My thoughts on today's news release are as follows.
1. REFINANCING
Looks like the refinancing is going to happen. They have added another 2 weeks to the redetermination date for the existing bank borrowing arrangement.
...the revolving period and borrowing base redetermination date under our syndicated credit facility to July 29, 2022, from July 15, 2022.
and The maturity date of both the syndicated credit facility and non-revolving term loan remain unchanged at November 30, 2022.
Note, they have kept the revolving credit facility at $260 million, AND REDUCED the term loan from $98.1 million (May 31/22 NR) to $80.7 million (July 14/22 NR)
In my view, if they had abandoned the refinacing into long term notes, this press release would not contain another extension. Instead they would have said they were continuing to borrow from their banking syndicate.
2. DEBT
Debt repayment in Q2 appears to be as expected (excellent). Total debt has gone from $448.8 million at the end of Q1/22 to $335.2 million at the end of Q2/22.
That is a decrease in total debt in Q2 of $113.6 million. OR in percentage terms for added impact - total debt was reduced by about 25% (one quarter of total debt), in a single quarter - Q2/22.
That is a major debt reduction. It is as hoped, and in my view, extremely important.
Its important because (in my view), OBE has been handicapped share price wise by the belief that it was over leveraged. Q2/22 shows that belief to be a thing of the past.
Removing the "over leveraged" association is a catalyst for multiple appreciation.
3. FFO.
FFO is not provided in the preliminary Q2/22 news release, so we can not compare it directly with the Q1/22 number.
However we can infer it from the total netback.
The total netback in Q2/22 is $169 million.
The total netback in Q1/22 is $112.3 million.
That is an increase of 56.7 million (an increase of 50% over the prior quarter).
This is essentially the cash flow. ie, cash flow increased 50% in Q2 compared to Q1. That is my definition of fabulous!!!
I don't think there will be many comparables that can beat that this earnings season. This is exactly what I was hoping for.
When investment committies have their analyst meetings and ask - which companies had the best increase in cash flow in Q2 over Q1? I think they are going to start hearing the name Obsidian. For many, thats going to be a name they havn't heard before. When they look deeper, they are going to say OHHHHH - where did you come from!
Increased institutional attention is a catalyst for multiple appreciation.
This implies a FFO in Q2 of about $158 million (take the FFO in Q1 without the performance bonus, which was $101.3, and add in the extra cash of $56.7)
FFO is also as hoped.
The Q2/22 reported FFO may be even better, as they will likely add back the share price performance bonus claw back - which I think is about $4 million if I remember correctly. That means final Q2/22 FFO around $162 million.
The Q1/22 FFO was $78.6 million. The Q2/22 FFO is around $162 million. That is an increase of $83.4 million. That is an increase of 106% in FFO from Q1/22 to Q2/22! That is a headline catching number. Infact I want to say it again - FFO increase of 106% quarter over quarter.
4. HEDGING
The only negative in this entire news release is the hedging cost. Sadly they continue to be adversely affected by hedging costs. In Q2 their hedging activities cost them about $13 million. ie, if they had not been hedged, the above numbers would of been $13 million higher.
They have done an excellent job of minimizing their hedging - but still, it cost them about $13 million in Q2/22. That is less than the $17 million (If I remember correctly) it cost them in Q1/22.
As their debt declines, hopefully they will reducing their hedging futher, or preferably down to zero.
If the company is not at risk financially by sales price swings, then hedging is something that should be done individually by those shareholders who are so inclined. The producer should focus on production, not speculating on future prices. That speculation has cost the company $30 million so far this year.
The PROP loan (which will be paid off in Nov/22) came with hedging requirements
5. CAPEX
The initial 2022 capex budget was $150 million.
In Q1/22 they spent $103.4 million on Capex.
In Q2/22 they spent $40.3 million on Capex.
That is a total of $143.7 million on Capex in H2/22 - pretty well their entire intial 2022 budget.
On June 16/22 they increased their 2022 capex budget to about $300 million. ie another $150 million in H2/22.
5. WHAT DID THEY DO WITH THEIR Q2 CASH
Looks like they brought in about $169 million in net cash in Q2/22.
About $40 million went to capex
About $113 million went to reduce debt
About $4 million went to decommisioning
About $12 million went to something else.
Bottomline - they paid down their debt by over $110 million in 90 days. (more than a million dollars per day!)
6. PRODUCTION
Q1/22 average production was 29,407 BOE/day
Q2/22 average production was 31,575 BOE/day
H1/22 average production is 30,497
Current OBE 2022 average forecast is 32,000 BOE/day (31,500 - 32,500 June 16/22)
That implies average production in H2/22 of 33,500 BOE/day.
7. GOING FORWARD
Oil prices are volitile. You can draw your own conclusions about where they go from here. Personally I think they equal or exceed Q2/22 over H2/22.
The implied H2/22 production of 33,500 is about 2000 boe higher than the Q2/22 production of 31,575. That means expect production in H2/22 to be about 6.3% higher than Q2/22
Lets do a little speculating.
If Q2/22 prices and hedging costs are the same in H2/22, then that $169 million in net backs they just got out of Q2/22 grows becuase of the increase in production, to about $180 million in each of Q3 and Q4/22 ($360 million total).
Add in higher prices in Q3 and Q4 (over those in Q2) and that netback increases.
Lower the hedging cost (remember it was about $13 million in Q2/22), and that will also increase the H2 netback.
Lets assume that prices don't increase in H2 and hedging costs don't delcine - that leaves us with $360 million in H2.
$150 million is budgeted to Capex.
That leaves $210 million
About $8 million will go to decommissioning costs.
Now you are at about $200 million in excess cash flow.
Their debt at the end of Q2/22 was about $335 million.
They told us at the Q1/22 Q and A that their target debt level is $225.
That means that at the end of Q2/22 they were about $110 million away from their target debt level.
That was 2 weeks ago - so they are probably only about $90 million away now.
The $200 million in extra cash flow happens over half a year - or 26 weeks.
That averages about $7.7 million/week.
That means they may be about 12 weeks away from hitting their target debt level!
Only 12 weeks - thats not very long. That would be about Oct 14.
After that, money starts flowing back to shareholders - in the form or share buy backs or dividends.
And, at a debt of $225 million, OBE said they would be set up to operate in a WTI $50ish dollar environment. ie they would be a long term low risk oil and gas producer.
One can speculate in many ways. The point of this is OBE is doing everything they said they would do. They are not far - just 12 ish weeks away - from officially being a long term low risk oil and gas producer.
8. SUMMARY
They just had a blow out quarter.
FFO looks like it increased over 100%
Debt was reduced by 25%
Fabulous! :-)