PWE - Penn West Petroleum

[SharperDingaan]

I think that might be inaccurate.  You cannot just total up all the individual holdings.  There is overlap.  Shares counted more than once.    The different entities have interest in the other like entities, yet they must be reported separately because they are effectively an insider.    For example STEPHEN LOUKAS 210K shares are part of one of the FrontFour shares count.  Between all of them they own 5.5.  Correct me if I am wrong....

 

 

Good news is that it is almost certain that they would at least try to join up with the other 5% holder (that other canadian, forgot name).  So I would agree that the activist group is more than just frontfour.    They need to force the hand.  They gave the market and ceo time, and it is not registering....  Something needs

to change

 

Our bad - total voting power per Loukas, Lorber, & Zachary is 28,755,846 shares.

 

SD 

[Cardboard]

Some of you guys are fixated at alphabet soup price being on discount while all other soups are on discount too and some a lot more.

 

There is nothing special going on with OBE that is not going on with other Canadian smaller producers. In case you have missed it, there has been a very large bear market in this sector this year. And currently, it seems that we have a lot of year end tax loss selling going on.

 

Add to this a general disgust for fossil fuels, that these names have been down for 3 years now and you have a recipe for undervaluation. I should rephrase: zero interest!

 

Forget about share consolidation. That is not going to make a difference to the kind of institutions who will buy based on price alone as they will then complain about lack of liquidity.

 

Cardboard

[doc75]

Cardboard

 

You seem pretty tuned into the small Canadian E&P space.  I've noticed a few comments you've made here-or-there on some of them, but do you care to share a short-list of those that you find most interesting at today's valuations?

 

 

[Cardboard]

Ok...

 

BXE, BIR, BNP, CJ, CQE, CONA, IPO, JOY, PPR, ZAR

 

And I am sure that I am missing some.

 

Point is, on price per flowing, price to reserves, price to NAV, price to PDP NAV, price to free cash flow, you will find some that score better than OBE. You will need to pay attention to decommissioning liabilities, decline rate, type of production, reserve life, netbacks, G&A, firm transportation capacity, etc. to properly compare but, it is doable.

 

Cardboard

[HJ]

Ok...

 

BXE, BIR, BNP, CJ, CQE, CONA, IPO, JOY, PPR, ZAR

 

And I am sure that I am missing some.

 

Point is, on price per flowing, price to reserves, price to NAV, price to PDP NAV, price to free cash flow, you will find some that score better than OBE. You will need to pay attention to decommissioning liabilities, decline rate, type of production, reserve life, netbacks, G&A, firm transportation capacity, etc. to properly compare but, it is doable.

 

Cardboard

 

Cardboard,

    I noticed that some of these names are much more gas than oil, BXE, BIR, BNP, etc.  What is your thought on the prospects of companies that focus on one vs. the other?  Seems like short of meaningful takeaway capacity addition, LNG, etc. North America, certainly Western Canada is going to be so full of gas that its value is destined to languish for quite a while here?  Or is the play exactly on expectation that there will be meaningful LNG takeaway occurring on the West coast?  How do you think about that issue?

 

Thanks

 

[Joe689]

Well oil is near highs, and as demonstrated by our hedges, we do not think it will be much higher.  Time to make some sales or land swaps and take advantage of strong pricing.    Now would be the time to unlock value.    It has been long enough and the market is speaking. If high oil price cannot give us fair value then we clearly need to make moves.  Why are we dragging our feet?

[Joe689]

A small insider buy and most interesting is that Kernaghan went from 5.4 to 6.7%.  Practically buying everyday. 

 

Crazy that with more than half our oil hedged, that we move so volatile with the futures.  So much risk has been removed and are almost guaranteed to reach our production growth guidance.    It has become a much more conservative investment than some of the higher leveraged names.    Crazy to think that we still trade well below our peers.  A comment from another poster, put it another way,

 

"Target Valuation at 8 x Operating Cash Flows is still too cheap, private transactions are strongly above x10 in this sector/for this kind of liquid/gas mix"

 

[Pelagic]

OBE put out a new corporate presentation for Dec.

 

https://s3-ca-central-1.amazonaws.com/obsidian-media-library/obsidian-energy/corporate-website/current/wp-content/uploads/2017/12/07081052/OBE_DecCorporatePresentation.pdf

 

The good news is Q4 production is on track for the high end of their guidance of 30,500-31,500 boe/d which should be a nice bump from Q3 production of 30,166 boe/d.

 

Mannville test wells seem to have been fairly successful, although why they aren't planning on allocating more 2018 capex there I don't know given their claimed 80% avg IRR.

 

Still having trouble reconciling their Q4 high end of guidance (~31,500 boe/d) with their 2018 guidance of 31,000 - 32,000 boe/d while also claiming 5% growth. I suspect they're planning to dispose of some of their legacy production that they've been keeping around to maintain production levels. Any thoughts as to what kind of oil pricing their legacy production of roughly ~4,700 needs to make it something they want to keep or invest in further?

 

[Joe689]

Remember them saying in Q3 that it negative netback of a few bucks.  Will try to dig up detail.

 

I lean toward keeping it unless you can get good value for it.  Otherwise, it will simply drop production which looks bad on paper.

[SharperDingaan]

Assume the 2017 exit rate is 31,500 boe/day - same as the 2018 guidance. The 5% growth must also equal the decline rate.

For 2018 guidance to be 31,500 boe/day, the 2017 exit rate (net of sales) must be 30,000 boe/day. Therefore, there must be a sale of 1,500 boe/day (legacy assets) settling in Q12018, or later.

 

1,500 boe/day decline + a 1,500 boe/day (legacy) asset sale must be getting replaced with 3,000 boe/day of new production at higher liquid content. Resulting in about 10% of daily production generating a much higher cash flow than it currently does.

 

We also know that some of their new wells are liquids gushers that have been significantly choked back. It is highly likely that if they were to sell more legacy assets, they already have the liquids to maintain guidance - and would just be repeating the cash flow trick.

 

Nice place to be.

 

SD

 

 

 

[Pelagic]

Remember them saying in Q3 that it negative netback of a few bucks.  Will try to dig up detail.

 

I lean toward keeping it unless you can get good value for it.  Otherwise, it will simply drop production which looks bad on paper.

 

Might be breakeven or slightly positive given better pricing in Q4. I agree that selling it entirely and reporting correspondingly lower production when the market is focused on production growth probably isn't an option even though it might be the right thing to do, depending on what they can sell it for.

[Joe689]

Gordon Malcolm Ritchie seems to be a new director.  Not sure if chairman or not.  So the activist funds did not get/take a seat.    Furthermore, he bought 100,000 in the open market yesterday.  I think that means that there is no outstanding proxy vote before the board at this moment.  Assume that would be material and therefore disallow his purchase

[Joe689]

Activist FrontFour is said to push for sale of Obsidian Energy

 

http://www.businesstimes.com.sg/energy-commodities/activist-frontfour-is-said-to-push-for-sale-of-obsidian-energy

 

[SharperDingaan]

It's not a bad idea, so long as the seller (for a higher price) can take stock over cash to avoid triggering a tax bill. The fact that OBE has NOT taken itself private yet to consolidated its share count - implies that OBE is not against the idea either. Their new board members are also not there to look pretty.

 

SD

 

[Joe689]

Let's get something done.  In my opinion, it has been too long waiting for the adjustment/respect in SP.  First it was the balance sheet, then the name change, then SEC resolution.  Now the Canadian politics.    We need to unlock value now.  I am personally over 1 year hold mark now, so any cash received would be long term gains, and likely 2018.    I am impressed with the focus of management over that last year or so, I do not blame them.    I done guessing why our adjustment has not come and what will make it come in the future.  Even, after today's new, it is trading like crap.  Maybe someone is holding it down, the short interest? Maybe there are less shares than we think available for trading.  At 500M you would think there is a plethora but maybe they are more tightly held than we think.  A lot of old timers from the early days of PennWest are still holding shares and refuse to give them up.  Unfortunately, they will never recoup their value.  Rick George was likely a proponent for playing the longer game and getting some of that massive value back but he is gone now. 

 

I've seen all I need see here sadly.  Sell the company.

[chrispy]

How does OBE's hedging work with the large spread between WTI and the decreasing price of oil in Alberta?

[Pelagic]

How does OBE's hedging work with the large spread between WTI and the decreasing price of oil in Alberta?

 

Most of what OBE has hedged is their light oil production. Heavy oil production from their Peace River operations is what has been affected by the increase in the spread between WTI and WCS, of which most is unhedged.

[HJ]

How does OBE's hedging work with the large spread between WTI and the decreasing price of oil in Alberta?

 

Most of what OBE has hedged is their light oil production. Heavy oil production from their Peace River operations is what has been affected by the increase in the spread between WTI and WCS, of which most is unhedged.

 

Actually, I'm curious how effective their hedge is.  Just shorting WTI on the exchanges doesn't necessarily work, snce it's the basis that has widened, WTI itself actually is up this quarter?  Are typical sales contract written as WTI minus a fixed cost to figure into transportation cost?  What happened last time the basis was this wide?  Didn't the E&P's end up just realizing a lower price?

[SharperDingaan]

A hedge is a physical sale of 'X' boe/d, at 'Y' price , for period 'Z' -  from a reference facility. The costs of getting the barrels to that facility is the sellers burden. If transportation costs (use of rail, or pay more for pipeline space) rise, the seller nets less.

 

Per a pipeline; heavy crude gets shut in, in favor of lighter production; and producers try to raise to raise their light production as much as possible. Arguably OBE opens the chokes on their light oil producers, and ships more oil to market at a lower net margin.

 

SD

 

[HJ]

A hedge is a physical sale of 'X' boe/d, at 'Y' price , for period 'Z' -  from a reference facility. The costs of getting the barrels to that facility is the sellers burden. If transportation costs (use of rail, or pay more for pipeline space) rise, the seller nets less.

 

Per a pipeline; heavy crude gets shut in, in favor of lighter production; and producers try to raise to raise their light production as much as possible. Arguably OBE opens the chokes on their light oil producers, and ships more oil to market at a lower net margin.

 

SD

 

Not sure I fully understand the mechanics at work.  Why would they fave light oil production over heavy crude?  Does their light oil production all get consumed at the local refinery?  If not, doesn't the light production (whatever not consumed at the local refinery) need to go through either pipeline or railroad to US anyway, which has the same problem as the heavy crude production?  When I wrote to the IR department on some of these E&P companies, I did't get an answer that's very satisfactory.  Whitecap, for example, said "The majority of Whitecap's oil production, including the recently acquired Weyburn asset, is pipeline connected.  Some oil production is sold via pipeline directly to local refineries in Alberta and Saskatchewan, and the balance is sold via pipeline to other parties who move the oil further to their refineries typically in the US.".  I didn't get an answer on what percent was consumed at the local refinery and what percent need to go to US.  Is there publicly available statistics on what percent of Western Canada light oil production is consumed locally and what percent go to either the US or the east coast?

[SharperDingaan]

A hedge is a physical sale of 'X' boe/d, at 'Y' price , for period 'Z' -  from a reference facility. The costs of getting the barrels to that facility is the sellers burden. If transportation costs (use of rail, or pay more for pipeline space) rise, the seller nets less.

 

Per a pipeline; heavy crude gets shut in, in favor of lighter production; and producers try to raise to raise their light production as much as possible. Arguably OBE opens the chokes on their light oil producers, and ships more oil to market at a lower net margin.

 

SD

 

Not sure I fully understand the mechanics at work.  Why would they fave light oil production over heavy crude?  Does their light oil production all get consumed at the local refinery?  If not, doesn't the light production (whatever not consumed at the local refinery) need to go through either pipeline or railroad to US anyway, which has the same problem as the heavy crude production?  When I wrote to the IR department on some of these E&P companies, I did't get an answer that's very satisfactory.  Whitecap, for example, said "The majority of Whitecap's oil production, including the recently acquired Weyburn asset, is pipeline connected.  Some oil production is sold via pipeline directly to local refineries in Alberta and Saskatchewan, and the balance is sold via pipeline to other parties who move the oil further to their refineries typically in the US.".  I didn't get an answer on what percent was consumed at the local refinery and what percent need to go to US.  Is there publicly available statistics on what percent of Western Canada light oil production is consumed locally and what percent go to either the US or the east coast?

 

The oil in a pipeline is a mix of various types, but the lighter the ‘blend’ the more valuable and easier it is to process. Blending light oil with heavy crude produces a much greater quantity of oil that is economic to transport, lowering the transportation cost/barrel for everyone.

 

Transportation cost is based on supply and pipe capacity (demand). When throughput is constrained, the cost to use the pipeline rises to the point where it’s no longer economic to sell heavy crude, which gets shut-in. To maintain production, the producer must make up for their shut-in heavy oil production, by pumping more light oil.

 

Until WC oil can break its land-lock it will always sell at a negative differential, and producers must use either scale or light oil production to compete.

 

SD

[Joe689]

Tick tock, tick tock.    It is not like we have not been patient with this one. 

 

The last two weeks of June '16, we averaged around $1.40 after the asset sale.  In that time period, oil averaged around $47.50.

 

Now fast forward to today.  We are nearly at $60 oil and treading at $1.25

 

Ughhhhh

 

Sharper, still giving it to the end of the year?  I suspect we now have to wait for the Q4 report.  There will be good news with that in terms of realized pricing, beat on guidance hopefully, and increased reserves.    But seems like we are always just another report away.

 

Management and BOD must still be evaluating options... or are they...  this puppy is sick

 

 

[SharperDingaan]

Tick tock, tick tock.    It is not like we have not been patient with this one. 

 

The last two weeks of June '16, we averaged around $1.40 after the asset sale.  In that time period, oil averaged around $47.50.

 

Now fast forward to today.  We are nearly at $60 oil and treading at $1.25

 

Ughhhhh

 

Sharper, still giving it to the end of the year?  I suspect we now have to wait for the Q4 report.  There will be good news with that in terms of realized pricing, beat on guidance hopefully, and increased reserves.    But seems like we are always just another report away.

 

Management and BOD must still be evaluating options... or are they...  this puppy is sick

 

We would have preferred a different outcome, but are willing to see the Q4 report.

Mr Market also exists to be exploited, and we're happy to oblige.

 

SD

 

 

 

[Joe689]

Kernaghan joins the board.  Nice call SD.  Bodes well for us as he has a lot of skin in the game.  I'd guess he is against selling the company (at least not until ready) considering some of his comments of being long-term and executing current strategy

 

 

[investmd]

Looking to deploy some $s in a Canadian Tax Free Savings Account (TFSA). Am new to this thread. OBE is down some 85%! off of it's 2009 lows! For a solid, sustainable company it should be a multiple bagger at these levels. To the folks on this thread who are bullish on OBE, how much upside is there. Looks like if there is a sale it will be at a price that is less than double today's C$1.63, or is there big upside in this investment?

thanks,