EUR 850.00 For Business Accounts Only

Morningstar | Oasis Announces Modest EPS Beat and Raises 2018 Guidance. See Updated Analyst Note from 07 Aug 2018

No-moat Oasis executed strongly in the second quarter, with total output coming in at the high end of prior guidance. Volumes averaged 79.4 mboe/d in the period, 28% up year over year. Management expects this positive operational momentum to persist through year-end, and it raised full-year production guidance to 84.5 thousand barrels of oil equivalent per day from 83 mboe/d. This reflects a 4% uptick at the midpoint, after accounting for roughly 5 mboe/d that is now expected to be sold during the third quarter.

The firm's financial results were slightly ahead of Wall Street forecasts as well, even though basis differentials widened during the quarter, reducing expected prices for the full year. Adjusted EBITDA and adjusted earnings per share were $241 million and $0.10, respectively, beating consensus estimates of $231 million and $0.07. Confusingly, strong realizations were used to justify a slight bump in the firm’s upstream budget for 2018, which is now $900 million-$930 million ($80 million higher at the midpoint). Still, that’s a relatively small increase, which seems more than justified by the potential for higher volumes. In any case, the modest impact of deteriorating prices was entirely offset by falling unit costs. Lease operating expenses are now expected to average $6-$7/boe during 2018.

Our slightly reduced fair value estimate reflects our view that at current activity levels, U.S. shale is likely to overheat, which could reverse the tightness in global oil markets that we are currently observing. There are at least 100 more light tight oil rigs currently in service than necessary to keep the market balanced in the next few years, and lower prices are the most likely mechanism to persuade shale producers to dial back their operations. In that environment, we no longer expect Oasis to add rigs after 2018, and this adjustment weighs on our valuation. Our new fair value estimate is $9 per share, making shares look expensive at the current level.

Our views on the need for a crude price correction from current (lofty) levels are detailed in our June 11 presentation "Coping with Frothy Oil Prices - Long and Short Ideas in the U.S. E&P Space."