Business Context and Reporting Period
The provided filing is Oasis Petroleum Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2012, not a Chord Energy Corp. filing. Oasis was an independent exploration and production company focused on unconventional oil and natural gas resources in the Williston Basin, primarily in North Dakota and Montana, with complementary marketing and well-services businesses.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2012 |
|---|---|---|
| Total revenues | $149.1 million | $287.6 million |
| Operating income | $60.2 million | $118.3 million |
| Operating margin | 40.4% | 41.1% |
| Net income | $76.0 million | $92.5 million |
| Net margin | 51.0% | 32.2% |
| Basic and diluted EPS | $0.82 | $1.00 |
| Net cash provided by operating activities | Not separately provided | $171.9 million |
| Capital expenditures, cash basis | Not separately provided | $440.8 million |
| Cash and cash equivalents at period end | $238.9 million | |
| Long-term debt at period end | $800.0 million | |
| Revolving facility availability | $500.0 million borrowing base; no borrowings or letters of credit |
- Average production was 20,353 Boe per day in the second quarter and 18,993 Boe per day for the first six months.
- Second-quarter oil production was 1.682 million barrels and natural gas production was 1.019 Bcf.
- Oil revenue was $138.6 million in the second quarter and $269.9 million for the six months; natural gas revenue was $6.6 million and $13.2 million, respectively.
- Average oil price excluding realized derivatives was $82.36 per barrel in the second quarter and $85.04 per barrel for the six months.
- The reported second-quarter net income included a $74.6 million net gain on derivatives, substantially driven by a $75.8 million unrealized mark-to-market gain.
Material Changes Versus Prior Comparable Period
- Second-quarter revenue increased $81.9 million, or 122%, from $67.2 million in the prior-year quarter. Six-month revenue increased $161.7 million, or 128%, from $126.0 million.
- Average daily production increased 158% year over year in the second quarter and 138% for the six-month period, primarily due to newly completed wells.
- Second-quarter net income increased $42.7 million, or 128%, from $33.3 million; six-month net income increased $66.0 million, or 249%, from $26.5 million.
- Operating income increased $27.8 million in the second quarter and $60.4 million for the six months despite higher operating costs, DD&A, and general and administrative expenses.
- Six-month operating cash flow increased from $102.1 million to $171.9 million, while capital expenditures increased from $212.3 million to $440.8 million on a cash basis.
- Cash declined $232.0 million during the first six months, compared with a $156.5 million increase in the prior-year period, primarily because operating cash flow did not cover capital expenditures.
- Lease operating expense per Boe improved to $6.49 in the second quarter and $6.32 for the six months, compared with $8.29 and $8.00, respectively, in the prior-year periods.
- DD&A per Boe increased to $23.87 in the second quarter and $24.04 for the six months, compared with $18.24 and $18.61, respectively.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- The company increased its 2012 capital expenditure budget on July 26, 2012, from $884 million to $1.062 billion. The revised budget included $912 million for development, $74 million for infrastructure and saltwater disposal systems, and $30 million for leasehold activity.
- Management stated that cash on hand, operating cash flow, and the revolving facility should be sufficient to fund the 2012 budget, but acknowledged that developing the full identified drilling inventory would require substantially more capital.
- Management reported 26 gross operated wells completed and placed on production during the second quarter, with 30 gross wells awaiting completion and nine gross wells being drilled at quarter-end.
- The company had 94 operated wells connected to a third-party oil gathering system at June 30, 2012, compared with three at the beginning of the year, and approximately 60% of gross operated oil production flowed through that system.
- The company planned to increase operated water production flowing through its pipeline system from approximately 30% at June 30 to approximately 80% by year-end 2012, with the objective of reducing operating costs.
- Commodity-price risk remained significant. The company used collars and put spreads covering a substantial portion of expected oil production. These instruments limited downside exposure but could also limit benefits from rising prices.
- At June 30, 2012, derivative instruments had a net fair value asset of $53.4 million. Derivative gains and losses were not designated as accounting hedges and could create substantial earnings volatility.
- The company had $800 million of senior unsecured notes, consisting of $400 million due 2019 at 7.25% and $400 million due 2021 at 6.5%. The debt agreements contained restrictive covenants.
- After quarter-end, on July 2, 2012, the company issued $400 million of 6.875% senior unsecured notes due 2023, receiving approximately $392 million of net proceeds.
- Material contractual commitments included approximately $58.5 million for early termination of drilling contracts, $73.4 million under minimum-volume delivery agreements, and $31.4 million for fracturing-service contracts.
- Non-cash impairment charges on unproved properties were $2.2 million for the quarter and $2.6 million for the six months. No impairment charges were recorded on proved properties.
- Management identified risks from oil and gas price volatility, transportation constraints and price differentials, service and personnel availability, reserve and production uncertainty, access to capital, environmental and regulatory matters, litigation, and counterparty credit risk.
- Disclosure controls were deemed effective. During the quarter, the company implemented a new accounting and land system and brought outsourced accounting functions in-house; testing and documentation of related controls remained ongoing.
Investor Verification Items
- Verify the issuer identity: the supplied document is Oasis Petroleum Inc.’s 2012 Form 10-Q, whereas the request identifies Chord Energy Corp.
- Reconcile reported net income and margins for the effect of the large unrealized derivative gain and assess cash earnings separately.
- Review the subsequent July 2012 debt issuance and resulting leverage, interest burden, covenants, and use of proceeds.
- Assess whether the increased $1.062 billion capital budget was funded by operating cash flow, cash balances, debt, or additional financing.
- Review the derivative volumes, floors, ceilings, sub-floors, settlement exposure, and potential limits on upside oil-price participation.
- Evaluate transportation capacity, regional oil-price differentials, drilling and fracturing commitments, and saltwater-disposal infrastructure execution.
- Confirm reserve growth, production guidance, drilling returns, and the sustainability of lower unit operating costs and higher DD&A per Boe.