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Oasis Petroleum Bonds: The Rout Is On

Summary

The Oasis Petroleum bond route is on – just as expected.

Even if you’re not in the business of “bond trading” selling the bonds here and buying back at deep discounts will do well for blending carrying-yield higher.

Commodity pricing mean reversion, priming risk, and a credit downgrade remain drivers to the asymmetric risk facing Oasis bonds.

I anticipate another 50% downside for each issue within the debt stack at Oasis.

I breakout the data-based case while providing some actionable advice.

The Oasis Petroleum (NYSE:OAS) bond route is on - just as expected. But the good news is, it should only just now be getting started- leaving plenty of room for opportunistic short sellers to take advantage of downward pricing pressure and leaving time for those long exposure to sell exposure down. Even if you're not in the business of "bond trading", meaning even if you're exposed to the Oasis debt stack in a yield-capture priority and are blind to the actual market pricing of the bonds, selling the bonds here (in the mid-$80's for most of the debt stack) and buying back at deep discounts will do well for blending carrying-yield higher. Again, these are concepts I presented in an initiation note back in mid-May. I reiterate these thoughts today and update my thesis prior to Oasis reporting Q2/2016 results.

Updating the Thesis…

Originally, in my initiation note, I thought the Oasis debt stack had exposure to three primary risks: commodity pricing mean reversion (lower to mid-$20's/mid-$30's WTI pricing) - which would change the credit outlook for Oasis (in that it would make higher in visibility the next risks listed), "priming risk" [or the risk that Oasis would issue more debt and/or senior debt (via its First Lien - or its revolver)], and potential downgrade risk driven by what would be a higher visibility into Oasis funding its ambitious maturation plans via increased leverage. As it turns out, all of these factors have come into play since publishing my initiation note. Again, the point of this note is to reiterate my original thesis but also to note that the bond pricing degradation detailed above(in the data-visual) should only accelerate from here forward. That matters. This trade is very, very young and still very, very viable.

With oil pricing being the primary driver of financials at Oasis, and with oil pricing having seen an accelerated collapse in pricing T30D [driven largely, in the opinion of this author, by the resetting of "temporary factors" (mild geopolitical risks, mild supply chain disruptions internationally, a fleeting sentiment shift on a global basis towards a supply balance, etc.)], commodity pricing mean reversion should continue to be the primary driver to downward pressure on the debt stack. This might take place with increased delta after Oasis reports Q2/2016 earnings. I'll be very closely watching both average sales prices realized without derivative settlements and average sales prices realized with derivative settlements.

Yes, I'll be watching in that pricing very clearly matters to the underlying structural integrity of the current debt stack at Oasis (SEE: priming risk noted above) - but...


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