Chord Energy Corp annual report, FY2018

Filing scope and business context

The supplied filing is Oasis Petroleum Inc.'s Form 10-K for the fiscal year ended December 31, 2018, filed March 1, 2019. It is not a Chord Energy Corp. filing; Chord Energy was not the registrant identified in the source text. The company was an independent U.S. unconventional oil and gas producer operating primarily in the Williston Basin, with a new Delaware Basin position, plus midstream and well-services businesses.

The filing covers the full 2018 fiscal year. Fourth-quarter data are included in the quarterly financial tables and operating discussion.

Financial and operating performance

Metric	2018	2017	Change
Total revenue	$2,321.9 million	$1,293.7 million	+79%
Oil and gas revenue	$1,590.0 million	$1,034.6 million	+54%
Operating income	$119.0 million	$144.0 million	Down $25.0 million
Net income attributable to Oasis	$(35.3) million	$123.8 million	Declined $159.1 million
Diluted earnings per share	$(0.11)	$0.52	Declined
Net cash provided by operating activities	$996.4 million	$507.9 million	+96%
Adjusted EBITDA	$958.7 million	$707.7 million	+35%
Total capital expenditures, including acquisitions	$2,203.5 million	$836.2 million	+164%

Operating margin was approximately 5.1% in 2018 versus 11.1% in 2017. Net margin attributable to Oasis was approximately negative 1.5% versus 9.6% in 2017. The filing does not present a single consolidated EBITDA margin under GAAP.

Average production increased to 82,525 Boe per day from 66,144 Boe per day, including 78,203 Boe per day in the Williston Basin and 4,322 Boe per day in the Delaware Basin.
Average oil price before derivative settlements increased to $61.84 per barrel from $48.51. The derivative-adjusted oil price increased to $52.65 from $47.99.
Natural gas price before derivative settlements increased to $3.88 per Mcf from $3.81.
Lease operating expense declined to $6.44 per Boe from $7.34 per Boe, while marketing, transportation and gathering expense rose to $3.56 per Boe from $2.31.
Cash flow benefited from higher production and prices, but investing cash outflows reached $1,613.5 million. Free cash flow, as defined by management, was negative $1,406.8 million because of acquisitions and capital spending.
Cash and cash equivalents were $22.2 million. Working capital was negative $57.6 million, but reported liquidity was $972.2 million, including $950.0 million of unused revolving borrowing capacity.

Debt, liquidity and capital structure

Long-term debt carrying value was $2,735.3 million at December 31, 2018, compared with $2,097.6 million at December 31, 2017.
Outstanding principal consisted of $468.0 million under the Oasis Credit Facility, $318.0 million under the OMP Credit Facility, $1,739.4 million of senior unsecured notes and $300.0 million of senior convertible notes, with total notes principal of $2,039.4 million.
The Oasis Credit Facility had $868.0 million of unused borrowing base capacity after $468.0 million of borrowings and $14.0 million of letters of credit. OMP had $82.0 million of unused capacity after $318.0 million of borrowings.
The company was in compliance with its debt covenants at year-end and reported no short-term debt maturities. However, maturities and refinancing requirements are concentrated in 2021 through 2023.
In 2018, the company issued $400.0 million of 6.25% notes due 2026, repurchased $390.6 million of senior notes and redeemed the remaining 2019 notes. It recorded a $13.8 million loss on extinguishment of debt.

Material changes versus the prior comparable period

The February 2018 Permian Basin Acquisition added approximately 22,000 net Delaware Basin acres for approximately $549.8 million in cash and 46 million shares. The company later expanded its Delaware position to more than 23,000 net acres.
Production and revenue rose substantially because of the acquisition and a larger drilling and completion program. The company completed and placed on production 121 gross operated wells, versus 153 gross total development wells completed in 2017.
Total proved reserves increased 3% to 320.5 MMBoe from 312.2 MMBoe. This included 38.4 MMBoe of additions and 32.9 MMBoe from acquisitions, offset by 30.1 MMBoe of production, 16.9 MMBoe of net negative revisions and 15.9 MMBoe of divestitures.
Net negative reserve revisions were principally associated with well performance and higher-than-anticipated decline rates in recently developed spacing units. Proved developed reserves were essentially flat at 201.1 MMBoe.
PV-10 increased 27% to $4,674.3 million from $3,683.7 million, primarily because of higher SEC price assumptions and increased reserves.
The company recorded a $384.2 million impairment charge, including $383.4 million related to the Foreman Butte properties held for sale. This was a major reason operating income and net income deteriorated despite higher revenue and operating cash flow.
The company revised prior-period presentation of certain crude oil purchase and sale arrangements from net to gross. The revision increased 2017 revenue and expenses but did not affect net income, earnings per share or operating income.
Management and the auditor identified a material weakness in internal control over financial reporting related to the presentation and disclosure of those crude oil purchase and sale arrangements. The auditor issued an adverse opinion on internal control effectiveness.

Guidance, outlook, risks and unusual items

For 2019, management planned total capital expenditures of approximately $690 million to $730 million, including $540 million to $560 million for E&P and other capital and $150 million to $170 million for midstream capital.
The 2019 plan contemplated approximately 70 gross operated Williston Basin wells and 9 to 11 gross operated Delaware Basin wells, a reduction in Williston activity from 2018 because of commodity prices.
Management expected to fund the plan with operating cash flow, derivative settlements, cash on hand and revolving credit availability, while retaining flexibility to defer spending or pursue asset monetizations.
Fourth-quarter 2018 Williston differentials widened materially because of refinery maintenance and record basin production. Delaware Basin differentials averaged more than $4 per barrel below WTI because of pipeline constraints; management expected 2019 pipeline expansions to improve takeaway beginning in mid-2019.
Commodity prices, reserve revisions, drilling performance, transportation constraints, service costs, access to capital, environmental regulation, hydraulic fracturing and produced-water disposal remain significant risks.
The company reported a material legal contingency in the Mirada litigation. Mirada sought more than $100 million in damages and asserted rights affecting Wild Basin operations and midstream revenues. Trial was scheduled for February 20, 2020, and the company stated that the outcome could materially affect operations, cash flows and financial condition. Oasis agreed to indemnify OMP for losses related to the litigation.
The company had $627.96 million of estimable future volume commitment obligations, plus additional commitments whose amounts could not be estimated because they depend on commodity price differentials. It also disclosed $52.45 million of asset retirement obligations.
Commodity derivatives covered 15.4 MMBbls of crude oil and 11.0 Bcf of natural gas for 2019 at year-end. The derivative portfolio had a net fair value asset of approximately $106.8 million, and 2018 included $213.5 million of derivative settlement payments.
The company expected adoption of lease accounting standard ASC 842 on January 1, 2019 to have a material balance-sheet effect through recognition of right-of-use assets and lease liabilities.

Most important facts for an investor to verify

Verify the issuer identity: the supplied filing is Oasis Petroleum Inc., not Chord Energy Corp.
Reconcile the large increase in revenue with the substantially higher capital spending, acquisition funding and negative management-defined free cash flow.
Assess the sustainability of production growth and investigate the negative reserve revisions and higher decline rates in recently developed spacing units.
Review the $384.2 million impairment, the Foreman Butte divestiture and the assumptions supporting fair value and future cash flows.
Evaluate debt maturities, borrowing-base redeterminations, covenant headroom and refinancing needs through 2023.
Follow remediation of the material weakness and confirm whether future filings contain additional revenue, expense or balance-sheet revisions.
Monitor oil price differentials, Delaware takeaway expansions, derivative floors and ceilings, and counterparty exposure.
Review the Mirada litigation, indemnification obligations and potential effects on Wild Basin operations and midstream economics.