Oasis: Takeover speculation?

A pure play on the Bakken, this driller is one energy specialist's top takeover target.

By TheStockAdvisors Feb 13, 2012 10:45AM
by Elliott Gue, The Energy Strategist

Oasis Petroleum (OAS), rated a Best Buy in my growth portfolio, is also my top takeover pick for 2012.

Oasis Petroleum offers pure-play exposure to the Bakken Shale and boasts more than 300,000 net acres that are prospective for Bakken Shale and the Three Forks trend. Management estimates that the company has 1,303 potential drilling locations in the Bakken Shale alone.

As efforts to develop and prove the productivity of the Three Forks/Sanish formation progress, the firm could add another 1,200 low-risk drilling locations to its inventory.

At the end of the third quarter of 2011, Oasis Petroleum's output averaged 11,500 barrels of oil equivalent per day, 92 percent of which was oil.

At the time of its acquisition by Statoil, Brigham Exploration held about 375,000 net acres in Bakken Shale and produced an average of 16,000 barrels of oil equivalent per day at the end of the third of 2011.

Statoil paid about $285,000 per barrel of oil equivalent production when the Norwegian state oil company acquired Brigham Exploration and assumed its debt.

Applying a similar multiple to Oasis Petroleum’s year-end production of 12,500 barrels of oil equivalent per day, the stock is worth about $36 to $37 per share.

Another popular valuation metric for rapidly growing E&P firms -- enterprise value (equity and debt) to earnings before interest, taxation, depreciation and amortization (EBITDA) -- indicates that shares of Oasis Petroleum trade at a slight premium to Brigham Exploration when Statoil acquired the company.

But investors should also consider the scarcity factor and timing. As a first mover in the Bakken, Statoil likely paid a lower price than future acquirers.

Based on Oasis Petroleum’s high-quality assets and strong production growth, management would likely demand at least $45 per share in any acquisition.

In such a scenario, the total value of the deal would be well under $5 billion, an easy mouthful for a host of major oil companies.

In 2011 Oasis Petroleum’s capital expenditures totaled $527 million. By year-end, the firm had nine rigs operating in the Bakken and had brought about 63 gross wells into production.

At the end of 2011, the firm was drilling seven additional wells and 25 of its wells were awaiting completion.

Adverse weather interrupted Oasis Petroleum’s drilling program in late spring 2011, a challenge that many other operators in the region faced.

The company’s output declined sequentially in the second quarter to 7,893 barrels of oil equivalent per day from 8,090 barrels of oil equivalent per day. In the third quarter, the firm’s production rebounded to 11,583 barrels of oil equivalent per day.

Management has suggested that planned expenditures could reach $850 million, which would imply a substantial increase in drilling activity.

The more Oasis Petroleum grows production and demonstrates the quality of its reserves, the more the firm would be worth in a sale.

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