Post by
JohnJBond on Jan 14, 2025 3:32pm
Reflections on Obsidian Energy’s News Release dated January
Reflections on Obsidian Energy’s News Release dated January 14, 2025
Reminder
In Sept 2023 OBE started a plan to grow from about ~32000 boe to 50,000 boe in three years.
My OBE analysis is focused on where are they on this journey?
Does it look like they will make it to their destination?
Are they behind or ahead of schedule?
Does it look like they will arrive early or late?
We don’t know what happens after OBE achieves it 50,000 boe destination, but we suspect its going to be good. Good as in, way more cash than OBE needs, and shareholders who would love a big dividend and higher a share price.
The Numbers
They expect 2024 to average ~37,450 boe.
They said Q4 2024 averaged ~40,000 boe.
Lets revisit the Q1 – Q3 2024 numbers
Q1 34,238 boe
Q2 35,773 boe
Q3 39,714 boe
Using 37,450 for the year, and the individual Q1 – Q3 results, we can solve for Q4.
The implied Q4 number is about 40,075 boe for Q4.
This suggests they rounded down to get their stated ~40,000 Q4 average. Which is much better than having rounded up!
It looks like Q4, 2024 was a solid 40k quarter. I’m very happy with that result.
In late 2023, at the start of the three year plan, if I remember correctly, 38,000k was indicated as their predicted 2024 exit. They purchased 1400-1700 boe mid way through the year, and suffered a month long native blockade. Together these added about 500 net boe’s to OBE’s 2024. It follows that OBE ended the year around 1500 boe ahead of schedule.
Although we don’t have the individual Q4 month results, it looks like they may have been in the 40-41k range at the end of the year.
Now that the numbers are out of the way, lets see what else we can learn.
Those following along on Twitter, know OBE went from 4 Rigs in Q4/24 to 6 Rigs presently. On its face, this is a 50% increase. However OBE’s growth is coming from their Peace River heavy oil land. In Q4/23 OBE had 3 active rigs in Peace River. It started Q1 with 5. That is a 67% increase. Rate of growth is positively correlated to number of active drilling rigs.
I note that in Q1 2024 OBE used 5 rigs. But only 3 were in Peace River, the other 2 were drilling light oil.
While all eyes may be focused on the journey to 50,000 boe, there may be a bigger value journey / achievement occurring behind the scenes.
This other journey, is the increase in reserves.
Reserves comes in three kinds – Proven, Probable and Possible.
Proven and Probable are be valued. Possible typically has no value.
This creates a value opportunity, whereby one can move valueless Possible oil, into valuable Proven or Probably oil.
A typical oil company may have some of each.
Sometimes you find a company that has a mountain of Possible oil, and very little Proven or Probable. The latter has an opportunity to greatly increase its value, just by moving some of their Possible oil, into Proven or Probable.
OBE is one of the latter. Their Peace River land is about 680 sections in size. In city people language, that is 680 square miles. To get a grasp of just how massive that is, pick a destination 680 miles away, and think how long it would take to drive there! Now imagine you owned a one mile wide strip over that entire distance! That is how much Peace River land OBE has. It is enormous.
Each year OBE gets a 3rd party reserve report. It is usually released to the public around Jan 30. The last one (released on Jan 30, 2024), stated 21.2 million barrels of Proved and Probable heavy oil. What does that mean you may ask?
Those 680 square miles of Peace River oil rights, contain a few identified oil fields. The main one is called Harmon Valley South. We know from a recent Polymer Flood application, that Harmon Valley South has about 1.9 million barrels of recoverable oil per section.
Another area (the Cadotte Application), that has not yet been put into production, disclosed an indicated (ie possible) 2.4 million barrels of recoverable oil per section.
If we use 2 million barrels of recoverable oil per section, then 21.2 million barrels of Proven and Probable, implies about 10.6 sections of land in the Proven or Probable Categories in the last Reserve Report. (The next one comes out around the end of this month, and OBE did a lot of drilling in Peace River in 2024).
Remember, OBE has 680 sections.
Keeping that in mind, lets look a little closer at today’s NR.
West Dawson
OBE drilled two wells in West Dawson in 2024. Today OBE noted they have 25 follow up locations internally booked. Translation – 25 locations of possible oil, that is probably not in the prior Reserve Report.
OBE gets about 4 wells per section. That suggests about 6.25 sections of possible oil at West Dawson (based on the single well pad, with two wells, they’ve drilled so far).
If we use the same 2 million barrels of recoverable oil per section, that suggests about 12.5 million barrels of recoverable oil. All of that won’t show up in the next Reserve Report, but some of it will. Once they get a few more economic West Dawson wells, then most, or all of it will show in the subsequent Reserve Report.
Dawson
On the subject of Reserve additions, OBE did most of its Dawson drilling in 2024. OBE has not publicly announced how many sections there are of possible oil in Dawson.
Looking at the current Dawson Well map, and filling in the gaps between wells, suggests about 13 sections. (containing 14 wells so far). Those 13 sections may all show as proven or probable in the upcoming Reserve Report.
Using 2 million barrels of recoverable oil per section, suggests Dawson may contribute about 26 million barrels of new Proven or Probable oil to the next Reserve Report. We may find out at the end of the month.
Peavine
This is basically an extension of their successful Dawson Clearwater oil field. OBE drilled a 3 well Pad at the end of 2024. The most recent public production data (Nov/24), didn’t give us any useful production data. Today OBE filled in that gap by telling us those 3 wells had an average IP30 rate of 302 boe/day. Translation – that is a really nice Clearwater oil pad – well above Type Curve.
Gift Lake
OBE drilled its first Gift Lake Well late last year. OBE bought 40 sections of Gift lake land in 2024 (part of the Woodcot purchase). This new well was drilled on that newly acquired land, from an existing Pad that contained two previously drilled Woodcot wells. Today OBE advised that the two prior Woodcot wells had drilled a shallower Clearwater pay zone, and the new OBE well targeted a deeper Clearwater pay zone. The new Well was rig released on Dec 8/24. OBE didn’t give any results for this new well. That said, it sounds like it was a commercial success. Commercial success means additional proven / provable reserves.
Nampa
Last Winter OBE drilled a successful Nampa Clearwater well. This is a new area, and that well indicated the presence of a new oil field. It was winter access only, so OBE only got about a month and a bit of production out of it before having to close the well for the rest of the year. This well should of added proven and probable recoverable oil to the upcoming Reserve Report. So far, OBE has given no public indication of the number of possible sections of oil they may have in this area.
Right now, OBE has two drilling rigs drilling at Nampa. One North of last winters well, and one South. The North Rig is reported as targeting the Clearwater. The South Rig is reported as targeting the Bluesky.
From a bystanders point of view, it looks like OBE may be expanding this Nampa area as fast as they can. These two rigs Spud on Dec 30/24 and Jan 2/25. Typical wells take about 2 weeks to drill. This suggests these rigs may be finished later this week. I will be watching closely to see if they continue to drill in the Nampa area. If they do, OBE may be moving this field to all weather access Field.
I suspect there may be a significant proven and probable oil addition to be had here. Time will tell.
Harmon Valley South
OBE mentioned they successfully tested a new drilling design in 2024. Those following along on Twitter will be familiar with the two “Matrix” wells I’ve talked about. Apparently OBE has named these “Waffle” wells. So from now on, Waffle it shall be.
Those two HVS Waffle wells have been fantastic producers - see my Twitter timeline for the numbers.
Walrus
At the start of the 3 year plan, Walrus was put forth as a foundation building block. Walrus did not live up to its hopes. That said, it’s still economic, and will contribute to additional proven and probable reserve additions.
At the end of the day, it didn’t matter. The lower than hoped volume from Walrus was more than made up for elsewhere – thus the 40,000+ boe Q4.
OBE drilled a new four well pad about three miles north of the prior Walrus development. Today OBE gave us an update on this Pad. They didn’t provide production numbers, but did mention that two of these wells came on line in late Dec and the other 2 last week. Ie, not enough time to get useful production data.
Most interesting is two of these wells have been drilling using the Waffle technique.
It sounds like these wells are economic. This means regardless of their rate of production, this pad will add to proven and probable reserves.
Cadotte
OBE drilled two, 3 well pads at Cadotte. One pad (13-15) showed initial results in the public November production data. Those first few hours of production did not look good.
Today OBE provided information that makes the Cadotte 13-15 wells look much better
OBE pointed out that these Cadotte wells take longer to clean up when put onto production. This is valuable and reassuring information that put the November production data in context.
OBE went on to say that the 13-15 wells are coming online in a staggered fashion. One well got to an IP 30 rate of 172 boe/day, and the other 150 boe/day. It appears clean up continues, and production may increase.
Light Oil
OBE has one light oil Rig drilling Pembina wells. The light oil area differs from the Heavy oil area, in that the former seems to add about as many proven / probable barrels as it produces (more or less).
These new wells tend to be excellent, and produce lots of volume and cash, but don’t appear to give the behind the scenes value assist of converting large amounts of valueless possible barrels into valuable proven and probably barrels.
The possible exception is OBE’s new Basal Belly River well. Decades ago, OBE’s predecessor drilled very successful vertical Basal Belly River wells. Horizontal Basal Belly River wells are a relatively new idea. Nearby producers like HAM have had good success with this method.
OBE seems to have all the ingredients to profit from horizontal Basal Belly River wells. OBE stated today the results from its first horizontal Basal Belly River well look encouraging, with some technical issues that will be resolved shortly. It will be interesting to see if (or when) OBE drills a second of these wells.
Hedging
As a general rule I don’t like hedging.
However, in some situations it’s nice to have.
There is presently some uncertainty about possible tariffs applied to Canadian oil imports into the US. If that were to happen, the US WTI price should increase, and the Canadian dollar oil gate price received by Canadian producers should decline. Ie the normal positive correlation between Canadian and US oil prices would become negative. That would be bad news for any Canadian producer that has tried to lock in their cash flow by hedging in US WTI.
OBE’s hedges revealed today, show they did not fall into that trap.
OBE’s oil hedges are Swaps in C$. If the Canadian oil gate price drops because of a US Tariff, OBE’s hedges will offset much of the loss. That’s reassuring.
At the same time OBE’s hedges continue to be short term (Jan, Feb and March). Whatever happens oil tarrif wise, should be over by then.
On the subject of Tariffs, if you are like me, you watched Premier Smith’s full interview yesterday.
In my view, Premier Smith is a top level operator. She doesn’t want tariffs on Canadian oil exports to the US. She did her part by visiting Trump, and those around him, to make her case.
She can also put a scare into Canadian producers, and American consumers (refineries etc), to prompt them to proactively pull all the strings they can to carve out oil from a possible US Tariff policy. I suspect she used yesterday’s interview to do the latter.
She may of put some cold water on the Canadian oil stock prices, but she may also of significantly lowered the probability of an actual oil tariff.
Summary
Returning to OBE’s 50,000k journey.
A 40,000 boe Q4 means OBE is ahead of schedule.
6 active rigs (5 in their growth area), indicates there is an increasing probability OBE may reach its 50,000 boe destination around the end of this year, instead of sometime in 2026. The 3 year plan, may turn out to be a 2 year plan (or 2 and a bit)
Its premature to say that with confidence. If oil prices co-operate, that probability will continue to grow.
At the same time, pay attention to the Reserve Report. OBE may be adding value even faster, by moving Peace River possible oil into probable or proven.
I think that’s it.
As always, these are my personal thoughts and reflections. They may be wrong, so double check for yourself.
Sincerely…………..