NR Jan 31/22 thoughts Its a bit of a muddle reading through todays News Release. Here is my impression.
Production Forecast
They've given production guidance that should be easy to beat.
32,000 - 33,500 boe average for 2023 when they were at 33,000 boe on Nov 8/22 is equivalant to putting the bar so low that they've already stepped over it!
I'll accept that their production in Dec was adversly affected by cold weather - but that is short term, and should of bounced back once the temp increased.
When I first read 32,000-33,500 boe as their 2023 average production, along with $300 million in Capex I was disappointed. But after giving it some thought, the only way they could do that is if they were drilling dry holes all over the place. If that were the case, then their reserve numbers would not be as good as they are.
I smell BS.
They don't have anything to gain by over estimating 2023 production - in fact all they get is ridicule if they come in under. If they estimate low however, and come in higher, they get nothing but praise.
There is no way they can spend $260-270 million drilling mostly development wells, and not grow production above where they were in early Nov/22.
On June 16/22 they thought spending $260-270 million on capex in 2023 would put production at 37,000-38,000 boe.
Back then their cost inflation was about 15%. Now its about 30% - ie $260-270 million then, is about $225 - 235 million now. That may not be enough to get to 37,000-38,000, but it should be enough to exceed the 2023 production guidance just provided.
FFO Guidance
The cash flow guidance is all based on WTI US$80 and C$3 gas.
If you think those will be the average prices for 2023, then this NR is for you.
(note OBE has not hedged any oil in 2023 - that suggests, they think oil prices will be higher going forward)
If you think WTI will be higher on average, then they've given sensitivity numbers to adjust cash flow.
For example.
A US$1 change in WTI results in an 8.6 million change in Funds Flow from Operations.
To give that some perspetive, Bonterra's version is a $1 change in realized oil price (ie C$1) results in a $2.147 million change in Funds Flow.
In other words, OBE's cash flow moves up rapidly with oil. Its about 3X the torque of Bonterra.
In addition to the above, a US$1 change in the WCS heavy oil differential results in a $3.2 million chnage in Funds Flow. This differential is about $24 today. It was about $11 in April.
The Transmountain pipeline expansion is supposed to start filling its new pipe in Q4. The differential is likely to be lower at the end of the year than it is now.
OBE has just told us that $80WTI, C$3Gas, and almost no production growth during 2023 will produce about $400 million in Funds Flow.
Lets see what that looks like with $100WTI...........that $400 million FFO jumps up by $172 million to $572 million. That is almost a 50% FFO increase. That is what troque looks like.
Now imagine the WCI differential moves from $24 to $10..........that adds another $45 million.
ie $400 million in FFO becomes $615 million very easily, if not probably.
Add 1000 or 2000 boe to average production, and that number gets higher.
Share Buy Back
The buy back is a positive surprise. They are going for the full 10% (about 8.2 million shares), as expected.
The unexpected part is they are going to increase their line of credit to start buying asap - ie BEFORE, they hit their target debt level of $225 million. ie, they are going to suspend their debt reduction plan to buy shares!!!!
This is the really good news in the NR. It follows they don't think the shares are going to be trading at this bargin price for long, so they are going to start buying as quickly as they can. They are so eager, they are willing to go into debt to do so.
This is where we get to read between the lines. Forget what they said about forecast production, and forecast cash flow. Between the lines they are saying FFO is going to be a lot higher this year than we can tell you today. We are so sure, that we are willing to abandon our debt target for the time being, and buy all the cheap shares we can get our hands on, while they are on sale!
I agree. Go cash flow negative in Q1. Spend all you can in Q1 on drilling and buying back shares.
Q2 (break up) will be very cash flow positive, becuase other than Viking, they can't drill - all they can do is tie in and collect the money from selling oil/gas. Q2 will bring in a lot of free cash flow - likely enough to repay what goes out in Q1.
What they didn't say
They didn't talk about dividends. But they did mention returns to shareholders if free cash flow exceeds their guidance (the $80/$3 guidance).
Their $80WTI / $3gas guidance doesn't have enough Free Cash Flow to pay a dividend. So they can't mention a dividend. But they did say if Free Cash Flow exceeds guidance, then expect some of that to go to shareholders. That is code for Dividends!!! How do we know? Because once you hit 10% annual share buy back limit, the only other way to return money to shareholders is dividends!
Near term.
I expect OBE to start buying shares soon. I don't know when. It doesn't take the TSE long to approve a 10% buy back request (its a rubber stamp). I don't know how long it will take to increase their bank line of credit - they've got the reserve value to do it. An extra $9 million dollars will get them a million shares right now.
We may find they create a working capital deficit to find the money needed to buy the shares, then use the increased line of credit to reverse the working capital deficit. Then pay back the line of credit in Q2.
Apparently they don't want to have to wait until Q2 to start buying back shares. They want to do it ASAP. ie, its concurrent, not consecutive - thats nice!
Lastly, there is a Q and A session tomorrow starting at 8:30am PST. You can send in written questions ahead of time.
You can listen later if you can't listen in real time.
ie, you can ask questions in advance, and you can listen to their answers when you have time. There is no excuse not to ask whatever is on your mind.
Log in, listen, and ask some questions. The best information comes out in their answers. I know what I will be asking.