Q1 2024 Thoughts This morning Obsidian Energy released their Q1/24 results, followed by a Question and Answer session online.
This are my thoughts - not in any particular order.
1 PRODUCTION
The first thing that stands out is Q1/24 production at 34,238. It is a solid increase. However they prevously indicated production of around 34,000 at the end of 2023, and about 36,500 around the end of Feb/24.
There were cold weather related production slow downs across North America in January. So a January decline was expected, however a slide backwards in March was not something I was expecting.
Without knowing the January impact, I thought 34,500 was the likely bottom of the range, with 35,000 boe ish being my estimate. With that in mind, I was disapponted to read 34,238. If I had not read 36,500 boe in late Feb, then I suspect I would of been excited about 34,238.
Looking at 34,238 on its own, its a strong increase over Q4/23 - which was 31,974 boe. That is an increase of 2264 boe, or 7% more than the prior quarter. 7% production growth from one quarter to the next is impressive. Its a funny thing how prior expectations can make a very impressive result, appear disappointing.
At the end of the day, results matter, and expectations don't.
This may be why OBE would not state their current production - which is probably higher. (OBE said Q4 production would be higher than Q1, but they would not give todays production).
2 DRILLING
They drilled 24.4 net wells in Q1/24, but only 11 went into production during the period.
I assume this 11 may include some drilled in the quarter before. This means 11 wells added, some of which would of been added later in the quarter - thus Q1/24 does not fully reflect these well's contributon.
Moreover, the other 13.4 ish wells will probably come online in Q2. ie, Q2 should have higher production than Q1 (also stated by OBE in their presentation this morning). New production that was paid for in the prior quarter.
3 THE GROWTH PLAN
Last September, about 7 months ago, OBE announced a 3 year growth plan which involved growing production to 50,000 boe in 2026 (about 2 1/2 years from now).
This plan is based on taking their heavy oil production from about 6000 ish boe to about 24,000 boe. An increase of about 18,000 boe.
If they can do this, it probably means significant share price appreciation (the amount determined by oil prices).
So its all about the IF! ie, this is the main reason to hold OBE.
As time passes, I've been searching for signs they can, or can not, achieve this plan.
OBE says they can. Today, after about 7 months of their 3 year plan, they reaffirmed they can do it.
OBE has the inside knowledge to know. I don't.
That said, I can follow along and see their progress.
They have a big heavy oil area in Northern Alberta (known as PROP). Their plan is to drill about 199 wells, to get the extra 18000 barrels. About 90 barrels per well.
90 barrels per well might not seem like a lot, but its not that simple, because well production declines with time. PROP wells are not fraked, so they tend to decline slowly compared to fraked wells. That said, they do decline.
A typical type curve PROP well starts out around 200-250 boe (depending on the field).
They've not drilled many new PROP wells since the plan was announced. But you can see they've been testing different strategies -
a) Infill drilling into previously drilled areas
b) Drilling new areas - Walrus, Nampa, Dawson for example
c) Drilling test holes to reconcile drill cores with seizmic info.
It looked to me like they were probing, testing and searching.
They recently discovered their new Walrus field. The results look ok, but I noticed a few new wells that looked like they were producting in the mid to low 100boe's - ie below the type curve. At Walrus they discovered a slightly deeper bluesky zone (ie two pay layers just a few feet appart). The deeper layer seems to be better, with the one result I could see producting a little over 200 boe. This sounds promising, but the initial results seemed a bit on the light side.
With those early results, I was starting to wonder if 199 wells would be enough to add 18,000 boe. I figured if the wells come in at lower than expected production, that issue could be remedied by drilling more wells.
And then we got today's update. One of the PROP pads (a pad with two wells), was drilled in their Harmon Valley South field, and today we were told
Initial Peace River 8-28 Pad Bluesky results are above type curve with an average pad 25-day IP rate of 533 boe/d (100 percent oil) per well
Bingo! Thats double the type curve!
But thats not the best part. These wells were drilled at 90 degrees into a previously drilled area! They look like infill wells. Same place, more oil! Look them up for yourself on boereport or petro ninja. Alternatively you can find where I shared them on Twitter.
How many more of these can they do? I don't know - time will tell. But if the first two adjacent tries worked this well, one wonders why more shouldn't also be successful.
This was the best part of the presentation in my view.
It took me from thinking...........I'm not 100% sure they can do this, even though they say they can................to.........wow, they really can do this!
4 DEBT
OBE appears to take full advantage of its accounts payable, and looks like they stretch their payments out as long as possible. This means their Working Capital deficit grows during Q4 and Q1. At the end of Q1 the working capital deficit is likely at its maximum.
Drilling stops in break up (now), capex declines but cash continues to flow in - the result being that bills get paid, and the working capital deficit declines. They wouldn't say what their working captial deficit is today - but chances are good its getting paid down significantly every day. ie, Net Debt shown at the end of Q1/24 is likely to be less today, and almost certainly will be quite a bit lower by the end of Q2. Translation - debt isn't a concern at all in my view.
5 THE GAS STORAGE QUESTION
There is a potential for Canadian Natural Gas storage to be filled by the end of Spring - and stay like that until November (something I've not seen before). This raises some questions - such as what happens to oil production if you can't get rid of your associated gas?
I asked this question in this mornings Q&A. OBE didn't waffle in their answer. They were quick to say their gas marketing process should result in zero impact on their ability to sell their oil. ie, they've already considered this possibility, and whatever it may look like for others, it won't be a problem for OBE (the price of gas may decline - they have most of theirs hedged - but their ability to sell their oil will not be impacted). It was a reassuring answer to a potential situation that could be problematic for others.
Thats about it - other than to say everything in Q2 is likely to be an improvement over Q1. Higher production, higher revenue (TMX is causing differentials to shrink, and the Canadian dollar is weakening compared to the USD).
Oh, and one more
FFO per share was $1.09. I believe that is after accounting for one time $9 million on share based performance bonuses. If I understand correctly, that would be about $1.23 FFO/share without the share based performance bonus. I took it out because (again if I understand correctly), other companies have a different bonus program that does not require they account for it in their FFO number.
Compare that to others. Whitecap (which is about 78c cheaper), had Q1/24 FFO/share of 64c. Almost the same share price, with almost half the FFO/share.
Cenovus Energy - which is nearly 3 times the price of OBE, and their Q1/24 FFO/share was $1.19
OBE is not some tiny lightweight company. Its enterprize value is around 1 billion dollars. It seems underpriced to be trading at 1/2 to 1/3 of larger companies with less growth!
Please check the above for yourself. They are my reflections, and may be completely wrong!