An Oasis in the Oil Patch
Kirk is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Having spent considerable time in North Dakota and Texas the past two years I have been able to study the oil and gas industries very close up including visiting many drilling sites in the Williston Basin. Among the smaller companies with wide open growth potential that is rarely mentioned in the press is Oasis Petroleum (NYSE: OAS).
Oasis, like Kodiak Oil and Gas (NYSE: KOG), which gets more media love, is a Williston Basin pure play. The company has about 320,000 net acres in the Williston Basin making it a top ten lease right holder, though not of the scale of top dog Continental Resources (NYSE: CLR), which holds almost 900,000 acres.
The company is growing quickly with nine drill rigs currently active in the Williston. Recent numbers came in above projections. I have strong reason to believe that revenue and earnings will continue to beat. Here is why.
In visiting the region twice this summer I actively sought out Oasis sites. My host on one of the trips, Robert Walstad, a portfolio manager for the Williston Basin Mid-North America stock fund, and I were able to get to several Oasis well pads. I found more later on my own. What I was able to determine is that Oasis has been busier than many desk jockeys expected.
As of today, the company has 39 wells listed on North Dakota's "confidential well list." What this means is that these are newer wells that are not yet required to report their results publicly. Those results will become known over the next several months.
For Oasis, a recent senior note offering will allow their growth pace to continue. Therefore, it appears that we can comfortably expect Oasis to continue to grow revenue.
Earnings will also continue to grow as margins widened and I believe will continue to widen. The expansion of margins is primarily due to a pair of reasons. The first is that the de-risking process is advanced at this point. In simplest terms, that means they know where the oil is now.
Secondly, new methods for spacing wells and doing "fracs" is making drilling more efficient. In reviewing Oasis' current investor presentation, we see that the company anticipates efficiencies to continue to develop. Having been through the region, one can see the progression of well pad development over the past few years.
On many pads, companies, including Oasis, are placing 2, 4 or even 8 wells on one 5-acre pad. In the past there was only one well per pad. That simple development is driving well cost down substantially. The companies are able to put more wells per pad because it was discovered that the wells would not communicate -- interfere or damage each other -- even with much narrower spacing than used just a year or two ago. As a result, Oasis is on track to make further efficiency gains as they optimize the pads they are drilling over the next year or so.
In addition, all of the companies in the Williston are taking advantage of the high success rate that is allowing infrastructure to be put in place prior to wells actually being drilled. This is no small thing as in other oil plays there is more of a stop and start approach as wells are drilled and it is determined whether or not there is oil.
In the Williston Basin, whether drilling Bakken or Three Forks shale, drillers know that they are going to hit profitable oil deposits with almost every well drilled. This is due to the fact that the Williston Basin is essentially an oil-filled rock bowl. As a consequence, the oil companies, and state, have been able to engage in a much more assembly-line style approach.
Long-term Oasis might be a take-over target as its acreage sits next to the acreage that Statoil bought from Brigham awhile back. If the company is not sold, it will most likely become a significant dividend producer as drilling slows and more revenues from producing wells fall to the bottom line.
Kirk and clients of Bluemound Asset Management, LLC own common stock shares of Kodiak Oil and Gas and Oasis Petroleum. Neither Kirk nor Bluemound clients plan any transactions in the next 3 trading days in the mentioned company's securities. Opinions subject to change at any time without notice. Follow Kirk on Twitter @GALPinvesting, GALP is Growth At Low Prices, for new columns, important financial news and weekly stock picks. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.