Post by
JohnJBond on Sep 21, 2023 1:23pm
More thoughts
The conference call has now ended - I encourage those who were unable to attend to look for the reply on OBE's web site. I expect it will be available soon.
Possible increase in published target price
Will this announcement increase analyst target prices?
Analysts these days typically use a Net Present Value model to produce a target price.
They use the future oil and gas price strip to price future cash flow, then discount that back to the present to get their target price.
In most cases, companies have fairly constant growth rates.
This means target prices are mostly impacted by changes in the future strip price - ie the modeled production growth rate stays reasonably constant, and the main variable is the future strip price.
OBE has just introduced a major increase to their future growth rate. It follows that analysts will adjust their models to account for this increased production. This should increase the published target price. It will be interesting to see if those banks that follow OBE put out an increased target price in the next 24-48 hours. Such increases are often followed by increased market prices.
Share buy backs
Initially after reading todays NR, my first thought was the money for buy backs is being redirected to growth. The conference call today put that concern to rest. The CEO said they have been buying back in September, and they have no concern about impacting liquidity - translation, there will be no impact on buy backs.
Maintenance cash flow
50,000 boe/day is expected to take $325 million of maintance cash flow. That is about $6.5 per BOE. That is like saying they need a net back of $6.5 to generate enough cash to keep going at 50,000 BOE. That is a very small netback. It follows there will be a lot of extra cash beyond that needed to maintain production. That is the sort of number that attracts buyers.
2024 exit rate
During the conference call they said their 2024 exit rate is expected to be 38,000 boe. Its not on the slides, but was stated verbally. This is important because it gives us an idea of the growth rate for 2024 (often 3 - 5 year plans end with larger production, but it takes a long time to get started).
We don't know the exit rate for 2023. At the Peter's conferance, the current rate was stated to be about 32,500 if I remember correctly. Maybe 2023 exits at 33 - 34k. Either way, it means 2024 growth of 10% plus, exit to exit. (it would be 15% if the 2023 exit is 33k, and that is a big growth number for next year).
10-15% growth combined with strong oil prices, and continued share buy backs! The near term story was good before. Adding in that kind of growth rate, makes the story even better!
Deploy the Viking Drill!
They have a number of Viking wells licenced and ready to drill. Apparently they've just been waiting for the right oil price, and that price has arrived. Those wells are fast and cheap to drill and they have a very high IRR. I don't know what it is at current oil prices, but likely over 200% - ie you get your money back fast, and you get to increase production in the near term.
Peace River IRR
The Peace River IRR is very good. Their forecast is based on $75WTI, so I assume their Peace River IRR forecasts are based on that WTI price. If you increase the WTI price, these IRR's will increase.
Currently the Walrus IRR is forecast north of 100%. After they build the processing facility they plan to have running in 2025, these IRR's are forecast to be 221%. 221% IRR is fabulous. Essentally that means you get your money back in about 5 months, and its all gravy thereafter. Best of all, these wells have a relatively slow decline rate, so there is a long period of free cash flow!
3D and 2D coverage
They've got a lot of 3D and 2D coverage of their Peace River land. It follows that the market can have a high degree of confidence in this planned production actually happenning. ie, its not some high tech story, this is real.
The Strategy
I agree completely that there is no point holding a load of oil in the ground. It only has value if its removed and sold. OBE has the oil in place, and needs a strategy to get it out and sold. The market is not valuing OBE's reserves presently, so implementing a plan to get that oil sold is just what we need.
This strategy is a change from my previous investment thesis.
My prior thesis was based on production at current rates, and predicting oil/gas revenue to determine when they'd achieve their target debt level, then trying to value share holder returns thereafter by way of share buy backs and/or dividends.
I hoped along the way, others capable of buying the whole company, would do the same, and a takeover offer may appear.
Anytime there is a change in course, it takes a bit of time to digest.
I like this plan, because it adds in the probable monitization of the Peace River asset into the share price. ie, it adds to everything that was previously in my investment thesis.
What is 24,000 boe of heavy oil per day worth?
In my view, the answer to that question is a big number - likely more than OBE's current enterprize value. That makes OBE more attrative as a possible take over target.
Take that number and divide it by 65-80 million shares, and see what that may be worth per share?
Possibly the most important part of this plan is not the forecast Free Cash Flow or forecast debt etc. Its the numbers that allow investors to calculate their own estimate of Free Cash Flow using their own forecast for oil and gas prices (and number of shares outstanding). Those numbers get huge very easily.
OBE can't put out a plan like this with a high forecast oil price, because it would invalidate the whole plan. They picked a conservative oil price ($75 WTI), because it seems like an easy target to meet. That feeling of an achievable target is transferred to the 50,000 boe target.
Its up to investors to then apply their own forecast oil and gas prices, to OBE's forecast production to come up with a target price. That target price is now higher than it was yesterday.
Hedging
I don't like hedging. Investors can hedge themselves. When a company does it for them, it limits the number of potential investors.
That being said, OBE hedges with near term hedges so they are less likely to miss out future price spikes. Their Sept hedges will be over soon. Their Oct hedges are in Canadian dollars, and limit upside to C$122. OBE is not losing much money on these things. Personally I'd prefer if they didn't lose any by avoiding them altogether. Back in the Frence days, OBE was very negatively impacted by hedging WTI in USD at a time when Canadian oil declined in value while WTI did not. Hopefully they don't ever repeat that. If they do keep hedging, hopefully they will remain very short term, and in Canadain dollars.