(Idea) Obsidian Energy
Obsidian Energy (OBE) is an oil and gas E&P that produces approximately 32,250 boe/d and is weighted 65%/35% liquids to natural gas. It operates in three Canadian plays, the Cardium, Viking, and Peace River, as shown in the following snapshot.
Source: OBE November 2023 Investor Presentation, Nov. 9 2023.
OBE planned to grow production by 6% but has grown by 4% due to the impact of wildfires. Next year, it plans to transition to more aggressive growth. The company’s board of directors has targeted 50,000 boe/d as the level at which it will have the scale to succeed as an independent E&P. Its three-year growth plan is outlined in the graphic below. Cash flow projections are based on $75 per barrel WTI, $3.00 AECO, a $15 WTI-WCS differential, and the capital expenditures necessary to boost growth.
Source: OBE Three-Year Growth Plan Conference Call Presentation, Sept. 2023. Red circle added by author.
The projections indicate that OBE generates enough free cash flow at prices above $75 per barrel WTI to fund growth capex internally. OBE is shown to generate approximately $200 million of free cash flow by 2026.
Growth will come from its Peace River heavy oil acreage, while production from its light oil plays remains steady. Cash flow from steady light oil production will fund the Peace River’s rapid production growth. The Peace River’s high oil content relative to OBE’s other acreage will increase its torque to oil prices as production grows, as shown in the area circled in red in the table above. It shows cash flow sensitivity to a $5 move in oil prices in 2026 to be more than double the current rate.
Management estimates that by 2026, OBE can keep production flat with capex of $300 to $325 million. This implies that at $75 per barrel WTI, maintenance capex will consume only half of operating cash flow, allowing the remainder to be allocated at management’s discretion.
Asset Value in Excess of Enterprise Value
OBE’s asset value is not properly reflected in its current stock price. In Peace River alone, management estimates OBE has 869 drilling locations. However, only 24 of these locations are booked in its reserve report.
Management's three-year growth plan assumes that 199 out of OBE's 869 total estimated wells will be required to increase production from the current 32,250 boe/d to 50,000 boe/d in 2026. In the Clearwater play alone, only 70 out of the comapny's 560 estimated drilling locations factor into its three-year growth plan. By 2027, management expects to have access to 80% of OBE's current land base for development purposes.
The company also has huge development potential in its light oil acreage. OBE is the single largest acreage holder in the Cardium, where management estimates it has 25 years of drilling inventory at the current production rate.
OBE also benefits from owning and operating the vast majority of its production, which gives it control and flexibility to implement its development plans.