Obsidian Energy (OBE) recently released its guidance for 2022. Obsidian’s production expectations are a bit higher (mostly for heavy oil production) than I previously modeled. This higher level of production combined with strong oil prices may help it reduce its net debt to under US$150 million by the end of 2022. Obsidian’s heavy oil margins particularly expand (in terms of the percentage increase) as oil prices improve.
Overall Obsidian looks fairly valued for a longer-term (after 2022) $65 WTI oil environment now, and may have a bit more upside with longer-term $70 WTI oil.
This report uses an exchange rate of US$1.00 to CAD$1.27.
2022 Outlook Based On Guidance
I had previously modeled Obsidian’s production for 2022 at an average of 29,000 BOEPD. Obsidian has since provided 2022 guidance for higher production levels, with a range of 29,100 BOEPD to 30,100 BOEPD. Most of that difference is due to Obsidian’s increased heavy oil production expectations as it continues developing its Peace River asset.
Obsidian has achieved good results from its new heavy oil wells. Strong oil prices particularly help its heavy oil economics. At mid-$80s WTI oil, it would likely realize in the mid-to-high $50s for a barrel of heavy oil. At $50 WTI oil, it would realize in the mid-$20s for a barrel of heavy oil, less than half the current amount.
Obsidian also noted that it is beginning appraisal drilling in the Clearwater formation in its Peace River asset. It is spending around US$8 million on the Clearwater wells and is not incorporating any production from these exploratory Clearwater wells in its guidance.
At current strip prices (including approximately $86 WTI oil in 2022), Obsidian is expected to generate US$582 million in oil and gas revenue. Obsidian’s hedges have around negative US$13 million in value at current strip prices, mainly due to the hedges it added with the PROP acquisition.
The table below shows the hedges that Obsidian added in the PROP acquisition. The volumes are relatively modest, but the swap prices (in the low-to-mid $60s) are low enough at mid-$80s WTI oil to have around negative $8 million in value.
After hedges, Obsidian is projected to generate around US$569 million in revenue.
$ Million USD
Light Oil And NGLs [BBLs]
Heavy Oil [BBLs]
Natural Gas [MCF]
Source: Author’s Work
This results in a projection that Obsidian could generate US$352 million EBITDAX in 2022 at current strip prices. This does not include the potential effect of other compensation (as mentioned below).
$ Million USD
Less: Operating Expense
Less: Cash G&A
Source: Author’s Work
Obsidian is also projecting US$115 million in capital expenditures, US$11 million in decommissioning expenditures and US$19 million in estimated charges for 2022 related to deferred share units, performance share units and non-treasury incentive plan cash compensation amounts. If we subtract another US$22 million for interest costs, that would result in a projection of US$185 million in positive cash flow for Obsidian in 2022.
Obsidian ended 2021 with approximately US$331 million in net debt, so this positive cash flow could reduce its net debt to US$146 million by the end of 2022. This level of net debt would be 0.4x EBITDAX, which would be a comfortable level of debt.
Due to the increased production expectations for 2022 and the strong near-term commodity prices (resulting in accelerated debt reduction), I’ve bumped up Obsidian’s estimated value to US$7.00 per share at longer-term (after 2022) $65 WTI oil and US$8.50 per share at longer-term $70 WTI oil.
At longer-term $75 WTI oil, Obsidian would now have an estimated value of a bit over US$10 per share.
Obsidian is probably fairly valued for a longer-term $65 WTI oil environment now, while it would have a bit more upside with longer-term $70 (or better) WTI oil.
Obsidian Energy appears capable of reducing its net debt to around US$146 million by the end of 2022 at current strip prices. Obsidian’s production guidance for 2022 was better (particularly for heavy oil production) than I expected, and combined with strong commodity prices, Obsidian may be able to generate US$185 million in positive cash flow in 2022.
The rise in Obsidian’s share price leaves it roughly fairly valued for a long-term $65 WTI oil environment now, but there appears to be a bit more upside in a long-term $70 WTI oil environment.