Oasis Petroleum Inc.

Good morning and welcome to the OASIS Business Update. All participants will be in listen-only mode. If you need assistance, please signal a conference specialist by pressing the Start key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the conference over to Mr. Michael Liu, Chief Financial Officer. Please go ahead.

Thank you, Nick. Good morning, everyone. Today we are providing preliminary operating and financial metrics for the fourth quarter of 2021, along with our 2022 outlook and formalized return of capital plan. We're delighted to have you on our call. I'm joined today by Danny Brown, Taylor Reed, as well as other members of the team. Please be advised that our remarks, including the answers to your questions, include statements that we believe to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently disclosed in our release and conference calls. Those risks include, among others, matters that we have described in our releases as well as in our filings with the Securities and Exchange Commission, including our annual report on Form 10-K and our quarterly reports on Form 10-Q. We disclaim any obligation to update these forward-looking statements. During this conference call, we'll make references to non-GAAP measures, and reconciliations to the applicable GAAP measures can be found in our releases and on our websites. We may also reference our current investor presentation, which you can find on our website. With that, I'll turn the call over to our CEO, Danny Brown.

Thanks, Michael. I'd like to start out today by thanking everyone for joining our call this morning. because I think we've got some really exciting details to share with you today. But before we begin, I'd first like to thank the employees of Oasis Petroleum for their hard work and dedication, which resulted in 2021 being a transformational year for our organization. So just a moment of reflection there. Over the course of the last year, the organization announced its first fixed dividend, which we subsequently raised later in the year, simplified our midstream structure, sold assets in the Permian Basin where we didn't see ourselves being able to build scale, and bought assets in the Williston where we did, paid a $4 per share special dividend, completed a $100 million share repurchase program, and announced the merging of Oasis Midstream Partners into Crestwood Equity Partners, a transaction which we believe was critical to help unlock the full value of our assets for our shareholders, which closed last week. Simply put, it was an amazing year. And to build on those actions, I wanted to spend a moment this morning talking about the return of capital program we announced yesterday. While I hope our actions through the course of 2021, which returned approximately $210 million to shareholders for the year, demonstrate our commitment on this topic, I also recognize that increased transparency would be helpful for investors. In light of that, and because returning capital is a key tenet of our strategy, last night we announced a fixed $280 million return program for 2022, which I believe, A, delivers more certainty to investors on the amount we will be returning, B, provides meaningful capital return in line with peers across a variety of metrics, and C, retains flexibility for the organization to pursue other value-enhancing opportunities, including M&A or accretive organic growth, should prices and conditions warrant. The $280 million program increases year-over-year returns by 33% and does so through a combination of a fixed dividend, variable dividends, and share repurchases. As part of our return program, we are increasing the base dividend immediately to an aggregate annual amount of $45 million. Given the share repurchases that took place in 2021, this yields a quarterly dividend of 58.5 cents per share, up 17% from the 50 cents per share we announced in November. Complementing this increase to our base dividend, OASIS expects to announce a variable dividend at the end of each quarter based on the difference between $70 million, which is one quarter of the annual $280 million program, and the amount used to pay the base dividend and repurchase shares during the prior quarter. We expect both variable dividends and share buybacks to play a role in our capital return framework, and we'll revisit the plan as the year progresses. And in conjunction with our plan, we also announced the approval of a new share repurchase authorization for $150 million. So now I'd like to pivot the discussion to our operational performance and plans. So let me start with how we closed out last year by shifting my commentary, before shifting my commentary to 2022. First, a little bit about our year-end reserves. As you likely noticed in our press release, year-end reserves are up significantly year-on-year. Proven reserves, including the impact of acquisitions, divestitures, prices, development planning, O&P deconsolidation, and revisions are up 38% to approximately 251 million barrels of oil equivalent. Our cost of development for 2021 was a very attractive $9.60 per BOE. However, our year-over-year reserve changes do include some negative revisions, and we've trued up our forecast with actual performance and feel like we're in a good spot moving forward. With the positive change in SEC pricing and reserves, it's unsurprising that before tax PV10 value is up significantly to $3.1 billion. So to finish up with comments on 2021, let me talk about the fourth quarter for a moment, where I'm pleased with the continued strong performance with cost, both on a capital and expense side, which led to strong EBITDA and free cash generation. In total, capital costs for the fourth quarter were roughly $20 million lower than guidance, despite the inflationary pressure we are seeing in the market. While much of this is the result of the good work of our engineers and field operations team, some is also the result of decreased activity, which translates to slightly lower volumes. So to discuss that for a moment, in the fourth quarter, we had a few items impact volume delivery. I think many folks recognize the really tough weather we had in December, which certainly played a role. But we also significantly reduced our work over rig activity, leading to many more wells than normal being offline. We reduced this activity deliberately to address some concerns we were seeing with safety performance. While I'm very proud that our 2021 incident severity is at a several year low, the absolute number of incidents across the organization is higher than we'd like it to be. And our issues on this front have been most pronounced with our work over operations. To be clear, The safety of our employees and contractors is of paramount importance to me and this organization. So we took a pause with our work over activity to ensure our expectations with respect to safety were well understood by all and that all of our employees, contractors, and service providers were aligned around the items we need to focus on to improve our safety performance. While we're largely back up and running on this front, we do have a backlog of downed wells that we will be working through in the early part of 2022 to reach normal downtime levels. Finally, I want to talk briefly about our Nikolai wall development in the northernmost portion of Wild Basin. We currently expect this program to develop a full cycle, fully loaded rate of return of around 90% at 60 and 3 pricing. These results are highly economic, but are below our original expectations. The units are located adjacent to an area of high structural flexure as you climb out of the basin center to the Nessun anticline. They also happen to be in an area of very heavy development and adjacent to some strong performing DSUs. From what we've observed with the early production and pressure data, these two units appear to have been connected to the neighboring DSUs, likely through natural fracturing, which has resulted in greater depletion than modeled and had a resulting impact on volumes for the quarter. So, with that commentary for the fourth quarter of last year, I'd now like to turn comments over to our expectations for 2022. As we evaluated the landscape of rising prices, experienced crew shortages, and service availability, rather than scramble to work with unproven service providers, and pay elevated rates to slot in activities to deliver a volume answer. We constructed a program that focuses on operational consistency, which we believe will lead, most importantly, to safer but also more efficient and cost-effective operations. The impact of this approach is reflected in the 2022 plan, which seeks to maximize continuity with our rigs and completion crews. We believe operational consistency is an important element in delivering high operational performance. This approach results in a 2022 program, which delivers a group of wells starting late in the first quarter and then has a continuous completions crew running starting in late May. In total, this delivers 41 wells over the course of 2022, including 11 three-mile laterals. While we believe this is the right approach, it delivers about 10 fewer completions for the year than we originally contemplated, with the first group of wells coming online toward the end of the first quarter instead of the beginning. When combining this development plan with the impacts of the workover backlog and Nikolai Wall project I mentioned earlier, we forecast delivering volumes at a midpoint of 67.5 million barrels of oil equivalent with 67.5 thousand barrels a day with significant capital savings over our originally contemplated plan. We think our development plan avoids approximately 60 million in 2022 and expect a capital program of approximately 295 million for the year. I would note that this amount includes about a 15% increase in well costs versus our expectations in the second half of last year. Taylor will cover some more details on our development plans when I turn it over to him in just a few moments, but we think this program sets us up well for a successful 2022. Finally, I wanted to touch on our ESG plans for the year. As you know, 2021 was a pivotal year on this front as the company released its first sustainability report as well as investor short debt. This allowed the company to set a baseline for performance and improve transparency and reporting on our ESG efforts. Going forward, you should expect to see more progress, including enhanced disclosures on our performance and target setting to drive key strategic objectives and improve our operations. With that, I'll turn it over to Taylor to expand on our operational results and give more insight on the 2022 program.

Thanks. Thanks, Danny. 2021 was the year of increasing activity after the slowdown of 2020. OASIS completed 23 wells over the course of the year and achieved low costs driven by improved design changes and record frack efficiency. As we enter 2022, the environment continues to change. Activity has picked up significantly, and the service industry is adjusting to stronger demand. We're seeing inflation of many items, which is putting upward pressure on both well and operating costs. Given this backdrop, OASIS has chosen a level-loaded two-rig program in 2022, which results in more modest production levels and lower capital, along with higher returns. We could have elected to spend more capital and deliver higher volumes, but chasing marginal services often results in poor efficiency and lower returns. We are confident we can deliver our 2022 program, and it will result in superior returns, significant free cash generation, and high shareholder distributions. In 2022, we expect to run an average of two rigs in the Williston and complete about 41 gross operator wells with an average working interest of 72 percent. We're expecting nine of the 41 completions in the first half of 2021. The remainder of the wells will be completed in the second half of the year. Importantly, while we are completing fewer wells than originally expected and completions are back in loaded, We were expecting to retain the same drilling rig and frack crews, which delivered strong efficiency in 2021 and should lead to continued safe and efficient operations in 2022. Our development areas will be more diverse than 2021, including South Nessun, Indian Hills, Fort Berthold Indian Reservation, and the city of Williston. We expect this program to deliver approximately 65 to 70,000 barrels of oil equivalent per day for the full year 2022 with an oil cut of about 64%. Volume should be fairly steady throughout the year, although we do expect the fourth quarter to be our highest given completions activity is back in loaded. The organization made tremendous progress in 2021 by reducing our cost structure, improving efficiencies, and finding new ways to improve our returns, like three-mile laterals. The relentless focus on continuous improvement should serve us well as we progress through 2022. With that, I'll now turn the call over to Michael.

Thanks, Taylor. OASIS provided preliminary fourth quarter results for certain operational and financial items. Complete fourth quarter results will be published in a press release and in a 10-K later in February, but we do not expect to host a call with that press release. Beginning with the fourth quarter release, you will see that the impacts of the OMP Crestwood merger leading to deconsolidated financials in our GAAP filings. This will highlight our core EMP business as GAAP financials will begin to look similar to our non-GAAP guidance. Capital is expected to range from 45 to 47 million in the fourth quarter, below original guidance of 60 to 70 million dollars. full-year 21 E&P and other CapEx came in around $168 to $172 million, a 24% decrease from our $215 to $230 million plan that we announced after adjusting for the Wilson acquisition and the Permian divestiture. The reduction in spending reflects a series of factors, including strong efficiencies, scheduled timing, well completions towards the low end of our range, and higher third-party participation in OASIS-WELLS and lower spending on non-DNC items. The team has done an exceptional job controlling costs this year and driving efficiency, and this will remain imperative in 2022 as we go through a period of rising costs. Last week, the merger between OASIS Midstream Partners and Crestwood closed. In exchange for its OMP units, OASIS received $160 million in cash and approximately $21 million of Crestwood units. I just want to reemphasize how beneficial this merger is for all parties involved. The addition of OMP is a strong complement to Crestwood, which is a highly regarded diversified midstream operator with a large and now even bigger footprint in the Williston Basin. OASIS feels confident Crestwood is the right midstream provider to handle a large portion of OASIS's hydrocarbons and produce water, and looks forward to a long and productive relationship. Additionally, this transaction helps unlock the value of our midstream business by allowing for deconsolidated financial reporting. As noted in our press release, OASIS recognized a gain for income tax purposes as a result of certain restructuring transactions entered in December. Additionally, OASIS recognized a gain for tax purposes on the $160 million of cash consideration paid to OASIS in the OMP Crestwood merger. In light of these gains, we determined that the tax benefits preservation plan that we put in place in August of 2021 was no longer necessary to preserve our net operating losses and other tax benefits. As a result, we have terminated the tax benefits preservation plan And this should be encouraging news for shareholders who want to build a position of greater than 5% of shares outstanding. OASIS had $172 million of cash at year-end 2021, and with the closing of the Crestwood merger, OASIS received $160 million in cash, bringing our pro forma year-end cash balance to approximately $332 million, with our only debt being $400 million of senior unsecured notes. Based on these numbers, we would have proforma leverage of less than 0.1 times if you annualize the fourth quarter 21 performance and add the expected distribution for Crestwood's $55 million per year. Also during the fourth quarter, OASIS paid $138.5 million to modify 19,000 barrels a day of swaps. Pricing was reset to $70 per barrel versus $50 previously. As noted in the press release, we also repurchased approximately 680,000 shares during the fourth quarter for $85.4 million. So in summary, Oasis is proud to continue to focus on returns, both return on capital and return of capital. Our organic capital program is one focused on delivering superior returns for the company and for our shareholders. In addition, we announced a formalized return of capital plan, which results in significant returns to shareholders, $280 million, which nearly mirrors the amount of capital we will be using in our organic capital program. OASIS is focused on delivering sustainable free cash flow and maintaining capital discipline, and we have the depth of inventory and the strength of balance sheet to deliver this on a consistent and recurring basis. With that, I'll turn the call back over to Nick for Q&A.

Thank you. And I'll begin the question and answer session. To ask a question, let me press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. This time, we'll pause momentarily to assemble the roster. First question comes from Derek with the Willis People. Please go ahead.

Good morning, all, and congrats on your update. Thanks, Derek. With my first question, I wanted to focus on the capital plan for 2022, certainly with an appreciation for the capital discipline you've shown with this announcement. Could I ask you to speak to the operating and inflationary environment in the Williston today, and if you expect some of the conditions to improve as we progress through the year?

Yeah, like, Derek, like Danny talked about, we're projecting about a 15% increase from kind of where we were second half of last year, kind of in the last year, and see that kind of, you know, picking up on an ongoing basis throughout the year. So 15% increase in total for the year. When you look at where it's coming from, it's really kind of a mixed bag depending on, what the service or product is. And so steel, obviously a lot of pressure. Labor has had quite a bit of pressure. Trucking. And in certain materials, chemicals are up in some areas. So it's really a bit of a mixed bag, but overall kind of a 15% increase on low cost.

Great, and as my follow-up, staying with you, Taylor, could you speak to the timing of your first three-mile lateral and your expectations on the degree of improvement in capital efficiency?

Yeah, so the first, we've actually drilled our first three wells. Those will be completed in the summertime. And we've got... about 20 to 25% of our total program this year will be three-mile lateral, so a nice piece. And then as you think about capital efficiency, we're projecting kind of 25 to 30% increase in cost to drill the three-mile versus up to a 50% increase in reserves. We're a little more conservative just coming out of the chute, probably more like a 40 plus, but think you'll get to that 50% reserve increase over time. And so you can factor those two things in so you get a nice bump in efficiency, capital efficiency standpoint. Great, very helpful.

Thanks for your time. Thanks, Derek. Thanks, Derek.

Thank you. Again, if you have a question, please press star then one. Our next question. from Davis Petro's RBC Capital. Please go ahead.

Good morning, y'all. Thanks for taking my question. I guess the first one, I'm kind of drilling in more to your defined shareholder return proposition. I appreciate the transparency and the visibility y'all are giving investors, but I guess the elephant in the room, the $280 million is assuming a $70 price deck when the strip's towards $85. So I guess, how are you thinking about maybe revising that over the year, or is that $280 pretty locked in for 2020 and it's more of a 2023 discussion on increasing that proposition?

So I think we'll continue to monitor that across the year. If we see strong performance, we certainly have an opportunity to visit with our board and talk about increasing that program. The cash generation capacity organization, as well as the strong financial position we're in, would allow us to do something like that, but we're going to monitor it as the year progresses.

Got it. All right. And I guess just kind of piggybacking on that, would that be something that would be more of a – a surprise per se, maybe that you return more than $70 million in a quarter, or would that be something you try to telegraph before that maybe on 2Q earnings for the back half, you're increasing it to, I don't know, $80 or $90 million per quarter? How do you think you'd maybe approach that or don't really have an opinion right now?

I'd say, well, I'll kind of go back to what I said a moment ago. We'll monitor it as the year goes forward. We'll see where prices are, and we'll be transparent about what we plan to do.

Got it. And if you don't mind, maybe sneaking in one last one. You talked about the optionality with kind of how robust the free cash flow outlook is, either going towards more consolidation or maybe some organic growth. I would appreciate maybe giving your updated thoughts between the two. I think previously you all talked about a desire to kind of grow the business through inorganic efforts. So maybe if there's an update to how the M&A landscape is looking in the Bakken, that would be appreciated.

Sure. Great question. So we continue to be believers that scale matters, and we've kept our eye on the landscape of different M&A and acquisition opportunities. We'll continue to have a keen focus on that. It'll be under a premise that, you know, if we're getting bigger, we need to get better, and that the real purpose is getting better, and I think that if we build scale in the right fashion, there's true operational efficiencies that we can gain from that, running a completion crew, continuously across the year, having geography of DSUs lining up to allow for more three-mile lateral drilling like Taylor talked about, just a whole number of operational things where we can bring synergies out of sort of building appropriate scale within the basin. So we'll be very focused on those opportunities. That's not to mention the sort of increased investor relevance and cost of capital benefits that we could get from doing something like that and the G&A savings we might have. We think it's an important element. Industry needs to continue to consolidate, and we need to participate one way or another in that consolidation. So that'll be a focus for us. Got it. Appreciate the time.

Thank you.

Thank you. Next question comes from Phil Johnson of Capital One. Please go ahead.

Hey, guys. Thanks. Just a couple of housekeeping questions, I guess, for Taylor. wanted to ask you about the 15% of CapEx that's going to non-D&C activity for the year. Can you maybe give us an example as to what that's your mark for?

Yeah, so non-D&C, you know, contains a, you know, a bucket of things. The biggest ones there are work over capital. So it's, you know, capitalized artificial lift equipment, workovers, things of that nature. Also, you contain land in that bucket. And so those are probably two of the bigger ones. There's some facilities cost as well.

Okay. And then we appreciate the guidance on the operated well count and the average working interest and the timing that you guys laid out. I'm just curious as to if there's any material non-activity plan for the year.

Yeah, we do have some non-op activity. It is relative to the overall budget. It's fairly modest. We've just, you know, over time, we did a great job of doing a lot of trades, and so trading out of other people's positions and getting more into our positions. So we do have, you know, a program, but it's not material.

Okay, so I guess on a net well count, it should be fairly small then?

Yes, correct.

Okay, thanks Taylor.

Again, if you have a question, please press star then 1. This concludes our question and answer session. colleagues. I turn the conference back over to Chief Executive Officer Danny Brown for closing remarks.

Thanks, Nick. Again, I'd like to finish off by thanking all of our employees for their hard work and dedication. I'm very proud of our accomplishments over the course of 2021 and look forward to building on our successes in 2022. Thanks for joining our call.

Conference is now concluded.

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