Business Context and Reporting Period
The provided filing is Oasis Petroleum Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The request metadata identifies Chord Energy Corp., but the filing text identifies the registrant as Oasis Petroleum Inc.; this entity discrepancy should be verified. Oasis was an independent exploration and production company focused primarily on unconventional oil and natural gas resources in the Williston Basin.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2011 | Nine Months Ended September 30, 2011 |
|---|---|---|
| Oil and gas revenue | $87.6 million | $213.5 million |
| Operating income | $40.3 million | $98.2 million |
| Operating margin | Approximately 46.0% | Approximately 46.0% |
| Net income | $66.3 million | $92.8 million |
| Net margin | Approximately 75.7% | Approximately 43.5% |
| Basic and diluted EPS | $0.72 | $1.01 |
| Average daily production | 11,583 Boe/day | 9,201 Boe/day |
| Cash flow from operations | Not separately provided | $139.7 million |
| Capital expenditures | $198.9 million exploration and production capital expenditures | $386.9 million cash capital expenditures; $399.4 million development and acquisition capital expenditures including accrued amounts |
- Cash and cash equivalents were $163.6 million at September 30, 2011, compared with $143.5 million at December 31, 2010.
- Short-term investments were $124.9 million at September 30, 2011. Total current assets were $425.5 million and current liabilities were $168.9 million.
- Long-term debt was $400.0 million, consisting of 7.25% senior unsecured notes due 2019. The company had no borrowings or letters of credit outstanding under its revolving credit facility and reported $137.5 million of unused borrowing-base capacity at September 30, 2011.
- The company reported a net derivative asset of $61.5 million. Derivative instruments generated a $71.2 million gain in the third quarter and a $67.1 million gain for the first nine months, primarily from non-cash mark-to-market changes.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased $54.6 million, or 166%, from $33.0 million in 2010. Nine-month revenue increased $133.8 million, or 168%, from $79.8 million.
- Production increased 110% in the third quarter and 108% for the nine-month period, driven principally by well completions and development in the West Williston, East Nesson and Sanish areas.
- Average oil prices excluding realized derivatives increased to $83.52 per barrel in the third quarter and $86.58 per barrel for the nine-month period, compared with $66.42 and $67.58, respectively, in the prior-year periods.
- Operating income increased from $10.8 million to $40.3 million in the third quarter and from $9.0 million to $98.2 million for the nine months.
- Net income improved from a $1.7 million loss to $66.3 million in the third quarter and from a $31.3 million loss to $92.8 million for the nine months.
- Operating cash flow increased from $30.9 million to $139.7 million for the nine months, while investing cash use increased from $164.7 million to $509.0 million due to higher capital spending and $124.9 million of short-term investment purchases.
- Debt increased from no long-term debt at December 31, 2010 to $400.0 million at September 30, 2011 following the February 2011 issuance of senior unsecured notes.
- Lease operating expense per Boe increased to $9.23 in the third quarter and $8.75 for the nine months, primarily because of higher water production, salt-water disposal and weather-related costs.
Guidance, Outlook, Risks and Unusual Items
- The board increased the 2011 capital expenditure budget from $490 million to $627 million, including a $587 million exploration and production budget. Management stated that cash on hand, short-term investments, operating cash flow and expected note proceeds should fund the revised budget.
- Third-quarter activity included 22 gross operated wells placed on production, seven gross operated wells drilling and 21 gross operated wells awaiting completion. Exploration and production capital expenditures were $198.9 million.
- Management expected salt-water-disposal infrastructure spending to reduce operating costs by approximately $2 to $3 per Boe in 2012.
- Subsequent to quarter-end, the revolving credit facility was increased to $1.0 billion, its borrowing base increased to $350 million, and maturity was extended to October 2016. The company also issued or agreed to issue $400 million of 6.5% senior unsecured notes due 2021, with expected net proceeds of approximately $393 million.
- Outstanding derivative contracts partially reduce exposure to oil-price declines but can limit cash flow when prices rise. The large derivative gain was substantially non-cash and therefore should not be treated as recurring operating performance.
- Contractual obligations included $51.0 million of drilling-rig commitments, $41.6 million of fracturing-service commitments, $35.5 million of volume commitments, $13.0 million of leases and $400.0 million of senior notes, excluding interest.
- Management disclosed a continuing material weakness in internal control over financial reporting. Disclosure controls were considered ineffective as of September 30, 2011, although management stated that the financial statements were fairly presented. Remediation was ongoing and could identify additional deficiencies.
- Key risks included oil and natural gas price volatility, transportation capacity, service and labor availability, drilling execution, access to capital, reserve estimates, environmental and hydraulic-fracturing regulation, customer and derivative-counterparty credit risk, and potential changes to oil and gas tax incentives.
Investor Verification Checklist
- Verify whether the intended registrant is Oasis Petroleum Inc. or Chord Energy Corp., because the supplied filing does not identify Chord Energy.
- Separate recurring operating results from the $67.1 million nine-month derivative gain, most of which was non-cash and mark-to-market.
- Reconcile reported cash capital expenditures with the $399.4 million development and acquisition spending figure, which includes accrued amounts.
- Review the post-quarter-end debt issuance, credit-facility expansion and borrowing-base increase, including their effect on leverage and future interest expense.
- Assess whether the company remediated the disclosed material weakness and ineffective disclosure controls in subsequent filings.
- Evaluate the ability of operating cash flow and financing sources to fund the expanded capital program amid commodity-price, service-cost and transportation risks.