Best Picks List 2013: Oasis Petroleum (NYSE: OAS) - A Bakken Shale Revolution

Introduction

After doing nothing much for the entire 2012 (only +4.2%), Oasis Petroleum (NYSE: OAS) is up over +32% YTD (till 07/09/2013) in 2013. This is a name which I have closely followed for the last couple of years and I am quite bullish on the prospects for this company in the long-term. This is also a holding in my Best Picks 2013 Model Portfolio which I am tracking from 01/01/2013 for 2013. I normally add to my position when there is a pullback to any of my preferred technical levels in an up-trend market. Additionally I trim my positions based on technical levels (e.g. high RSI) or when there is excess exuberance in the markets.

Region

OAS primarily operates as an Exploration and Production (E&P) company in the Williston Basin of Montana and North Dakota in the Bakken and Three Forks formation. Over the course of last few years production growth has increased by leaps and bounds in this region as more and more places are discovered from where shale oil can be drilled with ease using modern day hydraulic-fracturing techniques.

Financials & Growth Trajectory - Q1 2013 Summary Results

Q1 ended March 2013 oil production was 2482 MBbls compared to 1474 MBbls for Q1 ended March 2012, i.e. a growth of 68.4%. In terms of Oil equivalents the numbers were 2714 MBoe at the end of Q1 March 2013 compared to 1605 MBoe at the end of Q1 March 2012, i.e. a growth of 69.1%.

Oil related revenues grew to $231,675 (thousands) at the end of Q1 2013 compared to 131,376 at the end of Q1 2012, i.e. a growth of 76%. Average daily production increased to 30,153 Boe (barrels of oil equivalent) per day at the end of Q1 2013 from 17,633 Boe per day at the end of Q1 2012, i.e. a growth of  71%. Average oil sale prices increased to $93.33 per Bbl (without derivatives) in Q1 2013 from $88.10 per Bbl in Q1 2012, i.e. higher by 6% and contributes towards higher realized oil related revenues.

This amazing high growth numbers across all different data, points to the fact that OAS is still growing and at a rapid pace.

Financials & Growth Trajectory - FY 2012 Summary Results

Merger & Acquisition Opportunity

Market capitalization of OAS is around $3.9B, with around $1.2B in long-term debt. This puts OAS into a sweet-spot where any of the US based oil and gas giants [e.g. Anadarko Petroleum (APC), Apache Corp (APA), etc.] without a presence in the Williston Basin can easily gobble up OAS. At the same time OAS can be a target for any of the Canadian oil and gas company or for example if any of the Chinese or Korean oil and gas companies like to expand their presence in US for their domestic needs. There has been M&A by Chinese and Korean companies buying up US based and Canada based E&P companies assets. 

Bakken shale has attracted a lot of attention because of the huge shale oil contents of the region. Couple of previous M&A of companies in the region included Brigham Exploration Company (NASDAQ: BEXP) which was acquired by Statoil of Norway. Similarly GeoResources Inc. (NASDAQ: GEOI) was acquired by Halcon Resources. 

Downside Risks

Following are some of the downside risks to this high octane growth story:

• Slowdown of global economy which causes WTI (West Texas Intermediate - US crude oil benchmark) crude prices to fall thus affecting revenue realized for OAS. 
• Assumption and reliance on the net proved and developed reserves estimates data provided by the independent reserve engineers. 
• OAS can successfully and economically extract the oil from the prepared and drilled wells