Bakken Bounty

In recent months, positive news flow about energy financings has been an encouraging sign that the markets have done more than just turn a corner. While many gas-weighted companies are still challenged by prices that haven’t bounced back, oil-weighted companies are attracting the lion’s share of energy investors’ interest in the public markets.

That set the stage nicely for the first pure-play, Bakken-oriented initial public offering.

In late June, oil-focused, Houston-based Oasis Petroleum Inc. completed its IPO of 48.3 million shares of common stock at $14 per share for proceeds of $395.7 million to the company. Oasis sold 30.4 million primary shares in the offering, and OAS Holding Co. LLC, the selling stockholder, sold 17.9 secondary million shares. The Bakken-focused producer plans to use proceeds to pay debt and fund its exploration and development program in the Williston Basin. Morgan Stanley and UBS Investment Bank were joint book-running managers and Simmons & Co. International was co-lead manager. Oasis now trades on the NYSE under the symbol OAS.

Oasis Petroleum's acreage position, which is highly contiguous, would be difficult to put together from a grass-roots effort in today's oil-focused E&P environment.

Oasis was originally formed with $200 million from EnCap Investments LP in March 2007. Led by a team of ex-Burlington Resources execs, management was always focused on acquiring and exploiting properties that had good production and meaningful upside. The team includes Thomas B. Nusz as president and chief executive; Taylor L. Reid, executive vice president and chief operating officer; Kent O. Beers, senior vice president, land; and Robert J. Candito, senior vice president, exploration.

When the founders developed Oasis’ original business plan three years ago, it included a combination of U.S. and international areas that were oil-rich.

“Given product prices at the time, we felt there was more upside in peoples’ expectations for oil,” Nusz says. “We were looking to be more oil oriented, and because of this, the Williston Basin was one of our targets. We were fortunate in that there was an entry opportunity close to the time we were funded.”

In 2007 Oasis acquired about 1,000 barrels of daily production and 175,000 net acres along the western side of the basin. This positioned the company for significant resource potential from the Bakken and Three Forks formations. To date, Oasis has accumulated almost 292,000 net leasehold acres in the Williston, approximately 85% of which are undeveloped.

After two years as a privately held entity, Nusz says, the decision to approach the public markets for capital was a logical one. By the middle of 2009, the team knew its asset base would only realize its full value through a significant capital infusion, in order to drill more than 1,000 locations.

“When you start talking numbers of $200- to $300 million dollars a year for a capital program, there aren’t a whole lot of options out there. This is why the public markets made a lot of sense for us. Our team knows how to run large development programs, and the public markets like to see growth stories, both in terms of assets and the execution capability of a company. We are all Williston Basin, and our story is very straightforward.”

Timing Is Everything

The financial meltdown, and more recently, the oil spill in the Gulf of Mexico, left many E&Ps leery about approaching the public markets for capital. In Oasis’ case, Nusz says the timing of its moves to go public depended on an interesting convergence of events. Around the time the company’s asset base needed more capital in 2009, the public markets started to open up in spite of the overhang from the financial crisis.

“We had actually already retained some advisors in early 2009 to help us look at capital alternatives. They advised us that our story made us a good candidate for financing through the public markets, in spite of the issues in the broader market at the time. The financial crisis was hard for everyone, but there really is plenty of capital out there looking for a home today, and if you have a clean story with visible growth catalysts, you’ll attract it.”

Nusz says it’s hard to tell definitively if the Gulf oil spill affected Oasis’ debut in the public markets. It probably helped that all of the company’s assets were onshore, he adds.

“We were fortunate to be able to get in front of investors months earlier and let them know how we planned to deploy capital and run our business. Even without these unforeseen events in the markets, taking a company public is hard. It is not an easy process, and it took us nine months to complete it. But the markets, specifically institutional investors, were very interested in us.

“There was definitely an opportunity for an oil-weighted company with growth potential in the region that we operate. That, combined with our team’s track record, made people pretty receptive to our story, which let us put together a very high-quality investor base.”

Oasis was originally formed with $200 million from EnCap Investments LP in March 2007. Oasis sold 30.4 million primary shares in the IPO, and OAS Holding Co. LLC, the selling stockholder, sold 17.9 million secondary shares.

Management has allocated $220 million to its capital plan for 2010, the bulk of which will be used to develop its assets on the western side of the Williston Basin. The company has four rigs running now and will move to a fifth later this year. For now, acquisitions and joint ventures are not part of the immediate growth plan, Nusz says.

“Through our current acreage position, we have a tremendous inventory with a lot of development opportunity over a number of years. Right now, execution on the assets we have is job No.1, but our team has done value-accretive acquisitions for years. While acquisitions are not a near-term focus, when the timing is right it’s something we know how to do.”

Management’s experience at Burlington Resources has helped it run Oasis—as a public and private entity—like a division of a larger E&P company, he says. Staying focused on a management team’s strengths and the things it can control are key in the decision to go public, he adds.

“When you start the process of becoming a public company you want to frame strategic options, analyze each of them and anticipate how they may affect the company. After weighing risks and upside you narrow the choice down to the one that’s best for you. From there, it’s about having great assets as well as a successful execution.

“You have to be effective stewards of investors’ capital and ultimately deliver on expectations. This always holds true but it’s even more important with the uncertainty in the markets today. You really have to communicate what the company is doing and why, and minimize surprises. These things combined will attract capital, especially for the long term. For us, we’re in the right play; we have an excellent team; we’re debt-free and poised for future growth. We have plenty to be excited about.”

Wall Street’s Take

Several analysts see positive things on the horizon for Oasis. Two key elements clearly working in its favor: an experienced management team and its extensive Bakken position.

Morgan Stanley initiated coverage on the company in July with an Equal-weight rating.

“Oasis offers pure-play exposure to the Bakken oil play with funding in place to support 100%-plus production growth over the next two years or more,” noted E&P analyst Stephen Richardson in a July 27 research report. “We see upside to estimates for both resource capture and production growth on a 12 to 18 month view.”

Richardson says there are three important value drivers in the market debate for Oasis. The first is the need for lowered acreage risk. Currently, he says the market risks approximately 70,000 to 90,000 net acres (about 27%) of Oasis’ leasehold in both Burke County, North Dakota, and in eastern Montana, as limited well control and variable results from other E&Ps have suggested lower productivity from these areas. Results by Oasis and the industry should de-risk these acreage positions during the next year, he says.

The second driver is production growth. Morgan Stanley sees promising upside to its 130% and 120% growth estimates for Oasis’ production in 2010 and 2011, respectively.

“Just 10% higher well productivity would drive some 8% higher production in 2011,” Richardson says. “With 35 and 60 gross operated wells planned for 2010 and 2011, respectively, with six to seven rigs running, that should deliver 130% and 120% annual production growth over 2010 and 2011. The upside to these estimates is from the way recent well results have surpassed management’s productivity expectations.”

Lastly, the company’s options to expand its resources via infill drilling to the Bakken and the Three Forks are both material areas of upside, he says.

Meanwhile, Morgan Keegan & Co. Equity Research also initiated coverage on Oasis in late July with an Outperform/Speculative Rating and a fair value estimate of $23 to $25 per share.

“The Bakken remains one of our favorite areas to allocate investment capital,” notes senior E&P analyst Chris Pikul. “Oasis is in the early stages of accelerating activity from an enviable acreage position in the prolific Bakken shale play, the largest continuous oil accumulation in the Lower 48. Nearly 4 billion barrels of oil may be recoverable in this area, according to the United States Geological Survey.”

If the company can successfully develop its vast inventory of drilling opportunities, the company is poised to trade into a much higher valuation, Pikul says. With an advertised position of 292,000 acres, plus Three Forks opportunities, Oasis boasts an inventory of more than 1,000 potential net locations, or at least a 10-year menu of drilling opportunities.

“The upside there should support a higher stock price,” Pikul says. “With more than 90% oil production, we believe its shares are firmly within the preferred habitat of E&P investors today, which favors high-quality, oily production profiles, with strong balance sheets.”

In a July 27 research report, Pikul says Oasis investors should see dramatic growth during the next 18 months as production ramps up from approximately 4,000 barrels of oil equivalent per day to more than 10,000 per day from its large acreage position by year-end 2011. While Bakken players can continue to “cobble together small acreage positions and bolt-on bits of acreage, Oasis’s sizable acreage position would be difficult to assemble in today’s competitive environment,” Pikul notes.

“With the Bakken maintaining a high profile among E&P investors, we think the Oasis story comes down to two key elements: execution and valuation. With its limited track record of development drilling to date, investors will be highly focused on the company’s initial success in implementing large-scale development and delivering on the promised growth from the Bakken play.”

Richardson adds, “While the track record at Oasis has yet to be established—beyond some very shrewd and well-timed asset acquisitions and initial well results—we believe management has the capability to be amongst the strongest in the small-cap E&P universe.

“In a human-capital intensive business, our view is that strong management teams outweigh asset quality in generating value for shareholders. Oasis has a strong team that should support premium valuation over time."

With an advertised position of 292,000 acres, plus Three Forks opportunities, Oasis boasts an inventory of more than 1,000 potential net locations.