OAS: Is it oversold?

[dan_s]

Is Oasis Petroleum (OAS) oversold? My take is that all of the Sweet 16 are now grossly oversold, unless you believe crude oil prices are going to stay low FOREVER. My Fair Value Estimate for OAS is $35.45, compared to First Call's Price Target of $30.07/share. - Dan
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Gabriele Sorbara, an analyst at Topeka Capital Markets who has a buy rating on the stock, explained that current prices make Bakken an uneconomical region to drill for oil and gas, as opposed to Texas's Permian Basin and Eagle Ford that he said "are the lowest cost domestic resource plays".

If prices remain below $60 for a while, that could be bad news for Bakken producers such as Whiting Petroleum (WLL) , Continental Resources (CLR) and Marathon Oil (MRO) as well as for Oasis.

But Sorbara said that Oasis can weather a downturn, at least through 2015, because it has "a few years of highly economic inventory in the Bakken" and has hedged more than half of its 2015 production at a floor price of $89.13 a barrel.

Moreover, Oasis has reduced its spending plans for next year which, Sorbara said, is a "prudent move" because it will allow the company to spend closer to its cash flow while still increasing its production. The company will also focus on developing its low-cost properties at Bakken that break even at $50 a barrel, according to Sorbara's estimates.

Last week, Oasis said that it will reduce its capital spending for next year to between $750 million and $850 million, lower than this year's budget of $1.4 billion. The company is eyeing production growth of between 5% and 10%, as opposed to the third quarter of this year when it increased its daily production by 38.7%.

According to my forecast model (available under the Sweet 16 Tab), Oasis will generate over $500 million cash flow from operations in 2015 even if Bakken oil sells at $50/bbl all year. - Dan