Reflections on OBE's Q3 2024Obsidian Energy Q3 reflections.
On October 31, 2024, Obsidian Energy released their Q3/24 report. These are my reflections.
It takes a while to read a quarterly report. I start at the beginning, and go from there. As you read through, it’s a bit of a race to see what the next part says.
My recollection of reading this report went something like this………”That’s nice!”…..”This is Good”…….”Wow, that’s Good”…….etc
A SERIES OF GOOD NEWS
My main reflection since, has been to wonder which part was the best.
Some of the Q3 information, for example the September Well Results, is public open source information that I’d seen a few days earlier. I already knew about the excellent well results from the two new oil wells at the north end of the Harmon Valley South (HVS) Oil Field – as did those who follow along on Twitter.
One of these extends from the top edge of the HVS field, with its laterals running about 1 mile north (Pad 13-8). This well appears to extend the HVS northern edge by about 1 mile. Its IP30 was 448 bbls oil.
The second Well is a step out that started about 1 mile north of HVS, and its laterals extend another ~1 mile further north (Pad 13-18). This Well appears to extend the HVS northern edge by 2 miles. Its IP30 was 503 bbls oil.
The type-curve for these wells starts out at about 250 boe/day. OBE would have built its projections based on type curve wells.
When a well exceeds its type curve it means OBE is ahead of its forecast. This has many positive implications – its a bit of a virtual circle. The bottom line is More for Less. Ie, More oil, for less cost. When you get more for less, you get to do things like pay down debt, and buy back shares with the extra cash.
You can get about four of these wells on a Square mile. These two wells suggest there may be 4 or 5 square miles of similar wells waiting to be drilled at the top of HVS. Its not just the two big new oil wells – its also the possible 16-20 more similar they may of just found.
These wells can produce 300,000 - 500,000 ish barrels of oil during their lifetime (10-15 years ish). They pay back their cost sometime between 6-12 months (depending on oil prices). Then keep going for 10-15 years at a slowly declining rate.
Essentially after 6-12 months OBE has a big, free oil well to add to their collection.
A WHOLE NEW OIL FIELD
The Q3 report confirmed HVS good news I already knew.
West Dawson results however were new. In my view, they were the best part.
The Q3 report announced the discovery of a whole new Clearwater Oil Field!
If you are following the OBE story, you already know about the highly successful Dawson Clearwater Oil field OBE discovered at the start of 2023. They’ve been developing this oil field ever since, with excellent results.
West Dawson is not the same as Dawson.
The West Dawson results come from two wells drilled about 10 miles west of the Dawson Oil Field (9-21 Pad). They came on production on Sept 30. The Q3 report revealed these two wells averaged 269 bbls of oil per well over the first 24 days. It’s 24 days, because that’s all the time they had before the Q3 release.
These wells often improve as they clean up, with the second month being better than the first. They may turn out to be even better.
The Type Curve for these Clearwater wells is lower than the Bluesky wells at HVS. I can’t recall the initial Type-Curve production number as I write this, but I think its around 150 boe ish. The important part is not so much what the type-curve initial rate is, but that these two West Dawson wells exceed it, and generate the virtual outcome discussed earlier.
But that’s not all – this West Dawson oil is lighter than expected, so it sells for more.
Even better, OBE announced they identified 25 more drilling locations around these two new wells. That could be $1 per share (or more) just there!
Almost two years ago, OBE discovered the Dawson Clearwater oil field, and in yesterday’s Q3, they announced the discovery of another - the West Dawson Clearwater oil field.
PRODUCTION
Twice OBE has announced they achieved a certain daily production level. Then when they released the quarterly report for that period, the quarter’s production was a lot lower than the previously announced daily high. In retrospect, they achieved a good daily milestone and where happy to share the news. However that notable daily milestone was diluted over the quarter, resulting in disappointment.
Not this time!
OBE previously told us average production in July was about 38,500 boe, and August was about 40,000.
They had also told use they were doing a Plant turn around in September. This implied a potential production reduction in September.
Q3 production was 39,714 boe. That implied September production was about 40,670 boe. It was even higher than August!
OBE has pushed through the 40,000 boe/day threshold, and is now on its way to 50,000. The question is no longer, Will they do it. We are now at the point where we can start to wonder if they will get to 50,000 boe sooner than forecast.
FUNDS FLOW FROM OPERATIONS
OBE reported $1.64 FFO per share. (I’m not using the fully diluted number of $1.58 because OBE has a recent history of settling its share based performance program in cash rather than new shares.)
The Q3 Netback was $36.23
In the prior quarter (Q2), OBE reported $1.51 FFO per share. The Netback was $38.99.
In Q2, sales prices were quite a bit higher (netback was $38.99 vs $36.23). However OBE was able to get more FFO per share in Q3 than Q2.
This is a big deal. They got less per barrel, but made more per share.
They did this by producing more (35,773 boe Q2, increased to 39,714 boe in Q3), and reducing the number of shares though buy backs.
They increased production by almost 4000 boe in one quarter (3941 boe)! An 11% increase.
Normally when oil/gas prices are lower, an oil company makes less FFO/share. Not OBE.
OBE’s strategy of producing more, and buying back shares, is starting to show results.
DEBT
All that good news doesn’t stop there. OBE also reduced their debt in Q3!
At the end of Q2, Net Debt was $432.5 million. At the end of Q3 it was $413.6 million. Net debt declined by $18.9 million during Q3
SHARE REDUCTION
Not only did they pay down debt in Q3, but they also bought back 1 million shares (at a cost of $9.3 million).
In some earlier quarters, OBE has essentially borrowed to buy back cheap shares.
But not this time. This quarter they paid back debt, and bought back shares.
Increasing production; reducing debt; and buying back shares, are some of the positive things that happen when you drill above type-curve wells.
Bluesky or Clearwater oil production doesn’t drop right off like fraced shale wells. Instead they decline over a much longer time frame. They are the wells that keep on giving!
There is more, and I could go on, but writing about all this good news is getting tiring (It may be the first time I’ve ever written those words)!
SUMMARY
1. OBE announced a whole new Clearwater Oil Field, and did so with two new above type-curve wells.
2. OBE announced two big new Bluesky oil wells, and extended the northern edge of the HVS oil field.
3. OBE increased its production by about 11% over the prior quarter.
4. OBE increased their Funds Flow from Operations per share in Q3 vs the prior quarter, even though the price for oil and gas declined.
5. OBE reduced its debt about 4.4% vs the prior quarter.
6. OBE bought back another million shares.
They did all this while trading at about 1.2 times annualised FFO/share ($1.64 FFO/Q3 x 4 Quarters in a year x 1.2 = $7.82/share)
For those who prefer the PE ratio, OBE earned 44c in Q3, or $1.76 annualized (4 x 0.44). OBE closed at $7.85 / share today. Thats a PE of 4.46 (7.85 / 1.76).
Compare OBE's PE, and growth with more popular names, like Costco, Walmart, Nvida, Microsoft, Amazon (you choose), and see how they compare! You may find less growth, for about 10 times the price!
These are my reflections – they may be wrong – please treat them accordingly
Sincerely…………..