Thoughts about OBE's Q1/25 News ReleaseObsidian Energy released their Q1/25 report this morning.
The Presentation
They held a presentation, followed by a question and answer period in the afternoon. It’s about an hour long. You can listen to it from their web page.
https://www.gowebcasting.com/events/obsidian-energy/2025/05/07/annual-special-meeting-of-shareholders/play
If you havn’t already done so I recommend you take the time to listen.
The Sale
I’m not going to dwell on the Q1 numbers themselves because OBE is a different company today than it was in Q1. In the first week of April they sold about 10,300 boe of their Pembina assets.
The important impacts of this sale are:
1. Their production has dropped by about 10,300 boe. They are now a 29,000 boe company.
2. Their ARO got cut in more than half. I’ve discussed the exact amount elsewhere. The part to remember is it went from High to Average.
3. Their debt went from about $450 million to about $250 million. This is about $110 million on their debenture. ~$30 million on their line of credit (235 million limit), and about ~$110 working capital deficit.
4. They also have about $60 million of IPO shares. These can be thought of as off setting the debt.
If I’m not going to dwell on the Q1 financials, then what else is there? A lot!
A New Strategy to Build Value While Oil Prices are Low
Until yesterday, OBE was working on a 3 year plan to grow production to 50,000 boe by developing their largely unexplored Peace River heavy oil property. The expected 50,000 boe date was sometime in 2026. All their free cash was going to this goal, with a bit extra going to buying back shares.
When they sold ~10,000 boe of Pembina. This implicitly changed the plan to a 40,000 boe target.
This growth was funded by internal cash flow. The higher the oil price, the more the cash flow, the faster the growth. It also works in reverse. The lower the oil price, the slower the growth.
Its important to remember the goal. The boe volume is the expressed target, but the goal is to maximise the share price. You do that by maximising value per share.
There are two variables when it comes to maximising value per share. The numerator (income, funds flow, boe’s etc), and the denominator (number of shares).
You can increase value per share by increasing production, while leaving the number of shares untouched. Or you can leave production constant, and shrink the number of shares.
For example cutting the number of shares by 10%, is equivalent to increasing income by 11%.
Most companies with a share buyback program only buy back a percent or three during the year. Their buyback sounds good, but isn’t big enough to move the needle.
This brings me to the most important part of OBE’s news today. OBE has done a 180 pivot. They have swapped their strategy of focusing on the numerator (growing production), for a new strategy of reducing the denominator (maximum share buy backs).
Why you ask? Because the lower oil price has caused OBE’s share price to fall so low, that they get more value per share, by spending their capex on their own shares, than on drilling new barrels.
They have switched from a growth strategy, to a hold flat strategy, and focus on reducing the share count.
This is not an act of survival, its an act of opportunity. It may sounds odd, because very few companies ever find themselves with this opportunity. Or put another way, they get the opportunity, but lack the resources to do anything about it.
As a result, most investors have ever seen this strategy in action. They see reduced spending on Capex, and a mistakenly assume that means financial distress.
We saw a hint of this new strategy in April, when they dropped from 6 active rigs earlier in the year, down to just one – while at the same time buying back almost 3% of their shares in the last 3 weeks ish of April!
Today they made it official. In a week or two (my estimate) they will move to zero rigs. All the wells they have scheduled for H1 will have been drilled.
They will have lots of cash flow coming in from all the new wells they drilled earlier in the year (which we’ll talk about next), along with all their other producing wells. Capex will be minimal - just what they need to tie in what they’ve already drilled.
Cash will be used to pay accounts payable, while they go on a share buy-back feeding frenzy (my phrase).
OBE’s sale of their Pembina assets put them in a really fortunately position. They have the money to buy back as many shares as the regulations permit. Other companies may want to do the same, but low oil prices mean they can’t. Baytex for example just announced they are cutting their share buyback. They may wish they could do what OBE is doing, but they can't.
Its important to understand that OBE has changed strategy from a growth, to flat production model, because they get more value per share by spending their cash on reducing the share count. This is not the result of cutting back, its about seizing a rare the opportunity to maximising value per share
If oil prices stay in their current zone, OBE may have bought back 10% by the end of June (ie, in a bit over 3 months). That would be like increasing their production by 11% in 3 months! All while others sit on their hands waiting for this this low oil price storm to pass!
That is a big deal all by itself. This is an example of how OBE’s leadership stands apart from the rest.
Bad management loses value per share all the time
Average management adds value per share when oil prices are high
Excellent management adds value per share when oil prices are high or low
The Other Stuff
Now for the other stuff – the well results.
OBE’s Peace River land is massive. Its about 700 square miles. Imagine a strip 700 miles long and 1 mile wide – yes, that massive!
Much of which has never been horizontally drilled. The land extends from farm land in the West, to Jack Pine forest, with swamps and rivers to the East. There are two kinds of roads in Peace River. All weather roads, which can be travelled all year. And winter access only roads – which can only be used when the ground is frozen during the coldest winter months (end of December to sometime in March).
Developing this area starts with exploration wells. These are typically done in places not previously drilled. That means they are typically in places without all weather roads. These places can only be accessed for about 3 months of winter.
It follows, for those 3 winter months, you focus on exploration drilling, and testing what you drilled.
When the butter melts, you switch to drilling production wells in previously discovered areas, using all weather roads.
It’s the seventh of May, and today OBE was able to give us an update of what those exploration wells discovered. They were also able to give us some early results from their first, post winter production wells.
Exploration wells are important, because they are typically testing a large untested area. If successful, they open the door to a potential huge new development. Huge new development equals huge additional value potential!
North Dawson
I have been watching two of these exploration wells closely. I’ve been referring to them as North Dawson. In today’s OBE presentation they were called South Harman Valley South.
They are the first two wells in a 40 ish square mile scheme, which contains an estimated ~58 million barrels of recoverable oil. To put that in perspective, a proven or probable barrel of oil in the ground is worth around $10 (it varies based on market prices, but $10 is a good enough number for this discussion).
58 million barrels of estimated oil, drilled up to classify as 2P (Proven and Probable), would be worth about $580 million. That is almost OBE’s entire current enterprise value (market cap plus debt). With that kind of money on the line, I really wanted to know if those two exploration wells found oil. The answer today, was yes!
Because their access is by winter only road, you can’t take any chances getting heavy drilling equipment stuck on the wrong end of the road as the weather warms.
Wells like this are drilled and tested for as long as possible before moving the equipment out.
If I remember correctly, one well was tested for 41 days, and the other for 31 days, before they had to get their equipment out before the road thawed.
That may seem like a long time, but its not. It takes quite a while to get the water out of the well that was introduced during drilling, and while bringing the well up to pressure. Water out-competes oil, which means the water comes out before the oil. Only then do you see the oil. In this case, the 41 day well produced at 151 boe/day, and the 31 day well got upto 69 boe/day. Those oil numbers are likely to increase if these wells were tested for longer.
Both wells found 15 meters of pay - which is a lot (if I heard that correctly)
I view these results as proof of concept. Today OBE essentially revealed they have a major new oil field at South Harmon Valley (aka North Dawson). When oil prices improve, I expect they will make the winter access only road into an all weather road, and development will commence.
Nampa Clearwater
But that is just the start. They also drilled exploration wells in North and South Nampa. These are clearwater oil wells. They are a bit shallower, and cheaper to drill. They typically don’t produce as much daily volume, but the oil is lighter, and sells for a higher price.
Both North and South Nampa exploration wells tested as economic. I can’t remember how big each of these two schemes is as I write this (they are in my twitter time line). I think they are 11 and 12 square miles each or something similar. I also can’t remember the estimated recoverable oil in these two schemes, but its another big number.
Obsidian has started the process of applying to build an all weather road to develop North Nampa. The application has a Sept 1 construction start date, and an estimated December 1 operational start date (oil production). This timeline will probably be oil price dependent. If oil prices have recovered by then, expect road construction. OBE will be giving us their H2 plan at the end of June. By which time we should have a good idea if the present oil price turbulence is over, or here for longer.
Dawson Clearwater Water Flood Support
This brings me to the next exciting new development. OBE announced today they are in the process of drilling a pad in their Dawson Clearwater oil field with water support. This is three horizontal multi-lateral wells, with two single bore water injectors below. Headwater and Tamarack have used this approach for several years, with great success. They have essentially created pads with close to no decline, and increased ultimate production. It’s a bit like a SAGD, without the facility and steam expense!
OBE is now trying it for themselves. They have drilled the three producing wells. They are now drilling the first injector, and will then drill the second injector. I suspect they will be finished drilling in mid May, and then the rig will get stacked, and that will be it for drilling until the end of H1 (unless oil prices improve).
The two injectors will initially be produced (if they’re able to produce oil, why not find out first). Then they will be converted to injectors.
It will be very interesting to follow the success of this pilot pad. If its successful, it may be repeatable throughout the Dawson Clearwater oil field, as well as the newly discovered North and South Nampa Clearwater oil fields, and the newly discovered West Dawson oil field.
Turning those four oil fields into low or no decline production schemes has the look of another game changing possibility for OBE.
More Good New Well Results
There is more, like the new 259 boe well OBE announced from East Seal – another location that appears ready for additional wells.
Or the new 424 boe/day production well in their Northern Harmon Valley South hotspot. There are five new production wells here. This is the first to be produced. One, or maybe two are Waffle wells.
Waffle Wells
Lastly OBE finally went on public record about their Waffle Wells. These are an innovative lateral layout in which horizontal well bores intersect the traditional laterals. A really good analogy was used to explain how they work. Imagine trying to drive through a city during rush hour. If you only have one road through, you could find yourself stuck in stop and go traffic on that single road. But if you could chose between multiple exit roads, then you’d find the road with the fastest egress, and get thought faster. Simple but elegant. Only OBE seems to be using this approach so far - one wonders who will be the first to copy them?
When you put this all together, it becomes easier to see why Board of Director’s member Edward Kernaghan may of increased his position by about 650% following the announcement of the sale of the Pembina barrels in early February. He spent more than twice as much buying OBE shares than any other Canadian insider in the E&P sector!
Those are my thoughts for now - they may be mistaken. Please form your own. As always, please double check my numbers and statements for errors.
Sincerely, nj