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Obsidian Energy (OBELF) Investor Presentation - Slideshow

May 07, 2020 8:17 AM ETObsidian Energy Ltd. (OBE), OBE:CA15 Comments
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The following slide deck was published by Obsidian Energy Ltd. in conjunction with this event.

Obsidian Energy
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2020-07-14 20:20 ET - Market Summary

by Stockwatch Business Reporter

West Texas Intermediate crude for August delivery added 19 cents to $40.29 on the New York Merc, while Brent for September added 18 cents to $42.90 (all figures in this para U.S.). Western Canadian Select traded at a discount of $9.95 to WTI, down from a discount of $8.01. Natural gas for August added one cent to $1.75. The TSX energy index added 3.05 points to close at 76.96.

In its widely watched monthly report, and its first report assessing oil markets in 2021, OPEC forecast a record rise in global oil demand next year. The cartel sees demand spiking by seven million barrels a day in 2021. That will not be enough, however, to make up for this year's forecast demand drop of 8.95 million barrels a day (a slight improvement over last month's figure of 9.1 million barrels a day). OPEC further noted that its 2021 forecast includes no further downside risks. "This assumes that COVID-19 is contained, especially in major economies," said OPEC. (Meanwhile, amid spiralling COVID-19 case counts in the United States, California has reimposed lockdowns on businesses including bars, museums, cinemas and dine-in restaurants.)

Here in Canada, oil sands producer Cenovus Energy Inc. (CVE) added 23 cents to $6.01 on 12.5 million shares, after trumpeting its "bold," "robust" and "impactful" efforts on ESG (environmental, social and governance). Put another way, the company has released its 2019 sustainability report. The report clocks in at 92 pages, making it only one-third shorter than Cenovus's actual annual report on SEDAR, at 136 pages. (It is increasingly common for companies to file stand-alone ESG reports rather than include them in annual reports, due to concerns about length and complexity -- in other words, readability. Some ESG reports even exceed the page counts of annual reports as each subsidiary holds forth at length.)

The highlight of Cenovus's ESG report is arguably its goal of hitting "net zero" greenhouse gas emissions by 2050. The company first set this target in January, 2020, and although it was not the first oil sands company to aim for net zero -- Canadian Natural Resources Inc. (CNQ: $23.93) and MEG Energy Inc. (MEG: $3.66) beat Cenovus on that front -- it was the first to set a date. Cenovus clarified, however, that the date is purely "aspirational." There are too many technological improvements that will need to happen first. In addition, emissions can be "impacted by unique circumstances related to our response to external factors," as Cenovus rather defensively put it in the new ESG report. For example, in 2019, Cenovus had to defer the ramp-up of an oil sands expansion to comply with the government of Alberta's curtailment order, yet still had to inject steam to protect the integrity of the reservoir. This resulted in per-barrel emissions that actually increased in 2019 over 2018. When it comes to hitting net zero, sighed Cenovus, "progress won't be linear."

Speaking of non-linear, a shipment of Cenovus's oil sands crude has reached the halfway point of its circuitous cross-country journey to an Irving Oil refinery in New Brunswick. As discussed in the Energy Summary for July 2, Cenovus and Irving Oil took to Twitter on Canada Day to celebrate the kind of so-called success story that could only happen here: the planned delivery of Alberta oil sands crude all the way to the East Coast. Of course, in the absence of a pipeline -- rest in peace, Energy East -- the companies had to find a more roundabout way to move the oil. They loaded up a tanker in Burnaby, B.C., pointed its nose south, and sent it on a journey all the way down the West Coast, through the Panama Canal and then north again. Cenovus posted a picture on Twitter yesterday of the tanker passing through the Panama Canal. "It's exciting to see this journey unfold!" replied Irving via its own Twitter account.

Irving should be even more excited now that, according to the monitor on the MarineTraffic website, the tanker has actually already docked in Saint John, N.B. Cenovus and Irving's Twitter updates were not in real time; the vessel actually left on June 18, went through the Panama Canal on July 7 and arrived in Saint John today, after a voyage of 25 days and 17 hours. The entire journey spanned about 11,900 kilometres. By contrast, Energy East's proposed route was 4,600 kilometres.

Back in Alberta, Stephen Loukas's Cardium-focused Obsidian Energy Ltd. (OBE) edged up two cents to 55 cents on 39,600 shares. It was in the unusual position today of having its own interim president and chief executive officer, Mr. Loukas, describe it as "just no longer relevant in today's capital markets." To be clear, Mr. Loukas was not talking solely about Obsidian, but rather the numerous companies currently producing oil from the Cardium. Mr. Loukas told the Financial Post that there are too many Cardium companies that are simply too small in the context of today's market. This creates consolidation opportunities. "There are 15-plus companies that have a not inconsequential amount of their production profile in the Cardium," he said. By his estimates, "there should probably be two players in the Cardium -- three at most. Certainly not 15."

Mr. Loukas said he was "open-minded" as to whether Obsidian wants to be a buyer or a buyer's target. (The headline may have given a clue as to the reporter's thoughts on the matter: "Long-shot Obsidian talks up consolidation in beaten-down Canadian oil patch.") For nearly a year now, Obsidian has been engaged in a "strategic review," generally a euphemism used by companies putting themselves up for sale. Its cash position of just $4-million and its net debt of $517-million (as of March 31) raise questions as to how it would pay for a deal that put it on the buyer's side of the table. Still, in terms of production, Obsidian is a dominant player in the Cardium, producing roughly 22,000 barrels of oil equivalent a day from the play in the first quarter. Also worth noting is that valuations across the industry have plummeted amid the downturn. Just last week, Tamarack Valley Energy Ltd. (TVE: $0.83) announced an Alberta asset acquisition at just $1,700 per barrel of production, down sharply from last year's dealings at over $12,000 per barrel. (Tamarack is in a much stronger financial position than Obsidian, but the numbers are nonetheless striking.)

Certainly Mr. Loukas's comments will give shareholders much to talk about at Obsidian's upcoming annual meeting on July 30. The company will also seek shareholders' approval at the meeting for an amended, more generous equity-based incentive plan for directors and officers. Among other things, Obsidian's proposal would allow the maximum dilution under the incentive plan to rise to 9 per cent from 3.9 per cent of outstanding shares. This proposal seems to have caused some consternation among investors. To that end, Obsidian made the unusual announcement yesterday that it has posted an entire on-line presentation in support of its proposal, which in its view will simply "bring us in line with the peer group." A cynic might question whether Obsidian deserves to be in line with the peer group. Over the last three years -- three years being the maximum term of a rolling incentive plan before requiring fresh shareholder approval, under TSX rules -- Obsidian's stock has lost 95 per cent of its value, whereas the peers identified in the presentation have lost an average of just 80 per cent. None of them lost more than 93 per cent. This makes Obsidian the worst performer in the group, a fact that has not stopped its insiders from seeking increased incentive compensation.

We end, alas, on an unhappy note, as another once-prominent figure in the oil patch went drowning in debt -- with a twist. Calfrac Well Services Ltd. (CFW), a major fracking company that went public at $15.50 in 2004, today lost three cents to 14 cents on 7.06 million shares, after starting restructuring proceedings under the Canada Business Corporations Act (CBCA). This is not a bankruptcy or insolvency process, Calfrac wanted to make clear. "There is no admission of insolvency," its vice-president of capital markets firmly told the Financial Post. Unlike proceedings under the Companies' Creditors Arrangement Act (CCAA) or the Business Insolvency Act (BIA), a CBCA restructuring involves a technically solvent company that does not need a receiver to manage its assets. What Calfrac plans to do is a recapitalization that will put most of the company in the hands of its creditors. This proposal comes barely three weeks after Calfrac released its first quarter financials, showing a loss of $123-million and long-term debt of $947-million. The recapitalization will reduce debt by $570-million, but leave the current shareholders with just an 8-per-cent interest in the company.
On July 14, StockWatch (https://www.stockwatch.com) published an article about the smallcap E&P Business in Canada, with a sizable comment about Obsidian Energy. In particular, the author made the following statement about the proposed changes to OBE's equity-based incentive plan, which reads in part as follows:

The company will also seek shareholders' approval at the [annual] meeting for an amended, more generous equity-based incentive plan for directors and officers. Among other things, Obsidian's proposal would allow the maximum dilution under the incentive plan to rise to 9 per cent from 3.9 percent of outstanding shares. This proposal seems to have caused some consternation among investors. To that end, Obsidian made the unusual announcement yesterday that it has posted an entire on-line presentation in support of its proposal, which in its view will simply "bring us in line with the peer group." A cynic might question whether Obsidian deserves to be in line with the peer group. Over the last three years -- three years being the maximum term of a rolling incentive plan before requiring fresh shareholder approval, under TSX rules -- Obsidian's stock has lost 95 per cent of its value, whereas the peers identified in the presentation have lost an average of just 80 per cent. None of them lost more than 93 per cent. This makes Obsidian the worst performer in the group, a fact that has not stopped its insiders from seeking increased incentive compensation.

This article is relevant since it shows that an independent analysis of the Company's incentive proposals completely agrees with shareholder statements that this proposal is unacceptable.

To add to this outrage, Mr. Loukas just received 600,000 shares of Restricted Stock Units at a price of $0.55 CAD (ceo.ca/...). This is just the beginning of the dilution gravy train.

If you haven't already voted against the Proxy Amendment, please do so. If you want to read the changes directly, please look at Appendix D in the Proxy Circular. Finally, to end this self-dealing, please consider withholding all votes from the Board.

It is time we send a message to Mr. Loukas and his clan of thieves.
H
I wrote to investor relations and the Corporate Secretary with these comments. Please vote no to the undeserved compensation plans.
To investor Relations
I think it was a good idea to send out a deck highlighting the LTI programs and indicating how they line up with competitors. Unfortunately that deck should have come out in May so that investors were forewarned about the plan. This is another example of the disconnect the company has with its largest shareholder base, the Retail Investor.

There is a major fallacy in your program and the attempts to be competitive with a stock based program with others in your industry. If you make relative share price comparisons with the many competitors in the Industry, OBE stock has been beaten down 3 to 10 times as much as competitors. I know of no other surviving company that has lost 95% of their value since September 2018. Most companies may be sitting around half of their share price which means that these LTI programs give recipients a highly torqued instrument far and above other companies. The irony is that they get this reward for the being the poorest performer in industry.

Shareholders like myself have patiently waited for the realization that OBE Is way undervalued and look forward to catching up with other valuations. I did not anticipate having my fortunes diluted by rewarding the Management and Directors who have destroyed shareholder value.

My advice would be to delay this program until your share price metrics line up with competitors on a 5 year basis and then yes please reward the Management and Directors who brought us back to more normal valuations. In the mean time encourage all insiders to buy OBE stock using their own cash and taking on the risk that current shareholders have realized. That will give you tremendous alignment between shareholders, Directors and Management.
m
I want to alert all Retail Shareholder to the Proxy Circular which was issued in the last two days. In addition to voting against most of the Board, we are STRONGLY advising everyone to vote against all changes to the Stock Option Plan. In particular, the Board is now trying to amend the Plan by allowing for it to give Options to Directors, which can be up to "10% of the issued and outstanding Common Shares" (see Page 99 of the Circular, which has a redlined copy of the proposed changes). This will dilute ownership down to nothing, and essentially give the Company to Loukas and his friends on the Board.
H
I sent the following to Mark Hawkins, Corporate Secretary and Obsidian Investor Relations. Please write to them if you share my concerns about this latest shareholder attack.


Let me take this opportunity to voice my grave concerns about this proposed amendment contained in the Proxy Circular.
I cannot conceive of what you folks are thinking given the very difficult last 5 years experienced by shareholders and yet you have yet again found a way to hurt the retail shareholders while enriching yourselves.
The Obsidian proxy circular requests approval for an amendment to the stock option plans for staff, executive and Board members. In reviewing the details, the changes are very confusing but the summary of the plan is that Obsidian wish to greatly expand the use of stock options to incentivize staff, management and Board members.
The Proxy states that stock option plans are an effective way to incent and retain staff for the long term.
I have significant concerns with the timing and magnitude of such a program. Please consider the points below:
- The initial tranche of the program would represent a 7% dilution to existing shareholders. Obsidian have also increased the limits for future year’s dilution to 10% of shares which is significantly higher than the existing Corporate levels. This is a further detriment to our shareholdings and will cause further price degradation.
- The timing of such a program picks an exceedingly low point in this company’s stock price which no doubt makes the program very appealing as any recovery in the stock price from here has participants making out like bandits at current shareholder’s expense
- Why is the company concerned about long-term retention of staff and Board members? The Board size should be reduced given the company is a micro cap and there is no indication of a long term for this company given the strategic review options on the table. These are the types of plans that are considered as a reward for strong operational and share performance not a company that has destroyed the share price by 95% in 2 years.
- Such a program takes away from what would be a more appropriate program which is company staff and the Board buying shares in the market to demonstrate faith in the company’s future. I would suggest a stock purchase plan as an alternative where the company might subsidize stock purchases as an incentive.
I am advising all Obsidian shareholders that I know to reject this initiative. Such an initiative at this time confirms my earlier stated concerns that you have lost your sense of responsibility to shareholders.
Most shareholders are already voting against most of the Board. However, if you read the Proxy carefully, the real theft is that the Board is recommending approval of a revised Stock Option Program, which allows it to receive up to 10% of "issued and outstanding Common Shares" PER YEAR. If this were to happen, your investment is worth NOTHING. The dilution will be huge. PLEASE, vote against all proposals including the Stock Option and Compensation Proposals. The Board must have Shareholder approval to amend the Option Plan, and we MUST STOP THIS. The good news is that the two largest shareholders in the Company have already voiced that they will be AGAINST the proposal.
m
OBE Shareholder Group

Thank you for your continued support of the OBE Shareholders Group!

We wanted to provide you with an update on our quest to secure a Board position at OBE. Unfortunately, our first attempt has failed. However, we will continue to seek “retail investor” representation on the Board, which will require your participation and support.

We were fortunate to have an outstanding Board candidate within our network, Mr. Dwight van Kampen. Dwight has significant shareholdings in OBE, and lives in Calgary. He is also a certified public accountant, who had worked for over 20 years at Shell Canada in various senior roles including Director of Financial Operations and Corporate Governance. Most importantly, he was also a member of Shell Canada’s Board of Directors and is very knowledgeable about the Canadian E&P business. It is hard to imagine a more qualified Board candidate than Mr. van Kampen.

In accordance with OBE’s “By-Law No. 2” (advance notice of nominations of directors), Dwight first contacted OBE’s General Counsel & Corporate Secretary, Mr. Mark Hawkins, in mid-May. The timing of this contact was intended to be in advance of the “nomination window” mandated by the By-Law, which in turn was based on the announced date for the Annual Shareholders Meeting (July 30).

Ultimately, Dwight had a call with both Mr. Hawkins and Mr. Loukas, which occurred on May 14. It was clear from the call that Mr. Loukas had no interest in engaging with retail investors or entertaining any “outside” participation in “HIS” Board; Loukas’ demeanor was adversarial.

Upon pressing Mr. Hawkins regarding inclusion of Dwight’s candidacy in the Annual Meeting“Information Circular and Proxy Form”, Mr. Hawkins stated that “Obsidian is under no obligation to do this and will not be accommodating this request.” Without Dwight’s name on the proxy statement, his candidacy would fail, since most investors would not be attending the Annual Meeting and would be voting shares remotely based on the proxy statement. Therefore, Dwight removed his name from contention on May 22.

Legally, OBE could have accommodated Dwight’s candidacy by including his name on the proxy statement, but by declining to engage with retail investors, it clarified that the only way to get Mr. Loukas’ attention, is through overwhelming strength and if necessary, filing a legal action in Canada. The legal situation in Alberta is complicated, but there are clear avenues for forcing OBE to include an outsider on a proxy form. Unfortunately, the By-Law by itself did not provide this legal framework.

Of course, it is ironic that Mr. Loukas would block any attempt by an outside investor to seek a position on the Board of Directors by a fair and open election, when one considers how he obtained his current position. He forced David French to include him in the Board proxy statement based on FrontFour’s shareholdings, which were approximately 5% of public float, which is far less than our collective total. He did this because he felt that “Management” did not represent outside shareholders. Now that he is king, he acts very much like the management he was so critical of when he was on the “outside”, by preventing an open and democratic process.

As a first step to address this situation, we request that you withhold all of your share votes for all Board nominees EXCEPT for Gordon M Ritchie and Michael J. Faust. In other words, please withhold all votes for the following Board members:

*John Brydson
*Raymond D Crossley
*William A Friley
*Maureen Cormier Jackson
*Edward H Kernaghan
*Stephen E. Loukas

By voting for two of the Board members, while withholding votes for the remainder, we hope to demonstrate the collective power of the retail shareholders. We expect that proxy materials for the July 30 Annual Meeting should be made available over the next couple of weeks.

One additional option for us to exert some control over OUR Company is to call a Special Shareholder Meeting including filing of a proxy statement to make the following demands:

* Reduce the size of the Board from 8 to 6 members (which is more appropriate for a Board managing a Company with a marketcap of $31M USD)
* Reduce Board compensation to $50K CAD per year (payable in cash only, not stock)
* Election of Mr. van Kampen to the Board of Directors

Please provide us with your feedback about this proposal. However, if we cannot demonstrate our power by withholding votes for Board members, it’s not practical to incur the costs associated with filing for a Special Shareholder Meeting.

Although we are disappointed with Mr. Loukas’ open disregard for retail shareholders, we can succeed if we have the votes. We hope you will join us in this effort and look forward to hearing from you in the near future.

Regards,

DD
OBE Shareholders Group
Respond to obeshareholder@gmail.com
m
All OBE Retail Shareholders:
OBE Shareholder Group requests that you withhold all of your share votes for all Board nominees EXCEPT for Gordon M Ritchie and Michael J. Faust. In other words, please withhold all votes for the following Board members:

*John Brydson
*Raymond D Crossley
*William A Friley
*Maureen Cormier Jackson
*Edward H Kernaghan
*Stephen E. Loukas

By voting for two of the Board members, while withholding votes for the remainder, we hope to demonstrate the collective power of the retail shareholders.
kaplanassetmgt profile picture
The Board still needs a lot of guidance. Our Voice Of Responsibility group has been giving the Board a lot of great advise. They have not fully listened to us. We feel there will be major changes coming up. Contact me for the latest news.
cedarwoodken profile picture
Previous boards were certainly problematic but the current board seems to be making the right moves though there is still no guarantee of success.
matttrakker profile picture
Can’t wait to vote... against them all. Ps I’m in the group. Thanks for your hard work!!
HCD Senior profile picture
IMO BOD total failures in fiduciary responsibilities. Financial oversight & shareholder value seem to be alien concepts. No grade low enough to score them. Either get their act together or we should vote in mass to remove them all.
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