Rating Update: Stock Rating D-Negative (5/21/19)-Oasis Petroleum Inc (OAS).

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BUSINESS

Oasis Petroleum Inc., an independent exploration and production company, focuses on the acquisition and development of onshore unconventional oil and natural gas resources in the North Dakota and Montana regions of the Williston Basin, and Permian Basin. As of December 31, 2017, the company had 502,660 net leasehold acres in the Williston Basin; and approximately 312.2 million barrels of oil equivalent of estimated net proved reserves. It also operates midstream services and a well services businesses. The company sells its oil and natural gas to refiners, marketers, and other purchasers that have access to pipeline and rail facilities. Oasis Petroleum Inc. was founded in 2007 and is headquartered in Houston, Texas.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be below the cost of capital, OAS is expected to be a modest Value Eraser.

Oasis Petroleum has a current Value Trend Rating of D (Negative).
The Value Trend Rating reflects very contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. Oasis Petroleum has a slightly positive Appreciation Score of 69 but a very low Power Rating of 0, leading to the Negative Value Trend Rating.

Oasis Petroleum’s stock is selling well below targeted value. The current stock price of $5.81 compares to targeted value 12 months forward of $9.
This moderately high appreciation potential results in an appreciation score of 69 (only 31% of the universe has greater appreciation potential.)
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Oasis Petroleum has a Power Rating of 0. (This very low Power Rating indicates that OAS only has a better chance of achieving attractive investment performance over the near to intermediate term than 0% of companies in the universe.)
Factors contributing to this very low Power Rating include: recent price action has been extremely unfavorable; OAS’ earnings estimates have fallen very significantly in recent months; and is in an extremely unfavorable position current.

INVESTMENT PROFILE

OAS’ financial strength is below average. Financial strength rating is 36.
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Relative to the S&P 500 Composite, Oasis Petroleum Inc has significant Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that OAS is higher risk. All factors are relative weaknesses. Relative weaknesses for OAS include: low forecasted profitability, low historical profitability, low financial strength, high stock price volatility, low expected growth, and low historical growth. OAS’ valuation is moderate: low dividend yield, moderate P/E ratio, and low price/book ratio. OAS has unusually low market capitalization.

CURRENT SIGNALS

Oasis Petroleum’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

Oasis Petroleum’s current technical position is very weak. The stock price is in a 0.9 month down move. The stock has declined 16.8% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.

ALERTS

Recent meaningful positive changes in investment behavior have benefitted Oasis Petroleum Inc (NYSE: OAS): its shorter term price trend turned up.
Oasis Petroleum Inc (NYSE: OAS) has recently experienced limited negative changes in fundamentals. Negative developments: the consensus estimate for December, 2019 decreased significantly, and the consensus estimate for December, 2020 decreased significantly. Positive development: significant quarterly earnings acceleration occurred.
The stock is currently rated D.
On 5/21/19, Oasis Petroleum Inc (NYSE: OAS) stock enjoyed a major increase of 12.4%, closing at $14.39. Trading volume in this advance was normal. Relative to the market the stock has been extremely weak over the last nine months but has risen 17.6% during the last week.

CASH FLOW

In 2018, Oasis Petroleum generated a very significant increase in cash of +$5 million (+33%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$1,111 million. Non-operating uses consumed -$339 million (-30% of EBITDA). In 2018, there were no cash taxes paid. Re-investment in the business amounted to -$1,622 million (-146% of EBITDA). On a net basis, debt investors provided +$461 million (+42% of EBITDA) while equity investors furnished +$394 million (+35% of EBITDA).
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Oasis Petroleum’s Non-operating Income, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Oasis Petroleum Inc Peer Group. In most years, Oasis Petroleum was in the third quartile and second quartile. Currently, Oasis Petroleum is substantially below median at -30% of EBITDA (-$339 million).

Oasis Petroleum’s Cash Taxes, %EBITDA has exhibited a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Oasis Petroleum Inc Peer Group. In most years, Oasis Petroleum was in the top quartile and second quartile. Currently, Oasis Petroleum is at median at 0% of EBITDA ( $0 million).

Oasis Petroleum’s Business Re-investment, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Oasis Petroleum Inc Peer Group. In most years, Oasis Petroleum was in the lower quartile and third quartile. Currently, Oasis Petroleum is substantially below median at -146% of EBITDA (-$1,622 million).

Oasis Petroleum’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Oasis Petroleum Inc Peer Group. In most years, Oasis Petroleum was in the top quartile and lower quartile. Currently, Oasis Petroleum is upper quartile at +42% of EBITDA (+$461 million).

Oasis Petroleum’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Oasis Petroleum Inc Peer Group. In most years, Oasis Petroleum was in the top quartile. Currently, Oasis Petroleum is upper quartile at +35% of EBITDA (+$394 million).

Oasis Petroleum’s Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Oasis Petroleum Inc Peer Group. In most years, Oasis Petroleum was in the top quartile and lower quartile. Currently, Oasis Petroleum is above median at +0% of EBITDA (+$5 million).
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Oasis Petroleum’s Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Oasis Petroleum Inc Peer Group. (Since 2015 Cash, %Revenue has recently stabilized.) In most years, Oasis Petroleum was in the top quartile and third quartile. Currently, Oasis Petroleum is substantially below median at +1%.

PROFITABILITY

Oasis Petroleum’s return on equity has eroded very significantly since 2011 accelerating very sharply after the 2017 level.
This very significant erosion was due to very strong negative trend in pretax operating return and very strong negative trend in non-operating factors.
The productivity of Oasis Petroleum’s assets rose over the full period 2009-2019: asset turnover has enjoyed a volatile overall uptrend that accelerated very sharply after the 2016 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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Oasis Petroleum’s return on equity is above median (-4.2%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is slightly above median (-1.9%) reflecting asset turnover that is upper quartile (0.32X) and above median pretax margin (-5.8%).
Tax “keep” rate (income tax management) is above median (106.5%) resulting in after tax return on assets that is above median.
Financial leverage (leverage) is at median (2.11X).

GROWTH RATES

Overall, Oasis Petroleum’s growth rate has slowed considerably in recent years.
Oasis Petroleum’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.

Annual revenue growth has been 19.3% per year.

Total asset growth has been 16.0% per year. (More recently it has been -16.1%.)

Annual E.P.S. growth has been -18.9% per year.

Equity growth has been 14.0% per year.

Oasis Petroleum’s consensus growth rate forecast (average of Wall Street analysts) is -37.1% — substantially below the average of the historical growth measures.
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Relative to the Oasis Petroleum Inc Peer Group, Oasis Petroleum’s historical growth measures are generally top quartile. Revenue growth (19.3%) has been upper quartile. Total asset growth (16.0%) has been upper quartile. Equity growth (14.0%) has been upper quartile. E.P.S. growth (-18.9%) has been below median.

In agreement with this pattern, consensus growth forecast (-37.1%) is substantially below median.
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PRICE HISTORY

Over the full time period, Oasis Petroleum’s stock price performance has been volatile and significantly below market. Between July, 2010 and May, 2019, Oasis Petroleum’s stock price fell -66%; relative to the market, this was a -87% loss. Significant price moves during the period: 1) September, 2018 – December, 2018: -61%; 2) December, 2016 – August, 2017: -52%; 3) October, 2015 – January, 2016: -54%; 4) April, 2015 – September, 2015: -52%; 5) June, 2014 – January, 2015: -76%; and 6) June, 2012 – October, 2013: +120%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -44.7% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through April, 2019 of -44.7% is below median relative to Oasis Petroleum Inc Peer Group.

Current 5-year total return performance of -33.4% is lower quartile relative to the S&P 500 Composite.
Through April, 2019, with lower quartile current 5-year total return of -33.4% relative to S&P 500 Composite, Oasis Petroleum’s total return performance is slightly above median relative to Oasis Petroleum Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, OAS’ overall valuation is low. The highest factor, the ratio of enterprise value/revenue, is near the lower quartile. Ratio of enterprise value/earnings before interest and taxes is lower quartile. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is lower quartile. Price/earnings ratio is unavailable.
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Oasis Petroleum has a major value gap compared to the median. For OAS to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 1.97X to 3.01X. If OAS’ ratio of enterprise value/revenue were to rise to 3.01X, its stock price would be higher by $7 to $13.
For OAS to achieve upper quartile valuation relative to the Oasis Petroleum Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.97X to 3.74X. If OAS’ ratio of enterprise value/revenue were to rise to 3.74X, its stock price would increase by $13 from the current level of $5.81.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be below the cost of capital, OAS is expected to be a modest Value Eraser.
Oasis Petroleum’s current Price Target of $9 represents a +57% change from the current price of $5.81.
This moderately high appreciation potential results in an appreciation score of 69 (only 31% of the universe has greater appreciation potential.)
Notwithstanding this moderately high Appreciation Score of 69, the low Power Rating of 0 results in an Value Trend Rating of D.
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Oasis Petroleum’s current Price Target is $9 (-25% from the 2018 Target of $12 but +57% from the 05/21/19 price of $5.81). This fall in the Target is the result of a -5% decrease in the equity base and a -21% decrease in the price/equity multiple. The forecasted decline in return on equity has a slight negative impact on the price/equity multiple and the forecasted increase in cost of equity has a slight negative impact as well. Partially offsetting these Drivers, the forecasted decline in growth has a very slight positive impact.
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PTR’s return on equity forecast is 4.8% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, variable decline between 2010 and 2018. The current forecast is significantly below the 2011 peak of 25%.

PTR’s growth forecast is 3.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2014 peak of 33%.

PTR’s cost of equity forecast is 6.1% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2010 and 2018. The current forecast is well below the 2013 peak of 13.3%.
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At Oasis Petroleum’s current price of $5.81, investors are placing a negative value of $-5 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of -2.0% per year, and a return on equity of 5.5% versus a cost of equity of 5.4%.
PTR’s 2020 Price Target of $9 is based on these forecasts and reflects an estimated value of existing assets of $10 and a value of future investments of $-1.

About John Lafferty 37832 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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