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Morningstar | Decreasing Oasis FVE After Incorporating Modestly Higher Bakken Decline Rates

We are trimming our fair value estimate for Oasis to $4 per share after a second pass at the firm's first-quarter financial and operating results. That means--in light of the recent slump in crude prices--that it is one of the few exploration and production firms that does not currently look undervalued (see "Most E&Ps Undervalued After Slump in Oil Prices").

As a reminder, the firm remains on track to hit its 2019 production and capital targets with one quarter now in the bag. Output in the period was 91.7 mboe/d, which was 4% higher sequentially and 19% higher year over year. The firm’s financial results were mixed, with adjusted EBITDA and adjusted earnings per share coming in at $269 million and negative $0.02, respectively (consensus estimates were $236 million and $0.04). On the revenue side, realized prices were negatively affected by declining commodity benchmarks, but basis differentials improved markedly, owing to the utilization of the Dakota Access Pipeline to ship Bakken crude to the Gulf Coast. The firmwide average discount to West Texas Intermediate shrank to $1.30 per barrel from almost $7 in the prior period, although the benefit was partially offset by an $0.80/bbl increase in marketing costs.

The decrease in fair value was partly triggered by marking our model to market to account for the recent decline (our $55/bbl midcycle forecast is unchanged but our models incorporate three years of strip prices on the front end). But we have also moderated our well performance estimates slightly after taking a closer look at the decline curves associated with Oasis' recent vintages in the Bakken. Initially the firm's wells hold up extremely well, but after about six months on production the subsequent decline rate tends to be quite high, leading to lower projected recoveries.