Q2 2024 ThoughtsHere are my thoughts about Obsidian Energy’s Q2 report, released early this morning.
OBE made a lot of money in Q2. Their netback was $127 million in the quarter. That’s a lot of money in three months. Annualised, its’s over half a billion!
Half a billion dollars is a lot of money for a company with about 76 million shares outstanding. Its about $6.68 per share!
The stock closed today at $9.74. That is about 1.46 times the annualised netback. You don’t see a netback multiple like that very often – and when you do, it is normally attached to a company with serious problems.
So they are making lots of money, but their stock is really cheap! Lets have a closer look at what they’ve been doing with all that money, and see what we find.
OBE is in the first year of a 3 year growth plan to get to 50,000 boe/day in mid 2026.
This plan was announced on Sept 21, 2023.
OBE has now completed the first four quarters of that 3 year plan, namely Q3 and Q4 /23 and Q1 and Q2/24
This seems like a good opportunity to see how they did in those first 4 quarters.
In Q3/23 they produced 32,937 boe. They spent $46.4 million on Capital Expenditures.
In Q4/23 they produced 31,974 boe. They spent $100 million on Capital Expenditures.
In Q1/24 they produced 34,238 boe. They spent $114.3 million on Capital Expenditures.
In Q2/24 they produced 35,773 boe. They spend $59.2 million on Capital Expenditures.
I pause here, because some extra things happened in Q2/24, that need to be removed before it can be compared with the three proceeded quarters.
In Q2/24 an Indian Band decided to blockade part of OBE’s production for about a month. This blockade came and went, but in the process it reduced OBE’s Q2 production by 1550 boe.
Also in Q2/24, OBE purchased some existing production from Woodcote. The effective date of this transaction was May 1/24. This purchase added an average of about 1036 additional barrels to the quarter.
If we remove the 1036 boe purchased, and add back the 1550 temporarily shut in, we get a Q2/24 number of 36,287 boe. This is the Q2 average production OBE would of reported if the Woodcote purchase and the Indian Blockade had not occurred.
So over the four quarters, production went from 32,937 to 36,287 boe. An increase of 3,350 boe.
But if we do that, we are starting at 1 and going to 4. We need to start at 0, which is the the quarter before (Q2/23). In Q2/23 OBE produced 31,042 BOE.
With Q2/23 as the zero, OBE added 5,245 boe by Q2/24.
During this period OBE spent $319.9 million in Capital Expenditure.
This $319.9 million of Capital Expenditure created enough new BOE’s to replace the year’s declines, and add this additional 5,245 boe.
Which begs the question, how much did OBE’s production decline over the year?
OBE’s presentation states their decline rate is 21%. Or at least it was in 2023. That’s the only number I have to work with, so I will use it here.
It follows that if their average production was 32,937 boe in Q3/23, we can think of that as the production in the middle of the quarter – about mid August.
The quarter before (Q2/23), should give us the average production in mid Q2 – ie mid May. Q2/23 production was 31,042 boe.
One year later, in mid Q2/24, that 31,042 should of declined by about 21%, or about 6,519 boe. The decline is unlikely to be exactly that, but it’s close enough for this discussion.
If we add the 6,519 boe decline to the 5,245 boe increase, we get 11,764 boe. Those 11,764 boe are what OBE received after spending $319.9 million on Cap Ex.
That is about $27,193 per flowing Barrel.
If it costs you more to find boe’s than the market values your existing BOE's, you are better off just buying back your own stock or debt.
Likewise, a company adds value when it adds production for less than the Market values that production.
So what can we make of this? There was a time, not so long ago, that Oil companies traded for $100,000 per flowing barrel. In fact, there are some today that are priced that high - one comes to mind in OBE's neck of the woods.
OBE is undervalued (thus my own interest and investment), so what does OBE's production trade for in the current market? Ie, how much does the market currently value OBE’s 36,287 barrels of Q2 production?
OBE’s Enterprize value (Debt plus Equity) is about $1.2 billion today. If we divide that by the Q2 production OBE would of reported without the woodcote or blockade affects (36,287) we get $33,070 per flowing barrel. Note, if we include the woodcote and blockade affects (35,773 boe), then this number increases to $35,773 per flowing barrel.
It follows that OBE, as undervalued as it is, was able to find boe’s for less than the Market values its production. That sounds to me, like OBE was better off spending its money to find those additional boe’s, than buying its own shares or reducing its debt.
I’m having a little trouble wrapping my mind around that last statement – so lets exaggerate it, and look again.
Imagine OBE was valued at $50,000 per flowing barrel, and OBE could add new barrels for $10,000 per flowing barrel. If OBE had $100 million to spend, what should OBE do? Buy back its shares, or add barrels? I think that case is pretty obvious. OBE should add barrels for $10,000 and let the Market price them at $50,000.
There are some conclusions that come to mind.
First, when you combine the money OBE spent finding all the good new wells; all the poor new wells; building new roads and new drilling pads; and drilling exploration holes that were drilled, cored and refilled – all together, that money found new barrels that cost about $27,200 per flowing barrel. That sounds like money well spent.
Second, OBE’s Q2 Netback was $127 million dollars! In just 3 months! Did I mention how much money that is?
Third, OBE is making good progress on its path to 50,000 boe.
When I look at an oil and gas company, there are three things that matter to me.
1. How much money do they make?
2. How much is that per share, and what multiple is the market giving it (ie is it cheap?)
3. Is the Company spending that money wisely? Ie, are they finding BOE’s cheaper than the market is pricing them, or should they be using that money another way.
You can answer those questions for yourself. I’ve answered them for myself.
I’ll probably have more reflections going forward, but that’s it for this evening.
Oh yes, please do your own calculations, just in case I made a mistake above.
Sincerely…………..