What happened
Shares of oil and gas producer Oasis Petroleum (OAS) are down 26.3% as of 11:30 a.m. EDT today. Even though the company reported second-quarter adjusted earnings that were more or less in line with Wall Street's expectations, management's decision to increase capital spending has some investors concerned.
So what
On paper, Oasis Petroleum's results don't look like something that would merit a large stock drop like this. Earnings for the quarter, adjusted for some one-time non-cash gains, came in at $0.03 per share. That result missed analyst expectations by a penny.
Image source: Getty Images.
The larger reason Oasis' stock is taking today is that the company revised its capital expenditure budget for fiscal 2019. Management now expects to spend between $850 million and $890 million from an initial plan of $750 million to $790 million because of improved drilling efficiency at its rigs and higher working interest on both operated and non-operated wells.
A higher budget sounds good at first glance until you look at the cash flow statement. So far in 2019, the company has spent $102 million more than what it brought in for the year. With oil prices still in the low $50 per barrel range, it's hard to see a scenario where increasing capital spending is going to actually improve that cash flow number.
Now what
For the past several years, several oil and gas producers have been burning through cash, and Oasis Petroleum has been one of the guilty parties. It has outspent its cash-generating abilities every year for close to a decade. It would appear that it intends to maintain that streak in 2019.
OAS Free Cash Flow (TTM) data by YCharts
Many oil and gas investors are at their wits end with companies burning through cash like this and relying either on debt, equity, or asset sales to support its capital spending plans. Today's stock drop is evidence that few investors are willing to hang around to let Oasis prove that it can generate a positive cash return for investors.
Unless the company can prove it can do that -- and there is little evidence that it ever will -- investors should avoid this stock.
