Obsidian Energy: Wildfires Impact Q2 2023 Production

Summary

• The Albertan wildfires may reduce Obsidian's Q2 2023 production by over 2,000 BOEPD, while impacting its full-year production by around 600 BOEPD.
• This (and lower commodity prices) reduces my estimates for Obsidian's 2023 FCF to US$45 million.
• Obsidian is helped by narrowing heavy oil differentials, while lower royalties offset some of the commodity price impact.
• I now estimate its value at around US$8 per share in a long-term $75 WTI oil environment.
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Weaker commodity prices and the impact of Alberta wildfires (resulting in shut-in production) have reduced my estimates of Obsidian Energy's (NYSE:OBE) 2023 free cash flow to approximately US$45 million now, down from my earlier expectations for US$80 million in free cash flow.

The wildfires may have reduced Obsidian's full-year 2023 production by approximately 600 BOEPD so far. Obsidian's Q1 2023 results were solid, but Q2 2023 will take a significant hit from the wildfires.

I am now estimating Obsidian's value at US$8 per share in a long-term US$75 WTI oil (and CAD$3.75 AECO) environment.

This report uses US dollars (unless otherwise mentioned) along with an exchange rate of US$1.00 to CAD$1.36.

Alberta Wildfires

A very bad wildfire season in Alberta contributed to Obsidian needing to shut in a large amount of Pembina and Peace River production in May. There has been no indication of damage to Obsidian's infrastructure or key assets, but the wildfires resulted in the evacuation of many employees and contractors. At its peak, 15,500 BOEPD of Obsidian's production was shut in.

The wildfire situation remains volatile, although at last report Obsidian had restored all but 1,750 BOEPD in production. It has not provided an estimate of how the shut-ins may affect its full-year production, but I estimate a 600 BOEPD hit to full-year production at this time. Further outbreaks may increase this impact to Obsidian's full-year production.

Updated 2023 Outlook

I have updated Obsidian's projected 2023 results with production reduced by 600 BOEPD to account for the wildfires. This update also factors in lower commodity prices such as the low-$70s current strip for WTI oil.

Obsidian's realized price for its heavy oil was very low in Q1 2023, at a bit over US$33 per barrel. Differentials have been improving quite a bit though, so I am currently projecting Obsidian to realize US$39 per barrel for its heavy oil over the full year.

Obsidian is now projected to generate US$494 million in revenues before hedges in 2023, while its hedges may have US$15 million in positive value.

Type	Units	$ USD/Unit	$ Million USD
Light Oil And NGLs [BBLs]	5,338,125	$65.00	$347
Heavy Oil [BBLs]	2,458,275	$39.00	$96
Natural Gas [MCF]	23,622,800	$2.15	$51
Hedge Value			$15
Total Revenue			$509

Click to enlarge

Obsidian is now expected to generate US$277 million EBITDAX during 2023 at current strip and my revised production levels. Lower royalties should offset some of the impact of weaker commodity prices.

	$ Million USD
Revenue	$509
Less: Operating Expense	$124
Less: Transportation	$28
Less: Royalties	$65
Less: Cash G&A	$15
EBITDAX	$277

Click to enlarge

Obsidian is now projected to generate approximately US$45 million in free cash flow in 2023 based on current strip prices after accounting for capex, decommissioning costs, and interest costs.

Obsidian paid out US$7 million in cash (instead of shares) for performance share units and restricted share units that vested in Q1 2023. It did this since it believed that its shares were significantly undervalued. As of early May, Obsidian had not reported any share repurchases yet.

Obsidian is now projected to end 2023 with US$197 million in net debt before any spending on share repurchases, which is 0.7x 2023 EBITDAX.

Estimated Valuation

I now estimate Obsidian's value at approximately US$8 per share at my long-term commodity price estimate of US$75 WTI and CAD$3.75 AECO. This is around US$1 lower than my previous estimate of Obsidian's value.

The reduction is due to Obsidian's lower projected free cash flow in 2023, combined with a slight ($0.25 per share) reduction in my long-term AECO price. AECO strip is lower in the near-term, but CAD$3.75+ looks appropriate for 2025 onward.

Obsidian may be able to increase its value a bit by purchasing shares at current levels, although it will need to balance that out with debt reduction given the lower free cash flow expectations for 2023. I have currently assumed no share repurchases in my estimated value calculation.

If Obsidian repurchased 4 million shares at an average of US$5.50 per share, that would increase its estimated value slightly by around US$0.12 per share.

Conclusion

Obsidian Energy is now projected to generate US$45 million in free cash flow during 2023. This is a US$35 million reduction from my previous estimates due to weaker commodity prices (partially offset by lower royalties) and the impact of the Alberta wildfires.

The wildfires should have a relatively modest full-year impact (of around 2% of total production) but may reduce Q2 2023 production by the high-single digits.

I now estimate Obsidian's value at US$8 per share in a long-term US$75 WTI oil environment, before the impact of potential share repurchases.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of OBE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Comments

[filly1776]

Earnings are out...lowered guidance some but with improved WTI should help FFO and earnings:
obsidian-media-library.s3.ca-central-1.amazonaws.com/...

[cedarwoodken]

OBE bought back a total of 200k+ shares costing C$1.5 million on May 26 & 29.

[SaaS Sniper]

@cedarwoodken Wonder whether they bottom fished. Those dates are mighty close to lows dating back to Jan '22.

OBE technical chart sitting at these levels w/ bullish descending wedge near break out. If it breaks below $5.50-6USD, $4 would be next major support level.

[rsykes73]

@cedarwoodken not even 1% of market cap, in fact it’s about .2% of market cap, 👎

[batman10023]

how do you come up with the heavy oil price?

given where differentials are right now (and the quality discount) it seems a bit low (about $5 USD).

[Elephant Analytics]

@batman10023

It basically assumes US$31 discount versus WTI for OBE's heavy oil during the last three quarters of 2023. OBE's realized heavy oil price was ~US$12 less than WCS during 2022, so that would imply a WCS differential of negative US$19 to WTI during the last three quarters of 2023.

[Joshua Hartman]

@Elephant Analytics Good news! Eric Nuttall just shared that the differential is down to $11. I think that will keeping dropping as pipeline capacity comes online. twitter.com/...

[rsykes73]

@Elephant Analytics congrats, you hit it pretty much on the nose. I’m curious as to your opinion on management. This company always seems to have one more corner to turn, compensation of executives and directors appears to be a significant chunk of free cash flow, and op ex was up a little over 8% YOY despite a substantial decline in revenue.