Post by
JohnJBond on Nov 09, 2023 10:54am
Q3 2023 First Thoughts
This morning OBE released its Q3/23 results.
When I first read a quarterly report, my first thoughts are to see how it compares to what I thought (hoped) the company would do.
At this time, my first thoughts go to the funds flow from operations (FFO)
FFO is important to me at this point, because its how I compare OBE's investment merits to other alternative investments.
That means I want to know how OBE's FFO to share price ratio compares to others. At the present time, this is my personal guage of cheap vs fairly priced vs expensive.
Not so long ago, 4X was a good average ratio. Companies priced less than 4 were potentially "cheap", and likewise when over 4 they were potentially "expensive"
Thats a blunt view, in that poor performers deserve lower ratios, and rapidly growing (FFO) companies deserve a higher ratio.
Sometimes you get a company with probable strong future FFO growth, and a low FFO/share price ratio. Those are the companies I look for.
OBE was one of those examples, and its why its my favourite investment choice in this sector.
That said, when a new quarterly report comes out, the first thing I look for, is to see what that FFO/share price ratio is, and if it still is attractive compared to alternatives.
I was hoping for about $118 million in FFO in Q3 (this is before deducting the share based performance program - see below).
What did we get?
The company reported FFO of 98.9 million.
One of the catches when looking at OBE, is their share-based management compensation program. Its based on the quarterly improvement of their share price. ie, when the share price goes up in a given quarter, management gets a bonus in that quarter. Good managment decisions tend to lead to increased share price, which results in this bonus in that quarter.
If the share price stays the same in the next quarter, then this bonus should not be present.
I take that to mean that if everything stayed the same for OBE in Q4, the reported Q4 FFO would be the Q3 FFO, plus the Q3 bonus. For that reason, I like to look at the FFO in a given quarter without including the share price bonus.
In Q3 this bonus was worth $15 million. $13.1 million can be settled with a cash payment. None of these bonus shares vested during the quarter.
As I understand this method, this $13.1 million (potential future cash payment) has to be expensed in the quarter its awarded - ie Q3.
Which means to make the FFO comparable with other companies, this $13.1 million should be added back to the published FFO of $98.9. This results in about $112 million
$112 million is close enough to my hoped for number of $118 million. ie its about 6 million under.
But we are not done there.
What I'm trying to get to, is the amount of money the company is making from its operations.
We can also look at this from the other end - ie sales minus cost of those sales. This is the netback.
Netback is sales revenue minus, royalties, operating costs, and transportation costs.
In Q3, this was $124.3 million. ie about 6 million over my hoped for $118 million!
In simple terms, OBE made $124.3 million from its operations in Q3.
I note that the Q2 netback was $99.7 million - ie they made an extra $24.6 million in Q3 vs Q2 (thats about a 25% increase - thats a positive story!)
Once you have the amount of money generated by operations, you have additional costs, like interest expense for example.
The interest cost was $7.3 million in Q3. ie, amount made from operations, minus interest is about $117 million
The actual financing costs reported in Q3 were $13.2 million. Most of this extra financing cost came in the form of accretions. Its unclear if those are actual cash expenses or not. I prefer to be conservative, so I decided to deduct the entire Q3 financing cost.
If we deduct the whole finance cost ($124.3 - 13.2), we get to about $111 million in Q3.
$111 million is also the Q2 FFO plus the extra netback made in Q3. Further confirmation that $111 million is about the right number for me to use.
This is similar to the FFO number plus the share based compensation figure above.
Rightly or wrongly, my first thoughts are to go with a comparable FFO number of about $111 million.
There are about 79 million shares outstanding (as of the end of Oct).
So that gives us $111 / 79 shares or $1.40 in comparable FFO per share.
Annualize that, and it becomes $5.62 per share.
The share price closed at $10.69, for a FFO to share price multipe of about 1.9X
As I write this the share price is open, and currently $10.94, which gives a FFO to share price multiple of about 1.95X
The comparable ratio for BTE right now is about 2.
CPG is about 2.37
WCP is somewhere in the low to mid 3's, as is CJ
All of which means, OBE is still my prefered investment on a comparable basis.
Now that thought has been explored, I turn my mind to things like positive stories - and OBE's Q3 report is full of them.
Positive stories are how you get a higher than average FFO ratio. This is the other reason OBE is my sector favourite. It has a cheap FFO to share price ratio, and a positive story. This suggests the FFO to share price ratio should go from cheap to expensive, while at the same time the FFO should grow faster than average - ie a potential double share price boost.
Positive Story 1
Average production was 32,939 in Q3.
That is 1,895 more bbl/day that in Q2.
Positive Story 2
Q3 was 32,939
Q2 was 31,042
Q1 was 33,153
Their forecast 2023 average is 32 - 32.5k.
To achieve an average 2023 rate of 32.5 boe/day, they need a 32,868 boe average in Q4.
Given how much drilling etc they are doing in H2, there is a strong probability they will exceed 32,868 boe/day in Q4, and thereby exceed their 2023 production guidance.
Positive Story 3
OBE announced well results that were better than expected.
Positive Story 4
OBE is forthright, and open in its Q3 operational activities. Everything from road building in peace river, to removing bottlenecks etc. OBE's main story is its journey to 50,000 boe/day - ie 16% average production growth over the next 3 years. Big goals like that attract scepticism. The antidote to scepticism is open and authentic communication. In my view, OBE's Q3 report gives off a vibe of authenticity and openness. In my view, thats a postive story.
The better than expected well results also helps reduce scepticism.
Positive Story 5
Lack of upside oil hedges. Some people like hedges - I'm not one of them.
I'm all for protecting one's downside (like hedging natural gas last summer etc), but I do not like the idea of doing it at the expense of giving away the upside. Its like riding a bike with stabilizing wheels. Stablizing wheels are for those who can't ride. Oil companies are often run by oil engineers, who are great at finding and production oil, but are financially illiterate. People like that make finaincal market investment decisions that often don't end well. I think its very positive to not be hedged on the upside.
For example, BTE has a compelling story - except they hedge away some of their upside. If it were not for their hedges, I'd probably hold some of their shares.
There may be additional positives that come to me upon reflection, but those are my first Q3 NR thoughts.
Please keep in mind the above are my thoughts - that doesn't mean they are right.