RE:PresentationGreat post John!
Annual capex of 150M (all be it they can revisit) was 10-20M lighter then I thought.
The drilling results at end of 2021 in Peace River prob one reason for this.
Need less capital in Prop for the production.
JohnJBond wrote: These presentations are well prepared and scripted.
I find the questions and answers to often be most interesting.
There were lots of questions, covering a wide area from finance to geology.
Parts that stuck in my mind.
1. The Capex. Today they guided to just under $150m in Capex. They also noted it was front loaded, and would be revised mid year.
A well placed question asked for the details - ie how much in Q1 or H1. Q2 is typically breakup, when most cap ex is put on hold. The answer was just over $100m ($105 was the estimate).
Translation - they are spending $100 million in Q1 drilling! Q2 they sit back and rack in the cash! Then decide how much they are going to spend in the second half of the year. Thats roughly equivalent to a $300 million cap ex plan!
Translation 2 - it means they expect Q1 cash flow to be a similar number, or more.
Given the uncertainty of 2022 - ie will Covid end in Q1, and air travel return to normal in Q2. Meaning full-on oil demand growth and we all find out how much ( or how little ) supply reserves OPEC really has. ie, Oil has the potential to get a lot more expensive this year, OR, maybe covid continues, demand stays where it is and supply edges up keeping oil around where it is now. The answer to these questions will be much clearer by mid year.
In otherwords, OBE has just given us a H1 forecast (actually a Q1 forecast). Which is the limit of what a competant management team can do.
2. The Heavy Oil Wells.
A few questions tried to explore these wells. The key info is they are drilling 500 BOE wells.
They cost about $2.5 million each.
They have the infrastructure to tie in a number of these new wells without constraint. We don't know how many they can add before they run into bottlenecks - but its not anytime soon.
These wells generally have low decline. I don't know what their specific decline curve looks like, but I don't think they drop that much - maybe others can add some colour here - ie, what does a 500 BOE well produce settle in at, and how long does it last?
Financially these wells are relatively more expensive to operate. That is why when oil prices decline, they are the wells that get shut in.
I don't know the operating costs of the PROP wells, but what I do know, is that over a certain price threshold, they are cash cows.
The Questions/Answers touched on this point by saying that presently the Cardium and Prop wells are roughly equivalant interms of financial attractivness. In more financial terms, that means they presently have similar Net Present Values.
This is important information, because it means we are presently at the tipping point. As oil prices increase from here, the PROP wells will be more attractive financially than the cardium wells. If you are like me, and you think oil prices go higher from here (and more importantly will be higher for longer), then this is important news. It suggests H2 may tip development into a focus on 500 boe, $2.5 million wells.
This raises intriging questions - like how many 500 boe wells could you drill in H2 with $100 million? How many 500 boe wells can you tie in without hitting facility bottlenecks (and how long would it take, and how much would it cost to address those bottlenecks?)
If capex focus does tip towards PROP, it suggests production growth will be much higher than forecast (becuase of the relative lack of decline in PROP wells vs Cardium wells)
3. Financial questions.
They intend to refinace all their bank debt into some type of debintures - ie probably 5 year term notes that pay something like 7% ish interest.
They didn't tell us how much they are going to lock into debt
They did say they expect to have this done pretty soon - thats how I heard it anyway. I heard, in the first half of the year, and probably sooner.
If I had to guess, I'd predict Q2 because of less spending and more cash flow.
4. Free Cash Flow Questions
They would not make any firm suggestions about what their plans are with the free cash flow after the debt has been refinanced.
They basically said - trust us, because we are significant shareholders too - ie we will make decisions that will maximize share value.
It appears to me they are getting questions about share buybacks. I say this becuase they said their decisions will be shaped by the share price at the time. The theory behind share buybacks, is you only do so when your own shares are the most attractive use of capital.
Personally I don't like share buy backs. If the market doesn't value what you are doing, a share buy back is an attempt to cover that over (its similar to a reverse share split for example). The more appropriate action is to change what you are doing, and start doing something the market values.
They mentioned Buybacks, Dividends, Production and Acquistions. That is the full range of options. They used the word "fluid". Translation, they will do what makes sense when they get there.
Its rather like asking someone what they will spend their 2022 bonus on? I have my personal preferances, but in the end, its speculation until the cash is in hand.
This managment team won't speculate in public. They tried to reassure us by saying we all want the same thing - which is a higher share price.
They may want a higher share price more than us - as their bonuses are dependant upon it.
In my view, the best near term multiple expansion will occur when a material dividend is declared. Penn West (our piror name) was a oil/gas trust, and that structure got them to a share price of $350 ish.
OBE, with 2.5 billion in tax pools, can be a synthetic oil trust for several years.
Debenture holders don't like big dividends (the more cash in the company, the lower risk, and more valuable the debentures become). Given the upcoming debinture deal, it may be expected that future dividend strategies would not be discussed.
5. 2022 production.
They are guiding 13% growth from 150 million ish in cap ex. As discussed above, this is mostly being spent in Q1, with H2 currently only being assigned 40 million ish. If H2 in increased (as I expect), then growth will be quite a bit better than 13%.
They are forecasting 29,100-30,100 boe. Translation - they will be at 30,000 boe plus in Q1
Translation 2 - They could be 30,000 - 35,000 boe or more by the end of the year if raise H2 cap ex above $40 ish million. In my view, the probablility of that is pretty high.
6. Take over
OBE's enterprise value is about 2 times its funds flow. It's forecasting 13% growth based on low capex of just $150 million (way less than half its funds flow). If the share price doesn't jump soon, someone with a spare billion or two may buy the whole thing - and make a killing!