We knew the price of oil and gas was lower in Q1/23 than in the prior quarter.
The question was, how much would that reduce OBE's FFO in Q1/23 vs Q4/22.
Total sales in Q4/22 were $207 million
Total sales in Q1/23 were $181.7 million.
That is the difference those lower prices made. A drop of $25.3 million
That is before Royalties. When sales revenue goes down, so do Royalties.
Royalties dropped from $34.8 to $25.1 million (drop of $9.7 million).
The other costs are Operating Costs and Transportation.
Operating and Transport costs went up a little (remember production volume increased in Q1/23), but were more or less the same.
Transportation cost went up from 9.6 to 9.7 million for example.
Operating costs went up from $42.7 to $43.5 million
When you substract the costs, OBE went from $120.4 million in Q4/22 to $106 million in Q1/23
A drop of $14.4 million.
To put that in context. $14.4 million dollars would of paid for 1.4 million bought back shares, or could of reduced debt by 14.4 million.
$14.4 million is a drop OBE can work with, but its also enough to slow down the extra's - like share buy backs.
More importantly, its a good lesson in what OBE looks like when oil and gas prices are low
Q1/23 oil and gas prices were horrible (likely the lowest we will see this year, and maybe for years to come). Despite those low numbers, OBE's sales were $181.7 million. (thats almost 3/4 of a billion annualized). Thats a lot of money from poor product prices!
This is one of my main reflections on the Q1/23 results. When product prices are poor, OBE still brings in a lot of money!
What did they do with all that money? They reinvested it into the Company.
ie, they put it back to work, to produce even more down the road.
I won't go into all the details here, only my reflections
They drilled 4 exporation wells in their Heavy Oil area. (called Oil Sands Exploration wells, or OSE).
If you look on petroninja you can see the location of these OSE wells - pretty well a North to South line. You will also see they are each marked Abandoned. It can be discomforting to see a recent Spud date, followed by the word Abandoned!
Exploration wells are usually abandoned. They are drilled for the core and wire line results. Once drilled, they have completed their purpose, and are abandoned. These results are combined with seizmic data to produce a development plan - ie where to build dilling pads, roads, gas collecting pipe etc.
They didn't tell us what these cores show. Even if they did, its technical information that most investors will not understand. They did say
"The information gathered from the cores are encouraging."
They also said
.....opening the Walrus field for substantial future development and increases to future locations and reserves. We further delineated our extensive land position for both Bluesky and Clearwater formations through the drilling and analysis of our four OSE wells. In 2023, we will continue with our strategy to both develop and appraise future development opportunities in Peace River, and will outline a multi-year development and appraisal plan for the Bluesky and Clearwater formations in the third quarter of this year.
This means that next quarter, OBE will announce their Heavy Oil development plan.
That may be a big deal.
This is not getting talked about right now. But sometime in the 3rd quarter it will. They may say something like - they expect to double, or tripple etc Heavy Oil production over the next 5 years. That is just a sample example, but you get the idea. A very positive future looking statement, at a time when oil prices should be quite a bit higher.
I've already mentioned the Whitecap stuff (Pembina Cardium Unit 11). That is a very nice bonus. If OBE had not transfered operating control to Whitecap, OBE's 44% ownership of this area would likely be dong nothing. Instead they are getting 44% of some very nice looking wells. Whitecap would not be drilling this area unless it was good!
Viking sounds like its doing very well. They have about 1000 boe/day of unused processing capacity in this area if I remember correctly. Sounds like they are working away at filling this up.
What about the debt? They made some money and they reinvested more, where did that put them on March 31/23?
At the end of Q4/22 they had a Working Capital Deficiency of $91.5 million.
At the end of Q1/23 this was about the same, at $92.1 million.
What this means is their accounts payable exceed their accounts receivable by those amounts. Typically suppliers will give 30 - 90 days to pay. If you take advantage of that, you typically end up with a working captial dificiency. Its like using a credit card for all your purchases, then paying it off every month. At any given point during the year, you may have a negative balance on your credit card - that would be like a working capital deficiency. If you pay it off on schedule, its interest free borrowing.
During Q2/23 (where we are now), OBE will be bringing in sales, but this time, not spending it all on capex (because its break up and the ground is muddy, and the roads have weight restrictions). Instead, their cash will be used to pay down this Working Captial Deficiency.
As discussed above, in Q1/23 they brought in net cash of about $106 million.
Its way too early to tell how much they will bring in during Q2/23 (because we don't know the oil and gas price in May and June). Chances are it will be at least $106 million.
ie, plenty to pay down that Working Capital Deficiency
Last Q2 (Q2/22), they paid their Working Capital Deficiency down to $8.4 million for example. I expect something similar this Q2.
DEBT They increased the amount borrowed in their line of credit (as of March 31/23) from $105 million to $139 million. An increase of $34 million.
This increase seems to be a combination of increased capex spending in Q1 and reduced sales prices.
Capex was $107.1 million in the quarter.
I don't see this as a concern. They have previously said their annual maintainance capex is about $200 million/year. That means if they wanted to, they could dramatically reduce capex spending without reducing production volume. ie, they could pay that debt down aggressively if they felt the need to do so.
Their long term debt (essentially debt not including the working captial deficiency) was $259.3 million on March 31/23. Thats not far from their debt target of $225 million.
The 65 million Liquidity Covenant Their credit line limit is $200 million.
On March 31/23 they had drawn this to $139 million.
Leaving $61 million in unused credit space.
They apparently have a covenant on their long term debt that says they can't buy back shares unless they have $65 million or more of liquidity - ie they can't spend the last $65 million of their credit line buying back shares!
As of March 31/23 they were $4 million short of this liquidity threshold. That is why they didn't buy any shares back in March.
Where are they today? I don't know.
From the above, we know they had a working capital deficiency of about $92 million on March 31/23.
As mentioned above, as these accounts payable become due (their 30 - 90 day payment period comes to an end), they get paid. They probably get paid something like this.
The Line of Credit is used to pay accounts payable, and cash from sales (accounts receivable) is used to reduce the line of credit.
As mentioned elsewhere you can see the general numbers OBE is dealing with in Q2/23.
About $106 ish million (or more) coming in.
Accounts payable getting paid down by about $80 million.
Some capex/decomissioning expense (last Q2/22 they spent $40.3 on capex and $3.8 on decommission, for a total of $44.1 million)
Last year they spent about $10 million drilling Viking wells in Q2. It doesn't sound like they are going to be doing that year year.
Putting that all together, suggests that if oil and gas prices remain in Q2/23 like they were in Q1/23, then OBE's line of credit unused portion, is going to remain below $65 million.
This is a good new / bad news reflection.
It looks like the free cash flow coming in during Q2/23 will be used to reduce debt, not buy back shares.
So if your preferance is to reduce debt, then Q2/23 looks great.
If your preferance is to buy back shares, then don't expect it to happen during May or June (unless oil prices move higher) - unless they expand their line of credit futher.
This explains why the Q1/23 NR includes the following
The Company is currently in active discussions with several parties to further enhance
our liquidity position to afford more flexibility on a return of capital strategy.
OBE is still looking at ways to satisfy that $65 million liquidity covenant by getting access to some more borrowing capacity.
This actually brings a smile to my face. SL apparently really wants to buy back those shares while they are cheap! I can imagine him just trying to figure out a way to do it - talking to everyone he can.
Reflecting here - I say don't give up on that share buy back just yet!
Lenders may be asking for more than OBE wants to pay while oil is getting beaten up in the low $70's, but I don't expect that to last for long.
The physical oil market is tight. Global (and US) oil inventories are declining. The US is gaining jobs, not giving them up. Aircraft flights are increasing. Interest rates have peaked. OPEC just started cutting. OPEC is meeting in person in June - they do that when they have something they want to change (that is June 4, less than a month from now) These are all major positives for oil.
I can't tell you went oil will be higher. But I can say it will be higher. I suspect it will be sooner than expected.
So don't count that buy back out just yet. It may start sooner than expected. If we see another NR about increased borrowing capacity, that will be the buy back signal.
Production
Average production in Q4/22 was 31,742 boe
Average production in Q1/23 was 33,153 boe
An increase of 1,411 boe, or 4.4%.
704 boe of that was light oil (the most valuable stuff)
258 boe was heavy oil (not as valuable)
158 boe was Natural Gas Liquids (not as valuable)
291 boe was Natural gas (not worth much)
ie, a nice increase from the prior quarter, and the biggest increase where it matters price wise.
This was the average production for Q1/23. It sounds like the exit production may of been higher.
Most of the new Viking wells are being tied in at the start of Q2/23. I suspect Q2/23 may have slightly higher production than Q1/23.
Those are my reflections (aka my opinion only).
During Q1/23 I was concerned about how badly low oil and gas prices would impact OBE's results. It looks to me like OBE took those low prices very well.
I was looking for negatives in the Q1/23 report - I don't see them.
They got hit with a big wave of low prices. They plowed right through it without slowing down. 4.4% growth quarter over quarter in those conditions, is impressive.
They still pulled in a ton of money.
They increased their debt a little in Q1/23, but that will get reversed in Q2/23 (reversal is happenning as I write this).
The only disappointment is they promissed to buy back shares. Instead they spent that money drilling.
Its rather like a child being disappointed because their mom said she was going shopping and would bring back ice cream, but instead came back with chocolate.
A closer examination of the cash flows explains why that decision was made. Furthermore, it sounds like mom wants that icecream too, and will be going back to the shop as soon as she can to make that pruchase!