Q2 2022Q2/22 is now over.
I'm expecting a blowout postive Q2 quarter.
By blow out, I mean much higher FFO in Q2/22 compared to Q1/22 AND much lower debt.
As an added bonus (not sure if bonus is the right word, but it feels like one), there will be a negative performance bonus in Q2/22. This means part of the Q1/22 performance bonus is being clawed back. (its mark to market, so not actually clawed back from managers, but the liability on the balance is reduced - meaning net debt is reduced).
Lets start with the negative performance bonus.
The last NR said a $1 change in share price equals a $3.5 million performance bonus.
The share price ended Q1/22 at $11.08. It just ended Q2/22 at $9.94. That is a decline of $1.14.
1.14 x 3.5 million = $4 million return of prior performance bonus in Q2/22 (ie, an add back of $4 million to FFO in Q2/22).
Now for the Q2/22 FFO number.
I don't have any inside information, and I don't know the exact numbers. That being said, we do know some figures that can be extrapolated to give an idea of what Q2/22 may be.
Here is what we know.
Q1/22 FFO was $78.6 million.
This was after $22.7 million in performance bonus had been removed from FFO.
It was also after about $17 million in hedging cost was removed from FFO.
When we add those two costs back in, the Q1/22 FFO was about $118.3 million.
If sales price and volume stayed the same in Q2 and Q1, then FFO in Q2/22 should be $118.3 million - just like it was in Q1/22 (before hedging and performance bonus costs).
But, sales prices and volumes were higher in Q2, than Q1. So FFO will be higher in Q2.
How much higher?
We don't know their exact sales prices for every product they sold on each day of the quarter, but we do know that WTI averaged US$94.4 in Q1/22, and US$108.8 in Q2/22.
ie, we know WTI increased 15.3% in Q2 over Q1.
Here we get to make our first assumption - that Canadian liquids prices increased about the same percentage as WTI did in the US - ie about 15.3%. (it may not be quite right, but its fair assumption)
Now for volumes.
In Q1/22 the average volume was 29,400 boe, with 19,400 of those boe's being liquids (10,000 boe were gas).
We don't know the average BOE in Q2/22. We do know that on May 4/22 OBE stated their current production was about 33,000 BOE.
Here we get to make our second assumption. If production was 33,000 boe on May 4/22 (near the middle of Q2), then the average Q2 production is somewhere near that. I'm assuming the Q2 average was 32,000 boe (that feels like a reasonable and fair assumption - possibly on the low side).
I'm going to assume that the gas volume is about the same - ie 10,000boe. (it may be a bit higher in Q2, but not much)
That means, the liquids production in Q2/22 was about 22,000 boe
That means liquids production increased from about 19,400 boe in Q1/22 to 22,000 boe in Q2/22.
That is an increase of 13.4 %
I'm going to leave the price of gas out. They got $4.96/mcf in Q1. I think they did better than that in Q2. I don't know how much better, so I'm leaving it out (call it an unincluded positive that may help offset any unincluded negatives). It could be a nice unincluded positive - an extra $1 is about an extra $5 million ish to to the top line.
Returning to liquids.
Q2/22 has about 15.3% higher prices and 13.4% more volume.
Combine those and you get
1.153 x 1.134 = 1.307 or 30.7% more FFO in Q2 over Q1.
Apply 30.7% growth in FFO to Q1 FFO of $118.3 = about $155 million in FFO.
Now, add back the performance bonus claw back of $4 million, and FFO is $159 million.
From that we have to deduct the Q2 hedging cost.
It was about $17 million in Q1 with highly variable oil prices and more hedging than Q2.
The hedging cost will be a lot less in Q2 than it was in Q1.
If you make that hedging cost $9 million in Q2, the FFO is $150 million. (the hedging cost may be less than $9 million)
That doesn't mean FFO will be $150 million in Q2.
But it does mean $150 million is a good point estimate of what Q2 FFO may be.
It comes with a margin of error. Which could make it higher or lower if the assumptions are off.
Considering this esitmate does not include any marginal improvement in the sale price of nat gas, and may understate the actual increase in volume, and over state the hedging cost, it may be low.
All of that said.
Q1/22 FFO of $78.6 to Q2/22 FFO of $150 million is a 90% increase!
A 90% increase in FFO over a quarter, is a headline catching number.
But thats not all.
There was relatively little Capex spent in Q2 - maybe $20 million ish.
We don't know how much was spent in decommissioning in Q2/22. They spent $8.5 million in Q1/22.
Assume they spent the same amount on decomissioning in Q2/22 ($8.5 million).
So maybe $30 million of that FFO was used. Generally speaking that means the rest goes to debt reduction (there are some timing issues so you can say exactly).
But it suggests net debt may of been reduced by about $120 million in Q2/22. ($150 FFO - capex and decommissioning)
Net debt was $448.8 million at the end of Q1.
Reduce that by $120 million, means net debt may be about $330 million at the end of Q2.
Thats about a 26% decrease in net debt over a quarter - another headline catching number.
Note that on June 16/22 in the presentation Q&A they said their net debt on that date was a bit under $350 million - which supports the above estimated debt reduction in Q2.
That is what I mean by a possible blow out quarter - 90% increase in FFO and 26% reduction in net debt! How does the market react to something like that?
Please do your own numbers, and form your own conclusions. What you've just read are mine.
I'm feeling very good about my OBE investment.