, this is less of a concern for Oasis. Put simply, the company does not have enough Permian production for the widened differential to have a significant effect. Only 5% of the company’s Q1 production came from its Permian properties, and development plans are not likely to significantly increase that proportion in the next few quarters.
Oasis President and COO Taylor Reid outlined the company’s thoughts on the Permian differentials, saying “While Permian differentials are high right now, we see sufficient long-haul pipelines being built by the second half of 2019 to eliminate the gap. The increased capacity coincides with the timing of activity acceleration in our program for the Permian. For now though, 95% of our production enjoy that tight differentials we were experiencing in the Williston basin.”
Q&A from OAS conference call
Q: Any results you can give from the well that was placed online this quarter in the Delaware? And also, when are we going to see the first sort of Oasis location selected designs completed well results?
OAS: The one well that came online is Bone Spring’s well, but it’s only been on for about 30 days. So, it’s very early time. We’re encouraged by what we’re seeing, but we’re going to need six-months-plus of data to kind of form an opinion of what the wells are looking like. So, you’ll hear more about that one later on. Then as far as the completion techniques, we’ve taken what the prior operator was doing and have started to modify that. And the modifications that we’ve made so far have been a little bit of increase in size, so higher proppant loadings and higher fluid amounts as well. And then we’re working on a number of stages in the wells, cluster spacing and number of other things that we’ll talk about as we get more into the program.
Q: On the Delaware, just wondering what the current plans are for approaching the midstream side of the operations there. Are you looking to take-out capacity on some of the systems that are scheduled to start up around that back half 2019 timeframe you mentioned? And also from the gathering and water standpoints would be great to hear what the approach is there as it stands.
OAS: So on the midstream side, I think as we did the acquisition, I think kind of everybody saw that midstream was going to be very tight in the basin really for the next 18 months until the second half of 2019. So we didn’t get into any big acceleration plans until really seeing that. And so we’ve talked about that. It was one of the reasons why we’re drilling up in the Williston. Great differentials there. We’ll wait for that big pipe to come in on the crude side as well as the gas and NGL side in the second half of 2019.
From a gathering perspective, there’s actually a lot of opportunities there. So we’re continuing to evaluate the gathering opportunities. A lot of great third-parties that are out there that we’ll continue to talk to. Obviously, we think there’s a lot of opportunities for OMP as well. So we’ll continue to evaluate that.
You can look to what we did in the Williston as a way to think about things. We were, I think, very thoughtful in the Williston when we put our long-term gathering agreements in place. It got us to multiple points, very liquid markets. And because of the thoughtfulness of our marketing team, we enjoy some of the best differentials in the Williston.
That’s what we’re looking for in the Delaware. We set up really well on that position, because we’re very close to the Wink, which will be the crude hub, and as well as we’re very close to Waha, which is the gas hub. So you sit location-wise from the Delaware perspective, very close to the two largest hubs, both on the crude side and the gas side. So feel advantaged on that side as well.
And then you mentioned the long-term pipe, and as you can imagine we are securing kind of some of that long-haul transportation. It gives us a lot of comfort on differentials in the Delaware being similar to the strong differentials in the Williston or maybe even better on a longer-term perspective.
Q: Sticking in the Delaware, how should we think about your appetite for continued bolt-on acquisitions? And maybe if you could touch on the opportunity set for acreage swaps trades with your neighbors here in the play.
OAS: We’ve got about 22,000 acres with the current position. And as you think about the amount of core inventory here, with the thickness of the section, as we compared it to the Williston, with this thicker section, you can think about for surface acres what you’re getting is kind of 3 times to 5 times what we consider from a surface footprint in Williston. So, we’ve got a big runway of core locations, over 500 with the new acreage. And we’re very focused right now on continuing to core up the position. So, it’s really smaller deals, trades, trying to block up more of the acreage, put ourselves in a position to drill more long laterals, even though most of this is set up for long laterals at this point, and then continue to block it together. So, we don’t have a big need to go do a large-scale acquisition. It’s really supporting this position.
Now, over time, yeah, we’d love to continue to add to it. It’s not unlike what we’ve done in the Williston. When you look at the Williston, we’ve built that position over a seven-year period, highly focused on adding positions that really accrete to our skill set. And so, we’re going to do the same thing here. We’re going to, over time, look for more opportunities to add chunky acreage that has high control and will allow us to get the benefit of both infrastructure and our well services business.
