Chord Energy Corp quarterly report, Q3 FY2019

Business Context and Reporting Period

The submitted filing is Oasis Petroleum Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2019; it does not identify Chord Energy Corp. as the registrant. Oasis was an independent U.S. exploration and production company operating in the Williston and Delaware Basins, with midstream and well services segments. The filing was signed November 6, 2019.

Key Financial Metrics

Metric	Q3 2019	Q3 2018	9M 2019	9M 2018
Total revenue	$482.7 million	$674.6 million	$1,587.9 million	$1,722.2 million
Operating income	$8.4 million	$179.0 million	$130.5 million	$49.4 million
Net income (loss) attributable to Oasis	$20.3 million	$62.3 million	$(51.8) million	$(257.3) million
Diluted EPS	$0.06	$0.20	$(0.16)	$(0.84)
Net cash from operations	$251.0 million	$230.0 million	$639.9 million	$762.0 million
Capital expenditures, including acquisitions	$187.2 million	$372.3 million	$708.9 million	$1,898.1 million

Q3 operating margin was approximately 1.7%, compared with 26.5% in the prior-year quarter. Nine-month operating margin was approximately 8.2%, compared with 2.9% in the prior-year period. Q3 net margin attributable to Oasis was approximately 4.2%; the nine-month net margin was approximately negative 3.3%.

Production averaged 88,715 Boe per day in Q3, up 4% year over year; production was 71% crude oil.
Q3 crude oil revenue was $318.6 million and natural gas and NGL revenue was $25.9 million. Midstream revenue increased to $50.0 million, while well services revenue declined to $8.9 million.
Q3 Adjusted EBITDA was $256.6 million, and Q3 Free Cash Flow was $16.9 million. For the first nine months, Adjusted EBITDA was $775.6 million and Free Cash Flow was negative $85.9 million. These are non-GAAP measures.
Cash and equivalents were $19.4 million at September 30, 2019, compared with $22.2 million at December 31, 2018. Reported liquidity was $1.085 billion, including $1.066 billion of unused revolving capacity.
Total long-term debt was $2.799 billion, including $406.0 million under the Oasis Credit Facility, $431.0 million under the OMP Credit Facility and $2.039 billion principal amount of senior unsecured notes.
Total assets were $7.667 billion and total stockholders’ equity was $3.900 billion at September 30, 2019.

Material Changes Versus the Prior Comparable Period

Total revenue declined 28% in Q3 and 8% for the first nine months, primarily because lower commodity prices more than offset production growth. Q3 crude oil prices declined to $55.12 per barrel from $68.33, while natural gas and NGL prices declined to $1.81 per Mcf from $3.72.
Oil and gas revenue declined $109.7 million in Q3 and $148.3 million for the first nine months. Production increased, with average daily production up 3,315 Boe in Q3 and 7,700 Boe for the first nine months.
Operating income fell sharply in Q3 because of lower commodity revenue, the absence of the prior-year $36.9 million property-sale gain, higher DD&A and a $20.0 million litigation accrual. For the nine months, operating income improved versus 2018 primarily because the prior-year period included a $384.2 million impairment charge.
DD&A increased to $210.8 million in Q3 and $578.0 million for the nine months, reflecting higher production, lower estimated recoverable reserves and higher Delaware Basin well costs.
Midstream revenue increased $18.8 million in Q3 and $61.2 million for the nine months, aided by a second Wild Basin gas processing plant and third-party natural gas purchase arrangements. Well services revenue declined because the company reduced activity to one fracturing crew.
Net derivative results improved to a $47.9 million gain in Q3 from a $48.5 million loss in Q3 2018, but remained a $34.9 million loss for the first nine months.
The company reduced borrowings under the Oasis Credit Facility by $125.0 million during Q3. However, total debt increased from $2.735 billion at December 31, 2018 to $2.799 billion at September 30, 2019, largely reflecting increased OMP borrowings.
The company adopted ASC 842 lease accounting on January 1, 2019, recognizing operating and finance lease assets and liabilities. Prior-period amounts were not adjusted.
The company revised 2018 revenue and purchased oil and gas activity to present certain crude oil purchase and sale arrangements on a gross basis. The revision did not affect net income, EPS, financial position or operating cash flow.

Guidance, Outlook, Risks and Unusual Items

Management’s 2019 capital expenditure plan was approximately $832 million to $862 million, including $620 million to $640 million for E&P and other capital expenditures and $212 million to $222 million for midstream expenditures. Management stated that the plan could change with market conditions, drilling results, financing availability and other factors.
Management believed available cash, operating cash flow, derivative settlements and revolving capacity were sufficient to fund the 2019 plan and future obligations, but noted that substantially more capital would be required to develop the full drilling inventory.
The Oasis Credit Facility borrowing base was reduced after period-end, on November 4, 2019, from $1.600 billion to $1.300 billion; elected commitments were reduced from $1.350 billion to $1.100 billion. The company stated it was in compliance with covenants at September 30, 2019 and did not anticipate a violation in the next twelve months.
Management identified commodity prices, transportation capacity, service costs, personnel availability, reserve estimates, environmental matters, counterparty credit and access to capital as major risks. A 3% decline in expected commodity prices could eliminate the excess of estimated undiscounted cash flows over carrying value for Williston Basin properties; potential future impairment charges could exceed $2.0 billion for the Williston Basin and $350 million for the Delaware Basin under the disclosed assumptions.
At September 30, 2019, the company had a net derivative asset position of approximately $61.1 million. A 10% increase in crude oil prices would reduce the fair value of derivatives by approximately $55.2 million, while a 10% decrease would increase fair value by approximately $55.1 million.
The company accrued $20.0 million for pending legal proceedings during Q3. The Mirada litigation sought damages exceeding $100 million at the time of the filing’s reporting date, and later pleadings referenced damages exceeding $200 million. Trial was scheduled for February 2020. Management could not predict the outcome and warned of potential material effects on operations, assets and cash flows.
A separate North Dakota wage-and-hour lawsuit was pending; no class-certification motion had been filed as of the filing.
OMP funded $66.2 million of Bobcat DevCo capital contributions during the first nine months, reducing OMS’s ownership interest from 75% to 65.6%. Effective November 1, 2019, OMP also agreed to acquire certain Delaware Basin midstream assets and enter related commercial agreements.
The company paid no cash dividends and stated it did not anticipate paying dividends, citing debt restrictions and the need to retain cash for development and debt repayment.

Important Facts for Investors to Verify

Confirm the registrant: the provided filing is for Oasis Petroleum Inc., not Chord Energy Corp.
Verify the effect of the November 4, 2019 borrowing-base and elected-commitment reductions on liquidity, covenant headroom and debt maturities.
Assess sensitivity to commodity prices, including the disclosed potential for significant future impairment charges.
Review the Mirada and Solomon litigation, the $20.0 million accrual and any subsequent developments or settlements.
Reconcile reported liquidity with cash, unused borrowing capacity, letters of credit, debt maturities and restrictions on subsidiary cash.
Evaluate the sustainability of production growth and operating cash flow after lower commodity prices, higher DD&A and planned capital expenditures.
Distinguish GAAP results from management’s non-GAAP Adjusted EBITDA and Free Cash Flow measures.