Obsidian Energy Ltd T.OBE

Back to Reality

[JohnJBond]

Assuming OBE is not about to get a takeover offer from whoever bought the May 31/22 blocks, then its back to buidling value and examining the latest news.

The May 31 News Release states they have pushed the bank loan renewal date to July 15 from May 31.

This is what happens when you are getting ready to pay off the loan with money from elsewhere (ie debintures).

This is further indication that sometime this month, OBE will have swapped this bank loan for market long term debt.

That will pave the way for the next major value driver for OBE - Introducing a dividend.

As always, its difficult to predict their present cash flow, but we have the following the work with.

If I remember correctly in Q1 they had FFO of about $79 million.

That was after about a $17 million hedging cost

and

That was after about a $23 million performance bonus cost.

OR, about $120 million ish FFO before these one time charges.

ie, if they did the same in Q2 without the hedging cost or the bonus cost, they've have FFO of about the same.

BUT

Q2 oil production is about 18% more than it was in Q1.

and

The Natural gas price is higher in Q2 (it was $4.96 in Q1)    About 40% is hedged at about $4.50, but the other 60% is being sold at market.   We don't yet know what it will be in Q2, but it will be higher than Q1.

The Oil price is higher in Q2.     WTI averaged about US$94 in Q1.    Its around US$107 so far in Q2.

Thats about 14% more than in Q1.    OBE doesn't sell its oil for WTI prices, but what they do get is well corrolated presently to WTI - ie OBE is probably getting about 14% more in Q2 for its oil than it did in Q1.

As an example, if volume is up 18% and prices are up 14%, then they combine to make a 34.5% increase (1.18 x 1.14) - 1

A 34% increase in Q1 FFO would mean Q1 FFO of $120 million ish, becoming Q2 FFO of $160 million ish.

Substract from that $160 their hedging cost (we don't know what it will be, but it will be a lot less than the $17 million it was in Q1)

Then subtract their Q2 performance bonus cost (we don't know what it will be because its determined by the difference between the closing price at the end of Q1 vs the end of Q2).    We do know this will be a lot less than $23 million because their NR said much of this bonus hit is caps in Q1.

Assume the hedging cost and performance bonus together are $10 million.   That still puts Q2 FFO around $150 million.

Given the small amount spent in Q2 on capex, it follows that $120-130 million may be used to reduce debt in Q2.

Just like the performance bonus was more than some expected in Q1, it appears the FFO and debt reduction in Q2 will be much more than expected.    Both of which are positive for the share price.

All of which brings us back to the potential dividend - how much might it be?

Once the bank debt is replaced with debintures, they may be able to stop hedging - that would eliminate the hedging cost in H2.

The performance bonus cost for H2 is to hard to predict.    However the company did state that this will be limited for the rest of the year because much of the bonus components hit their caps in Q1.

IF oil prices increase 10% in H2 over Q2, that would mean average WTI price of $117 in H2 vs $107 ish in Q2.

WTI is already at $117, so thats an achievable number.    And if volumes average the same in H2 as Q2, then FFO in H2 would be around 10% higher in H2 than Q2.   

That would mean FFO in Q3 and Q4 of about $175 million (more if product prices improve more than 10% or volumes increase more than Q2 - both of which are probably going to happen).

That would mean $350 million ish FFO in H2 ($175 Q3 and $175 Q4)

Substract out the H2 Capex (lets say $150 million)

Now you are at $200 million FFO in H2.

Subtract out the hedging fees and performance bonus (lets say $10 million if hedging is reduced and bonuses are largely capped)

Now you are at $190 million ish in H2

Thats $190 million ish of free cash flow in H2.

It would take $82 million to make a $2 annual dividend ($82 miillion in H2 annualized).

Put simply, they could pay a $2 annual dividend, and have $100 million ish left over in H2 to put to general corporate purposes - reducing debt, remediating old wells etc etc etc.

It doesn't take much imagination to see the very real possibility of a $2 annualized dividend (16.7c ish per month) getting started in July

We know from CJ, which has just announced their own dividend, that the market is pricing their dividend yield at 6.5%.

CJ is a reasonable comparable to OBE risk wise, so OBE ought to get a similar dividend yield.

A 6.5% yield for a $2 dividend means the share price has to be $30.77/share.

Thats the pathway to a $30 share price, and it could all happen in July.

The bonus points are that if they do increase capex to $150 million in H2 (currently about $45 is budgeted), then volumes will probably increase in Q4 to exceed those in Q2.   ie even higher FFO in H2

IF oil goes up in H2 beyond $117, there could be even more revenue - ie even higher FFO in H2

This is a very coarse and quick analysis.    Its not meant to predict the exact FFO in H2.    Its meant to show how achievable a $2 dividend is.

For the board to pay a $2 dividend, I suspect they will need to forecast more than double that in free cash flow.   I think can.

IF they do spend $150 million in capex in H2 (after 100 million in H1) - that would be $250 million in capex during 2022.    The result should be a good increase in production for 2023 - possibly into the 35,000 - 40,000 boe range for 2023.   That would give them even more reason to feel that a $2 dividend is sustainable for the foreseeable future.

[arnolddiver]

A $2 dividend would be fantastic. At $30usd share price that's a 6.67% yield which is reasonable. I wonder if Loukas will want to drill more now rather than later and introduce dividends/buybacks in 2023. We shall see at the annual meeting. 

[JohnJBond]

Look at the drill permits they've received and you'll answer your own question 

[masfortuna]