PWE - Penn West Petroleum

[Joe689]

I am looking for a debt/equity restructure coming.... and unsure that will be good news.  But this ratio does not work. 

 

Q2 ER will not have any of that.  It would be material news, and nothing has been executed yet. 

 

But yes, there will be some intra-company restructuring for sure. 

[SharperDingaan]

If they have a refinancing in the coming news, that's your debt/equity restructuring.

We expect a flurry of announcements, versus just the Q2ER.

 

SD

[Joe689]

Any one recognize this new 8% holder? 

[Joe689]

Report looked better.  Might be seeing a bottom of the business aspect.  But then again, no hedges here, so if WTI doesn't cooperate.... well you know....

 

PR closing got delayed again.  2nd delay.  Financing problems?

 

 

[Liberty]

80 million market cap, down from 13.3 billion at peak. You almost have to respect the efficiency of the value destruction in just a few years.

[Joe689]

Just when you thought things could not get worse

 

https://www.obsidianenergy.com/press-releases/obsidian-energy-announces-termination-of-agreement-to-dispose-of-its-interest-in-the-peace-river-oil-partnership/

 

 

Over three months go by into the closing process, with both companies updating public as it progressed, only to have the partner reject it a few days before closing.

 

No explanations.

[Joe689]

Faust took a President role at SAExploration...and Chairman?  CEO of two failing companies?  Not the "flurry" of announcements I was looking for.

[SharperDingaan]

To do that, Faust had to have the permission of the board, and the major shareholders.

And as he is now splitting his time ... OBE will also not be paying him as much going forward (same 'day' rate, but now fewer days).

If you cut the staff by 50% - you should cut the CEO's comp as well.

 

OBE's drilling budget is 120M for 2019, and funded entirely from FFO.

1H2019 FFO in conditions similar to today, was 77M. Most would expect them to earn the remaining 43M in FFO  (and cover the 120M drilling budget) by late October at worst. CAD 120M of FFO over 73M shares is CAD 1.64/share. 34% above today's CAD 1.22.

 

The current price is not because of the CEO.

It is just irrational pessimism .... that will ultimately buy us a nice house in St John  :D

 

SD

 

 

[Joe689]

Should we be happy that we have a part time CEO?

 

And without a perfect entry here, most cost basis are multiples where we trade today.    The only way one will be made whole here is averaging down it seems or multiple expansion. 

 

OBE is not unique.  Sector is destroyed

[Liberty]

It is just irrational pessimism .... that will ultimately buy us a nice house in St John  :D

 

SD

 

Unless what's irrational is the optimism, in which case the house might look like this:

 

[SharperDingaan]

Nice starter kit!

if I just add water, it'll grow ;)

 

Today everyone is depressed. We get it.

It's been a lot of years and there are probably going to be a lot more. Money is stranded, positions are way under water, the pending election is looking like it is not really going to change anything, and US shale producers are about to start bankrupting in a big way. WTI pricing is not co-operating, tax-loss wash-trade deadlines are coming up, and the WCSB is nothing but a never-ending shit-show. Traders nightmare.

 

By now, it should be obvious to all, that to do well here - investors have to play the long game.

Make the prize big enough, so that even if you have to sit on this shit-show for 10 YEARS, you are still a lot further ahead than you would otherwise be. Earn some dividends, and plow the cash back to lower cost bases (WCP, MTL, ECA, etc). Swing trade the more obvious irrational pricing for small gains. Nickels and dimes add up.

 

It should also be obvious, that you very likely aren't going to collect - if you haven't been implementing good risk management along the way. If you're not sufficiently diversified, over-exposed, and/or lack other interests - investing in the WCSB is going to be a long and painful ride. This is the once/quarter sock-drawer stuff, and get on with enjoying life someplace else.

 

If we water well - and the starter kit turns into a 500K mansion, it will have cost us no more than 10-15% net of all mitigation.

If it takes 10 years - it's really no big deal. We didn't have to work for 25 years to pay off a mortgage from savings; our capital did the whole thing for us. Different mentality.

 

Sure there's always the possibility we screw up; but we're pretty sure OBE is not going to BK.

We are essentially gamma trading along a long runway.

 

Just go do something else.

You will be a lot healthier for it, and probably a lot wealthier as well.

 

SD

 

 

 

 

[Liberty]

By now, it should be obvious to all, that to do well here - investors have to play the long game.

Make the prize big enough, so that even if you have to sit on this shit-show for 10 YEARS, you are still a lot further ahead than you would otherwise be. Earn some dividends, and plow the cash back to lower cost bases (WCP, MTL, ECA, etc). Swing trade the more obvious irrational pricing for small gains. Nickels and dimes add up.

 

That's some bagholder gold there.

 

The company is down like 99% in less than 10 years. 86% just in the past year. It's not just about letting time pass. There has to be value creation for the market to recognize it, and the equity has to benefit from it, if there's something left after debt service. Some companies are just plain bad and destroy value. Some industries are inherently speculative because their main drivers are things that are entirely outside of management's control (when you are heavily levered to commodity prices). And if you have to wait 10 years, you have to look at your opportunity cost. If the SP500 was up 400% in those ten years, that adds up too.

 

Some people do make money trading these lottery tickets. They happen to buy at some local bottom and it pops and they sell and they're getting out of the casino with more money. Lucky. But it's hard to imagine how any long-term investor is making money with this, because anyone who's been holding for any period would need multi-baggers to get back to even, and then probably one more bagger to catch up to opportunity cost, and then probably a few more baggers on top of that to make it worth the risk taken in the first place. It could happen, but that's a dangerous game that seem heavily stacked against you.

[Joe689]

So it goes without saying that if you are fresh to this name, you might be at the right place (casino), at the right time.  You are among the <1% that have a cost basis at even.    Just saying.  Might be a good spec pick at this time.    Near 60 WTI, it does produce near 160M in funds flow.  They paid down debt last Q while production went up.  That is positive.  Deep value here or deep value trap

[Liberty]

So it goes without saying that if you are fresh to this name, you might be at the right place (casino), at the right time.  You are among the <1% that have a cost basis at even.    Just saying.  Might be a good spec pick at this time.    Near 60 WTI, it does produce near 160M in funds flow.  They paid down down last Q while production went up.  That is positive.  Deep value here or deep value trap

 

If speculation is what you're after, the odds might be better going to an actual casino, though. People were calling this one dirt cheap all the way down.

[Joe689]

I might say it is hard to speculate in casino.  It is all worked out already.  Nothing but random probability "Guaranteed" in the house's favor.  Nothing to speculate?

 

But ya, I hear what you are saying

[SharperDingaan]

We own WCSB stock because we want the exposure.

It's the catalyst that gives us the cheap buying opportunity, and the catalyst that will eventually let us sell out at a high price. We're going for a ride, and we bought the basin for that reason. To some folks, this strategy is just to rely on luck (short-term orientation), to others it is simply being shrewd (long-term orientation).

 

How we 'feel' about OBE depends on our cost price, how long we've owned it, and our ability to put more in &/or continue holding.

If we've already held this for many years, and our cost price is $15+, this is an utter POS. If we can't average down, or continue to hold, we're staring at a permanent loss that we may well never recover from. If this is you, are you really stilll making rational investment decisions?

 

Sure there's opportunity 'cost', but there's also opportunity 'benefit'.

To most people; over a long holding period, most of this opportunity 'cost/benefit' will simply wash out.

 

Leaving the reality.

If you're livelihood is based on investment interest/activity in the WCSB, OBE is a POS.

If your aim is long-term value, you obviously have a different POV.

You also have a life 'elsewhere'

 

SD

 

[Joe689]

Like the Chinese and their oil sands assets.  They are not going anywhere.  ;-)

 

 

Anyways, maybe we can start to share more qualitative and constructive points on this corporation.

 

I think the latest events that can shed light on valuing this company is the non-core asset sales by CPG on Tuesday, specifically the one in SASK.

 

"The conventional assets being sold include approximately 7,000 boe/d of current production (70% crude oil and 85% total liquids)

and 49.2 MMboe of 2P reserves. These conventional assets operate with a higher operating cost structure.  Additionally, the future decommissioning liabilities associated with these non-core assets are higher than those associated with the Company’s key focus areas."

 

These are waterfloods just like our Pembina.  Little difference.    OBE's Pembina produced around 10k boe/d.    If we got 30k per flowing that is $300M right there.  CPG's 2P on those was 49.2 MMboe .  Cannot find OBE 2P on its Pembina only but see its entire Cardium at over 100 MMboe  2P.

 

 

4.5 times 2020 cash flow at current strip prices, based on an operating netback of $18.55 per boe;

 $30,000 per producing boe; and

 $9.80 per 2P boe, including FDC of approximately $270 million, as assessed by independent engineer

 

So I might suggest that 300M is the base level for selling Pembina, and leaving another near 18K flowing.    Cardium is 20k flowing, the other 10k is from Willesgreen, by far their best asset.  The only asset they are putting capex towards.    You imagine that would be north of $30k per flowing. 

 

No matter how I chop this up, there is more than the current 93M in equity.   

 

Banks lend on PDP on a conservative discounted strip basis.  The bank was happy to extend a $550M credit line.  I think that is safe to say our value of PDP @ strip minus 10%.    Then I just think about the massive 1P and 2P.

 

But here we are...  I mean you really cannot invest in this company if you are not half way bullish or stable on WTI.  And I think that is what it might comes down to.  Majority seem to be betting against oil.

 

Private parties bought CPG assets.  Many companies are buying back tons of stock.  Look at Encana for example.    At this valuations, they are slowly becoming privatized.  Public market is not valuing them at what private parties are.   

 

As another poster put,

 

"CPG paper @ $55 wti:

 

- The equity trades at 1.33x.

- And the debt in a couple months, ($2.75 billion) will be 1.75x.

 

So you have the whole capital structure for 3.1x FFO, and these assets for 4.8x. operating cash flow (i.e ex interest and SG&A).

 

If you were to value the whole company off these assets (which carry a lower netback)...you add back the SG&A + interest per boe and get an operating netback of $32.30 @ $55 wti.

 

$32.30 x ~150,000 boe/d x 365 = $1.77 billion operating cf.

@ 4.6x ...

 

...You get $9.73 per share.

 

At a 1.75x 2019e debt to FFO @$55wti, I think the market is overdoing it on the discount for the assets inside the capital structure.

 

There is a lot of space between what the market is paying for these assets inside CPG, and what Unita/sk went for.

"

 

 

 

 

 

 

 

[SharperDingaan]

Agree per your assessment.

 

OBE does NOT actually NEED to sell anything.

Under ongoing curtailment they already have the FFO to both maintain production and the capacity to roll/retire debt as it comes due. If they simply roll the business for another year; net production will increase up to 20,000 boe/d, interest cost will fall, FFO will rise further, and quarterly earnings will return to the black.

 

Sure they would like to sell something (PR, Viking), and the trading community would prefer that they do - but they don't need to fire sale.

Yes, PR today is an orphan, PR a year from now? entirely different story. Sales/purchases are just selling today to buy cheaper elsewhere - yes it can work, but it's diminishing returrn and not really worth the risk.

 

I could just buy/roll time-decaying options on WTI, or just buy a boring OBE - and let time work for me.

At USD60 WTI, OBE does very well - at USD55 WTI they still do prettty well; and every quarter they will do better - as production increases and costs continue to fall. Obviously, we hold the long-term view.

 

Not what the trading community wants to hear.

 

SD

 

[Joe689]

I agree mostly but they are not out of the woods in terms of leverage.  They have $478 debt.    They are slaves to the bank as they are near the top of their available lending.  Not to mention equity is 90M.  The capital structure is poor.  With them having near zero hedges, if oil drops below 50 for a prolonged period, they will surely become distressed as credit lines trigger covenants,  same old story as before.  I'd rather deleverage when oil prices are higher, then deleverage under low prices and corporate distress.

 

Debt needs to be lowered.  No excuses.  And I am unsure if organically, time wise, lowering per year is enough.  They need about 100M lower. 

 

But yes, in some sense the problem is that selling assets for anything under fair price does not help as you loose the cash flow, the production, while you lower the debt.  So it might not have the affect on the multiples you were seeking.  That is how the market viewed the PR sale.  A don't care.  They did not see it as a huge deleverage moment.    But frankly the market did not understand that it was more than deleverage but it was to become that pure play and lower costs significantly. 

 

 

[Joe689]

Strategic Review

https://www.obsidianenergy.com/press-releases/obsidian-energy-initiates-formal-strategic-alternatives-process/

 

Followed by two downgrades by RJ and GMP.

 

This should be interesting

[Joe689]

With half the saudi production offline for undetermined amount of time, what will oil spike to with the  new deficit, and more so risk premium.

 

OBE is only 15 percent hedges and fully torqued to oil by way of leverage as well.

 

Oil prices affect EV.  OBE is 80% debt, 20% equity.    Going from a company that might to BK to company printing cash could affect EV by double.  An EV double means equity moves 5x. 

 

If oil spikes hard, look for a multibagger here.  They will hedge as much as the can and save the company.  Most companies have 50% hedged and much less capital structure leverage

[yzstevie]

With half the saudi production offline for undetermined amount of time, what will oil spike to with the  new deficit, and more so risk premium.

 

OBE is only 15 percent hedges and fully torqued to oil by way of leverage as well.

 

Oil prices affect EV.  OBE is 80% debt, 20% equity.    Going from a company that might to BK to company printing cash could affect EV by double.  An EV double means equity moves 5x. 

 

If oil spikes hard, look for a multibagger here.  They will hedge as much as the can and save the company.  Most companies have 50% hedged and much less capital structure leverage

 

It all depends on how fast SA can repair the damaged facilities right?  If they get everything sorted out in 1 week or 2 weeks, then the oil price will quickly come back down? 

[tombgrt]

With half the saudi production offline for undetermined amount of time, what will oil spike to with the  new deficit, and more so risk premium.

 

OBE is only 15 percent hedges and fully torqued to oil by way of leverage as well.

 

Oil prices affect EV.  OBE is 80% debt, 20% equity.    Going from a company that might to BK to company printing cash could affect EV by double.  An EV double means equity moves 5x. 

 

If oil spikes hard, look for a multibagger here.  They will hedge as much as the can and save the company.  Most companies have 50% hedged and much less capital structure leverage

 

My CRC leaps aren't doing all that bad either. 250% move in a day ain't bad at all.

[Liberty]

Looks like the moment was short-lived...

 

https://www.cnbc.com/2019/09/17/oil-slips-following-the-biggest-climb-in-history-after-saudi-attacks.html

[SharperDingaan]

Come back in two months ....

Do you really think there will NOT be a strike on Iran, aimed at removing both the leadership and the processing facilities?

And do you really think that Iran will NOT strike in kind?

 

'Cause while everybody is bombing Tehran .. a couple more missiles quietly slip over the KSA border.

And this time, they finish the job.

 

The WTI supply and war premiums are not going away.

And they are interchangeable.

 

SD