RE:VikingIts going to be really interesting to see what OBE decides for its 2023 plan.
On the one hand they have all their heavy oil area to explore. Given that their recent purchases have all been in this area, suggests that someone (probably more than one), with decision making influence, is excited about heavy oil, and this asset in particular.
On the other hand, at current prices, light oil will be out performing heavy oil.
However, what you drill today, you don't sell until tomorrow. ie, if you shoot at where the target is right now, you will miss because the target will be somewhere else tomorrow. Its all about firing at where the target will be, not where it is now.
We all have different ideas about where the target will be.
Behavioural finance is about how psychology affects investment decisions.
The average person overweights current information when predicting the future. (which means they need random luck to be correct)
Thats why you do not want an average person making strategic investment decisions.
OBE has many options.
1. We have a point extimate of their 2023 budget from their preliminary budget published early in 2022. One based on $95 oil, 37500 boe/day, $660 million FFO and $270 million capex.
2. How will this change?
3. Every $10 in WTI is about $100 million in FFO (rough but close enough).
4. ie $80 WTI gives them $500 FFO
5. $270 million in capex is still very affordable when you have $500 FFO.
6. WTI would have to be $60 (or less), before capex would equal FFO.
7. It follows that reducing capex is unlikely from the point of view of being unable to afford it.
8. They could reduce capex if they wanted to increase free cash flow (to reduce debt, buy back shares, or start a dividend). This is possible, but may require an internal pivot in leadership thinking.
9. If they do not reduce capex, then they have to decide how to allocate it between competing projects. At current prices, and lower prices, the Viking wells are appealing. We can see from their permits that Viking is getting a larger share of Q1 capex
10. The money spent on Viking may come from heavy oil.
11. The tricky part is heavy oil drilling is mostly a winter activity - so what you don't do this winter, you may not be able to do until next winter.
12. The other tricky part is that while heavy oil is relatively cheap today, it may not be later in the year. US natural gas is cheap now, which means the cost of refining heavy oil has declined. Transmountain pipeline will likey be flowing next winter.
What does that all add up to?
1. Capex probably won't be changed (up or down).
2. Viking drilling will happen in Q1. The results they get from drilling next to thier successful step out hole may determine how much Viking drilling they do in Q1 and Q2. ie, rather like a snow ball rolling down hill.........once it gets going it may increase in size.
3. Heavy oil - its hard to tell what they do there in Q1. I suspect much depends on the results of current new holes. Do they increase exploration over production while heavy oil prices are low? Exploration risks dry holes, but it adds value by increasing reserves if successful. The exploration has to be done. Its better to explore during low prices and produce during high.
At the end of the day its about matching your own forcast with that of your inventment management team's
If you expect oil to stay the same price or decline this year, then OBE may not be a good company for you.
If you think oil prices increase this year, then OBE may be a good match. In my view, OBE's forecast is for increasing oil prices, and they will be aiming for a target thats higher not lower. Thats were I want them to aim, which is why my money is where my mouth is.
ps, with current prices (WTI $80) and capex of $270-$300 million, they should be able to hit their debt target by the end of Q1 and buy back 10% of their shares in Q2. The only thing that can turn that into a negative, is disappointment from not having done it 6 months earlier - that disappointment is a sunk cost.
ps 2. Reports from China over the New Year Weekend are that some of the major cities are returning to normal (ie the covid wave peak has come and gone). That situation will get better every day. Chinese oil consumption will increase with increased mobility and activity. Word will spread, and oil prices will increase.
ps 3. The R0 for the current covid strain is so high (15-20) that the wave is very steep, very high, and very brief. China has gone from flatten the curve to steepen it. From covid zero to covid 100%. Its now been 4 weeks since China ended covid zero. That is enough time to hit a peak in high density cities - supporting the anacdotal reports.