NEW YORK (TheStreet) - With oil below $55 a barrel, Oasis Petroleum (OAS) hasn't seen these kind of prices since it went public in mid-2010, but that doesn't mean the Houston-based company that operates in North Dakota and Montana's Bakken shale-oil formation can't withstand the downturn.
During the last few years, when crude prices were mostly between $70 and $110 a barrel, Oasis increased its production from about 8,000 barrels of oil equivalents a day in 2011 to about 45,400 barrels a day, its target for this year. It's understandable, therefore, that investors are concerned about the company's ability to survive plunging oil prices. The company's shares have fallen by about 70% to around $13.50 this year.
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Gabriele Sorbara, an analyst at Topeka Capital Markets who has a buy rating on the stock, explained that current prices make Bakken an uneconomical region to drill for oil and gas, as opposed to Texas's Permian Basin and Eagle Ford that he said "are the lowest cost domestic resource plays".
But Sorbara said that Oasis can weather a downturn, at least through 2015, because it has "a few years of highly economic inventory in the Bakken" and has hedged more than half of its 2015 production at a floor price of $89.13 a barrel.
Moreover, Oasis has reduced its spending plans for next year which, Sorbara said, is a "prudent move" because it will allow the company to spend closer to its cash flow while still increasing its production. The company will also focus on developing its low-cost properties at Bakken that break even at $50 a barrel, according to Sorbara's estimates.
Last week, Oasis said that it will reduce its capital spending for next year to between $750 million and $850 million, lower than this year's budget of $1.4 billion. The company is eyeing production growth of between 5% and 10%, as opposed to the third quarter of this year when it increased its daily production by 38.7%.
The good news for Oasis Petroleum's investors is that oil staying below $60 a barrel is a worst-case scenario, which might not happen.