Obsidian Energy Ltd T.OBE

Q3

[JohnJBond]

I suspect cashflow for Q3 will be pretty close to C$1/share.    That would likely take debt down to about C$400, and making it possible to exit 2021 with debt of C$350

The main downside unknown is the nature of the Loukas contract extension.     ie, did his old contract expire during the quarter, and did that trigger a share price performance payout that would affect cash flow.

On the plus side, the increase in Natural Gas prices may have had a bigger impact on cashflow than oil prices in Q3.    About 2/3rds of Nat gas production appears to be unhedged.

Until recently, Natural gas has been essentially irrelevant to OBE's valuation.    One dollar increase in Nat Gas is like a $6 increase in oil.    OBE has about 9000 BOE of Nat gas, vs 13,000-14,000 BOE of oil.

I don't know what prices they got for their Natural Gas Liquids in Q3, or presently, but they were getting very little earlier, and those prices are strengthening.

Remember Natural gas Dutch price benchmark is about US$225 BOE presently and LNG is about US$200 in Japan and South Korea.    This means as much Nat Gas as possible is being taken out of the US by LNG for those markets - driving up US prices, which pull up the Canadain price (Canada exports around 3TCF of natural gas by pipe to the US annually)

Will be interesting to see how much progress has been made in Q3 to lower the debt, and what negative surprises will be revealed in the way of managerial costs.

In any event, its looking like perfect weather for OBE given the following

1  Low number of shares = high exposure to increased cash flow / share

2  High debt becoming low debt over months rather than years

3  Large exposure to Natural Gas compared to peers.

4  Unfollowed by analysts so lots of room for increased attention

5. Largely unhedged, with most hedges very short term - month ish out so able to participate in Oil/gas price spikes

6  Energy crisis already in parts of the world resulting in power generation switching from Nat Gas to Oil - thereby increasing oil demand

7.  Focus on green energy has resulted in reduced global oil/gas replacement, reducing supply

8.  Takes about $2 in cash flow per share to maintain or slightly grow production.   Current annualized cash flow likely double that with room to grow rapidly with increased oil/gas price

9.  At year end 2021 (3 months ish), debt may be close to C$350 with similar cash flow, meaning debt to cash flow ratio of 1X      From that point on there is a good chance cash flow inexcess of $2/share will be spilt 50/50 ish between debt and dividends, or maybe 33/33/33 debt/dividends/extra development.    Either way, that suggests shareholders may be 3 months away from a $1 ish/year dividend.     If not 3 months, then maybe 6.     Either way, it appears to be firmly on the horizon and getting closer every day.

10.  Oil is a good inflation hedge and a good US$ hedge - both of which are looking shaky

11.  Private equity funds are continually searching for places to park cash where they can get a good, inflation protected return - sooner or later one of them will notice the near term upside of OBE and may make a solid offer to take it private.    How much would they pay for $2 in free cash flow per year?   How much for $4?

12.   If Private equity doesn't act, then sooner or later the Reddit crowd will catch on

[kavern23]

John...are you using a capex of 40M for Q3?

[JohnJBond]

Yes approximately.    We won't know the exact number until the financials are released, but $40M is a good point estimate.    Its unlikely to be less than $30 or more than $50. The higher the capex, the lower the debt reduction.   

[JohnJBond]

One of the most appealing things about OBE is that it went though a 7:1 reverse share split, and very few others did. An extra $74 million dollars to OBE is another $1 share in cash flow. That same $74 million dollars to Baytex for example is an additional 13c in cash flow. Add $74 million dollars to Whitecap, and its about an additional 11c in cash flow. The market isn't presently pricing

[Hendrick3]

Great analysis. Thank you for sharing. A great document to read on stock down days. There is a very bright future ahead. 

[WanTBe1]

Waiting for results.

[JohnJBond]

Amendment.   Should read - I expect Q3 Cash flow of about C$0.80/share, and debt of about C$415.    Year end debt may be $350 but more likely to be around $370. Year end debt is dependant on Q4 prices for Oil, Nat Gas and NGL - all of which are strong, and have good reason to get stronger.    All of which means its too hard to currently predict year end

[Hendrick3]

Your new numbers are more in line with what I thought. I was thinking 75 cents cash flow and $425 debt. I any event 4q is shaping up to be slightly over $1 cash flow and as you say could be as low as $350 by year end. I suspect any dividend plans will be announced in 2q 2022 as part of the AGM. Appreciate your well written analysis. 

[masfortuna]

Whether it's 350-360-370 it really doesn't matter. What does is that by q4 2023 the debt is gone.

[kavern23]

Thanks to John and Hendrick3 for sharing. I like seeing other people's numbers to see if I am in the ball park and I basically am.  I have 77 cents for Q3....with a higher probabilty to be 75 cents then 80 if I was getting exact. Reason i say this is because obe has had so much incentive due to high commodity prices to reactivate or recomplete as many wells as they can. Usually increase

[CornInHerPuss]

It feels weird to see so much optimism about the divi being reinstated.  I remember when the share price was sub 50c CAD, I don't think anyone was too optimistic about it then.I sure remember thinking that the cash I had put into it was gone and was just hoping they would have been able to sell Peace River so we could have a better fighting chance. How the wind has turned. 

[JohnJBond]

The timing and size of a dividend is important because it's how the market presently values oil stocks  it used to be cash flow multiple.   Then it was production growth rate Then it was consolidation   Loukas tried to gain market value by trying to consolidate with BTE - BTE resisted (thankfully) Now the market values based on return of capital  The

[CornInHerPuss]

Agree to disagree... I think a big reduction to the debt would bring stability to the share price and decrease volatility... Lesser debt = lesser volatility = lesser alpha... I for one would appreciate for the stock to start stabilizing and not correct 50% just because WTI drops 5$. I dividend would certainly attract investors looking for income... and god knows there are a few out there in

[Hendrick3]

I think somewhere in between is the right move. Free cash flow will be close to $200 million in 2022. Take 1/3 as a dividend and 2/3 for debt reduction. $134 million against debt will bring debt well below $300 million by year end 2022 and $66 million is about 90 cents a share for a dividend. Just initiating a dividend will fire up the stock do I would declare 3 cents in 4q 2021 and then 12 cents

[BrownDog5340]

Hendricks, I like the way you talk.

[Kramerkarma]

I did conservative numbers. And got 70.6 FFO 94c and 37.6 FCF 50c .... thats $80cad light 55 cad heavy 48 ngl 15hedge gas 4kboe and 5kboe 21.6 ...52.12/boe and 31.5/boe ffo. Think we could pass 32 and change and also 25k boe instead of q2. Anyways thought you could see & compair.

[Hendrick3]

Your numbers look pretty reasonable to me. I figure about 75-80 cents FFO/ share but your analysis is more detailed and therefore more credible than mine. You need to include $1 million compensation charge for higher stock price but that is pretty minor in the grand scheme of things. 

[Kramerkarma]

thanks I might be 8.5 mill low on capex and aro. Plus the possible 1 mill you mentioned. So 28.1M FCF ... really hope production is closer to 25k and some operating costs come down $1

[Tim14235]

Hedge the rest of the gas!  If it keeps going up, we will simply drill more of it.

[Hendrick3]

I think their policy of hedging max 50% is prudent. Today's price in the high $5's may just be the beginning and a big run. In the past this company screwed itself with excessive hedging. This time around their limited hedging has allowed them to flourish.