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Morningstar | Capital Expenditure Cuts Outweigh Margin Improvement: Reducing Oasis FVE to $5/Share

We are reducing our fair value estimate to $5 per share after incorporating the results of Oasis' fourth-quarter financial and operating results. As a reminder, we think the firm should see some margin improvement during 2019. Management is now expecting a realized crude discount of $1.50-$3.50 per barrel on average (versus WTI), which is about $0.50 higher at the midpoint than the 2018 average. Yet unit cash costs are expected to improve by about $0.50 year over year, and well cost guidance in the Williston Basin was set at $6.9 million-$7.7 million per completed well (we were previously modeling $7.7 million on average).

However, the benefit is offset by a lower drilling cadence. The updated capital budget will fund four to five operated rigs, down from six to eight. While this decision ensures that the firm will remain free cash flow positive, assuming current prices, it will result in less production growth. Our updated production forecast for 2019 is 88 mboe/d, which is consistent with recent guidance but well below our prior estimate (116 mboe/d). Beyond 2019 we expect a similar commodity environment, which means any increase in activity will be fairly modest. The impact on our valuation more than offsets the margin improvements referenced above, resulting in a net decrease in our fair value estimate.