Oasis Petroleum is selling its Permian position for less than half the price it paid to enter the play.
In 2017, Oasis announced it was acquiring 20,300 net acres in the Delaware Basin for $946 million, an average $46,000 per acre in cost. At the time, analysts said that was the highest price paid for a position in the Permian. Now, however, the company will sell the assets for a little more than half that price, at a potential consideration of $481 million.
In a business update Friday, CEO Danny Brown said that the Permian position was a good asset, but that opportunities for Oasis to build meaningful scale around it had dwindled due to consolidation around it.
“As we’ve discussed before, we believe size and scale are extremely important as we need to drive more volumes over lower costs to improve operating efficiency and returns on capital, and unfortunately we just did not see a reasonable pathway to build the scale and vision when we entered the Permian Basin,” Brown said. “Given this difficulty, we explored alternatives and are happy with the valuation we are receiving.”
The Permian divestment is the second major transaction announced by Oasis in recent days. It follows the announcement of a $745 million acquisition of Diamondback’s QEP assets in the Bakken, which added 95,000 acres to the company’s existing Bakken Portfolio. The new acquisition added about two year’s worth of Tier One drilling inventory, and brings the company’s holdings to around 500,000 acres.
The transactions are attractive when considered together, Brown said.
“When you look at this in aggregate, and net out the two transactions we’re picking up production for less than $15,000 per flowing barrel and EBITDA for 1.7 times,” he said. “Of course there are many ways to look at a transaction and another of those would be to apply specific values for producing barrels and ascribe the rest of the inventory. So in that scenario, if you assume $30,000 per flowing barrel, based on our Q 1 production, that leaves $265 million for inventory.”
These figures assume WTI remains $60 or above in 2023, 2024 and 2025, Brown acknowledged, for up to three $25 million earn-out payments.
“But, if we find ourselves in a sub-$60 world, we’ll be just as happy with the consideration we received,” he aded.
The deal also puts Oasis on a path to zero net debt by mid-2022, Chief Financial Officer Michael Lu said. Hedges have also been layered into the deal.
“So overall, we’ll have great liquidity under our revolver, and an increased ability to return cash to our shareholders net for the two deals and, as a reminder, we recently announced that we plan to increase our fixed quarterly dividend by 33% to 50 cents per share after the Williston acquisition closes,” he added. “We also recently announced $100 million share buyback program, and we’ll continue to explore more ways to get cash return to our shareholders. “
Associated midstream assets in the Permian, meanwhile, including Panther Devco, will remain with Oasis Midstream Partners, which is anticipating increased activity by the new operator. That potentially makes the sale almost immediately accretive to OMP.
The increased activity and the shifting of internal capital will ultimately allow more cash to be focused in Williston, as well as returned to Oasis shareholders, improving the company’s reinvestment rate with minimal impact to ongoing exploration and development.
The sale of the Permian assets is supposed to close in June, but will more likely to close in July, company officials said. Third quarter volume guidance will be updated during the company’s planned earnings call in August. The effective date of the sale, however, is April 1. Any downward impact to third quarter volumes will be offset by an upward adjustment to the purchase price.
The company plans to hold its production “flatish” going forward, and it will continue to look at operating practices that improve Bakken economics, including bigger fracs and longer laterals. Indian Hills, for example, will be moving to 3-mille laterals. Economies of scale are also helping Oasis negotiate better deals with vendors, helping further lower per unit costs of production.