Why I'm Invested in OBEWhen I consider a company for investment, I look at three things.
MAM
1. Management
2. Assets
3. Multiples
A good investment candidate needs all three
Good management
Good assets
Low multiples
Its easy to find two out of three.
For example, you might say Costco has good management and good assets, but their multiples are high. That’s two out of three.
Or you might find good assets, and low multiples, but bad management (thus the low multiple). Again two out of three.
You get the idea. If you want good management and good assets you almost always have to pay a premium (ie high multiples)
It’s like trying to buy cash at a discount. Occasionally you can do it, but its very unusual, and the opportunity is brief.
All of which brings me to why I’m invested in Obsidian.
In my view, it is a three out of three.
Management
Obsidian is managed by activist investors who took control a few years ago before covid. They had (have) a personal and managed shareholding in the company, and felt they could get better value out of the assets than the prior management.
They are not there to pad their resumes. They are there to increase the share price for themselves and their investors.
Yes they get paid to do so. But their bonuses and personal shareholdings increase in value with the share price. They have the same objective as myself – raise the share price as soon as possible, and don't waste money on non-essential extravagances.
They don’t just have good intentions and motivation – they have the ability and strategic foresight to get it done.
They’ve demonstrated repeatedly the ability to pivot quickly to take full advantage of changing market conditions. They successfully steared OBE out of potential bankruptcy during Covid. All the moves they’ve made are those I would of chosen. Its one thing to think it, its another to execute. They are doing both. I’m impressed.
The Board of Directors may be the most market savvy in the Canadian Sedimentary Basin. You may or may not agree. But any way you look at it, they are in the top tier.
OBE has really good management
Assets
To me, good assets in an oil and gas producer mean three things.
1. Producing wells that will continue to produce for a long time. I don’t want Wells that start out great, then decline down to almost nothing by the end of the year.
2. New wells that will pay back their cost in about a year. I don’t mind spending a lot of money on new wells, but I want that money back by the end of the year, so I can spend it again in the next year. Put another way, I want an asset base that can build a portfolio of free wells about one year after they are started
3. A heavy weighing of possible oil vs proven or probable. I want an asset base that will increase in value as it is put into production, by moving possible oil into proven or probable. Ie, I want increasing production and increasing proven or probable reserves. Two moves in one.
OBE has all three of these. Their Peace River asset is massive at ~680 square miles. Its so big, you can see it on a one page map of Canada.
The oil wells are low decline. They tend to increase in production over the first 2-3 months as the well cleans up. Then they tend to decline for a few months. Then they tend to settle into a production rate that goes on for years. 10 – 15 years is not unusual.
But that’s just the start. There is so much oil here, that when the wells finally go dry, they have only removed 5-6% of the oil in place. I’ll say that again. When the well goes dry, 94-95% of the oil is still in the pay zone. That means this asset is just begging for enhanced recovery. By enhanced recovery I mean things like Polymer flood and emulsion, for example, or steam injection.
OBE recently received approval to do a 2 section polymer flood/emulsion in their Harmon Valley South oil field. In the application OBE wrote they anticipate getting an additional 5% of the oil in place. Ie, they expect this technique to double the oil recovered.
This Asset is massive, and as technology improves in the future, its likely to produce more and more. It reminds me of the Permian before horizontal fracing was discovered.
These Peace River wells also tend to pay back in about a year. Some are faster and some take longer. Even at today’s lower prices, the average pay back time is close enough to a year for me. As prices increase, the payback period gets shorter.
Only a small part of their Peace River asset is proven or probable. Its mostly possible. Not all is possible – some will be impossible. That said, there is so much oil here, that the ultimate recoverable may be enormous.
In addition to this Peace River heavy oil asset, they also have a huge Cardium light oil property, and a much smaller Viking light oil property. The Peace River property is so good, that it distracts from the others.
Multiples
Good management, and good assets should mean high, premium multiples.
By multiples, I mean things like the number of times cash flow you are prepared to pay for the asset / management combination. You can substitute other things, like earnings, or proved developed production barrels etc. The outcome should be the same.
OBE has about 73.5 ish million shares outstanding.
At today’s oil prices, and today’s oil volume, OBE is probably generating about $600 million in funds flow from operations (annualised). Ie if you took todays FFO and multiplied it by 365 days, it would probably be close to $600 million.
That is a little over $8 in FFO per share (about $8.16)
The share price as I write this is $8.43.
Ie the share price to FFO multiple is about 1.03X
That is low. Its so low, its almost unbelievable.
Summary
So there you have it. MAM. Three out of three.
I can’t think of another that beats it.
These are my views. Keep in mind I may be mistaken, or I may of missed something important – please do not take my word for it – look for yourself.
Sincerely…………..