PWE - Penn West Petroleum

[Joe689]

Kernaghan/Kernwood continue to buy.  Picked up another 1M shares in December bringing them up to 6.9%.    Between them and FrontFour, they were picking up all the tax loss selling.  Eating it up.  Be interesting to see if they continue buying in January now they he is a director. 

[chrispy]

Imagine what December could have been like without them buying the tax loss selling...

[Joe689]

You would think an oil major would just swipe this company's reserves for a fraction of the book value.      Would be immediately accretive to the buyer

[sculpin]

You would think an oil major would just swipe this company's reserves for a fraction of the book value.      Would be immediately accretive to the buyer

I would think Waterous at CONA would be taking a close look at this. He has failed to buy a few assets since the Fall, latest being the Cenovus sale of Weyburn that Whitecap purchased. CONA would most likely have to make a hostile bid for OBE though as it seems the managment & Board are entrenched for the current time. He will have to hurry though as oil goes solidly above $60 and some of the negativity & discount comes off the Canadian E&P's the opportunity slips away each day..

[Joe689]

At first glance, it does not seem like they could afford OBE.    Although I agree, OBE is ripe for the picking for PE.  1B might be able take it.

[SharperDingaan]

A quick back-of-the-envelope, as to why OBE (& the industry) hasn't risen with todays 63.43 WTI price...

 

WTI at USD 63.42 last occurred Dec-2014, during a steep fall in price. Average monthly prices were 84.34 (Oct), 75.81 (Nov), 59.29 (Dec).

Average TSX price for OBE was 6.14 (Oct), 4.45 (Nov), 3.72 (Dec).

Hence today's price should be around CAD 3.98    (63.43/59.29)x 3.72

 

Problem is that at the time (Q4), the OBE books were overstated.

There was an impairment charge of 634M, and a goodwill charge of 1178M recorded in Q4.

On the 497.3 M share count, a write-off of CAD 3.64  (634+1178)/497.3

The real price after write-offs, was around CAD 0.34  (3.98-3.64).

Adjust for the cost/settlement of the lawsuits & subsequent company downsizing - & it was really CAD 0.00 (or below)

 

Today at CAD 1.56, and 504M shares, the MV of the equity is worth 786M. We also know this is reasonable as it's well below the impairment adjusted BV of the assets which are not expected to further impair in any significant way. THIS is where the 'value' of the last few years has been accumulating. 

 

OBE could stay independent, get taken out, or self liquidate. To take them out, the buyer would have to pay at least the impairment adjusted BV showing on the books - as OBE could simply self liquidate (or take itself private & relist) to achieve it. Practically, they would have to pay BV + MV of the equity + a premium for a takeout AND payment in stock, versus cash.

 

OBE has very attractive assets, opportunities, and acerage. Whether its better to accept the shares of a major (& play the recovery through them), versus go it alone, depends on the terms. We're open minded.

 

Just a different way of looking at things.

 

SD

 

 

 

[Joe689]

This has been the thought for sometime but it seems the market is telling us something different....    If the options were that easy, wouldn't people be racing to own the common?      "The time is now" with oil prices at their yearly highs.  Company needs to address the elephant in the room.

[Pelagic]

A quick back-of-the-envelope, as to why OBE (& the industry) hasn't risen with todays 63.43 WTI price...

 

WTI at USD 63.42 last occurred Dec-2014, during a steep fall in price. Average monthly prices were 84.34 (Oct), 75.81 (Nov), 59.29 (Dec).

Average TSX price for OBE was 6.14 (Oct), 4.45 (Nov), 3.72 (Dec).

Hence today's price should be around CAD 3.98    (63.43/59.29)x 3.72

 

Problem is that at the time (Q4), the OBE books were overstated.

There was an impairment charge of 634M, and a goodwill charge of 1178M recorded in Q4.

On the 497.3 M share count, a write-off of CAD 3.64  (634+1178)/497.3

The real price after write-offs, was around CAD 0.34  (3.98-3.64).

Adjust for the cost/settlement of the lawsuits & subsequent company downsizing - & it was really CAD 0.00 (or below)

 

Today at CAD 1.56, and 504M shares, the MV of the equity is worth 786M. We also know this is reasonable as it's well below the impairment adjusted BV of the assets which are not expected to further impair in any significant way. THIS is where the 'value' of the last few years has been accumulating. 

 

OBE could stay independent, get taken out, or self liquidate. To take them out, the buyer would have to pay at least the impairment adjusted BV showing on the books - as OBE could simply self liquidate (or take itself private & relist) to achieve it. Practically, they would have to pay BV + MV of the equity + a premium for a takeout AND payment in stock, versus cash.

 

OBE has very attractive assets, opportunities, and acerage. Whether its better to accept the shares of a major (& play the recovery through them), versus go it alone, depends on the terms. We're open minded.

 

Just a different way of looking at things.

 

SD

 

What are your thoughts on OBE partnering with a better capitalized entity to develop some of their property? As oil prices rise it seems they're caught in the unenviable position of having valuable assets but not enough cash flow to develop them quickly. For long term value creation it may make sense to go it alone but finding partners to develop some of their land now seems like an easy way to unlock some of its value and increase cash flow which would allow them to fund more internal development. The added bonus of this strategy is that production, even if split with a JV partner, would likely be unhedged and sold at higher rates than what they currently have hedged.

 

I think it's pretty clear that their asset in the Cardium is excellent and their ability to decrease decline rates makes it very valuable. I know they've added quite a bit of production in the 4th quarter, even beyond what they had initially planned, but it still seems like they should be able to find someone willing to partner with them in either the Cardium or the Mannville (where they claim an 80% avg. IRR).

 

Here's their January presentation in case anyone is interested or hasn't seen it.

 

https://s3-ca-central-1.amazonaws.com/obsidian-media-library/obsidian-energy/corporate-website/current/wp-content/uploads/2018/01/08111313/2018_JanOBECorporatePresentationvF.pdf

[SharperDingaan]

Nobody is going to come knocking until after the 3rd party year-end audit and reserve reviews have been done.

Then we dance.

 

OBE has lots of options, some of which are as you have described.

Ultimately it's going to be the best and highest use that takes it; for some properties that may mean a sale, for others a buyout.

 

SD

 

 

[Joe689]

Good PR.  Market needed some reassurance.  I know I did.    We had some gushers!  Rates look great in Peace River and even better in Cardium!  Cardium truly is our crown jewel, and we got to keep drilling and prove our assets

[SharperDingaan]

Nice to see some guidance ..... but they could sure use a better script writer.

 

"Our four well pad in Willesden Green Cardium was on-stream as of January 3, 2018. The pad has averaged approximately 2,800 boe/d since the wells came on production, implying an average of 700 boe/d per well over that timeframe. As a result, we expect to increase our entire Willesden Green Cardium production by over 30% for the month of January."

 

If this pad is adding 30%. December-2017 Willesden Green production must be about 9,333 boe/day (2800/.30). January production will be around 12,133 boe/d (9,333+2800)

 

"In December, we drilled two primary horizontal wells in Willesden Green targeting the bioturbated interval. We also drilled three of four horizontal producers from our PCU #9 pad, which employs a low capital, integrated waterflood approach to mitigate declines. Willesden Green primary wells are expected to be on production by mid-February, while the PCU #9 pad is expected to come on early April. "

 

If wells in this area are averaging 700 boe/d, these 5 new wells will add 3,500 boe/day by end of April. April production will be around 15,633 boe/d (12,133+3500). Willesden Green Cardium production is expected to grow 68% (15,833 Apr-30, versus 9,333 Dec-31) in just 4 months, and that wasn't important enough to highlight?

 

May we all do well.

 

SD

 

 

[Joe689]

And market does not seem to care....Weird action this past couple weeks.  There is a seller that continues to unload.  Hard to imagine why we just reported gushers

 

 

[Joe689]

Looks like FrontFour will go the way of a proxy:

 

 

https://finance.yahoo.com/news/long-term-shareholder-frontfour-capital-130000357.html

 

 

This is getting ugly.  I guess it is good because it shakes up the gravy train

[SharperDingaan]

A lot of the beef seems to be with 1H2017 decisions, & disagreement on strategy. Like it or not; the WF was successful (depletion rate down 75%), PR is delivering results above industry average, and there has been disposition that hasn't hurt net production. Granted that management was pushed, and pushed hard, but it's essentially an argument of good versus very good; looking at history that we cannot change.

 

We're inclined to agree there is a material board level governance problem, & the pissing match is harming everyone.

ALL significant shareholders should have 1 seat at the table, ALL directors should have direct share ownership, and the collective holding of all NON FrontFour board members should well exceed that of FrontFour. Minimum shareholding requirement of all board members; no more than a 50% loan guarantee from OBE, to those who need more skin in the game. The loan guarantee acts as a 'buyback', and those who chose not to participate - depart to make space for others.

 

FrontFour's presence has been useful, and illustrative. It is unlikely that the recent (& material) drill results would have been released without their pressure. The fact that the release did not highlight the material possibility that Cardium production could well increase 60%+ in 4 months, it is light oil, and the production increase is entirely un-hedged - indicates that it was a forced release. Hard to imagine that an approver would not have added a relevant paragraph, had the pissing match not diverted attention.

 

We are just simple shareholders, and not affiliated with anyone; but our own thoughts are that we are now past the point of remaining independent. We crossed the threshold when the decision was made to not consolidate the share count.

 

Take the argument behind the barn and settle how OBE will be run, or sell it.

 

SD

 

 

[Cardboard]

"We are just simple shareholders, and not affiliated with anyone; but our own thoughts are that we are now past the point of remaining independent. We crossed the threshold when the decision was made to not consolidate the share count."

 

You really like to sound important do you?

 

What are you going to do? Contact FrontFour and offer them your vote on your 10,000 shares if they agree to a useless share consolidation?

 

Cardboard

 

[Joe689]

That is rude.  I think he was simply saying exactly that, that their opinion doesn't mean much, but this is what their gut thinks.  I appreciate the opinion.

 

And I bet he/they own a lot more than 10K shares.

 

Anyways, what is your opinion on this dysfunction?

[Cardboard]

I have read enough posts over the years from SD to have formed my opinion. There was some pump and dump. Talk about hedging while it was simply selling a position as noticed by many posters and this language used trying to sound sophisticated... LOL!

 

Regarding OBE, it is getting interesting again. However, it is feeling the same pain as all other Canadian small to mid-cap energy stocks or generally being ignored.

 

I think the company is doing all the right things and Front Four is not what I would want in my corner. They have lost corporate battles in the past and their record on delivering shareholder value is very poor in my view. Plus, if daddy was still alive, you would not be hearing about these guys.

 

They are now pushing for a growth strategy with high decline rate while investors are asking for a living within your means and adequate cash flow generation to honour debt. Take a look at an old favourite or Painted Pony to see how that is working for them?

 

Cardboard

[StevieV]

 

Anyways, what is your opinion on this dysfunction?

 

What dysfunction are you talking about:  (1) the battle between FF and the OBE board/management; or (2) OBE management dysfunction (hedging and the like)?

 

I don't know that (1) is a particular sign of dysfunction.  It is not uncommon to have an activist, and it is not uncommon for the board to resist the activist.

 

On (2), the extent of the hedging was no doubt a mistake, and there were probably drilling mistakes as well.  However, I thought the update was positive and the plan moving forward reasonable (outside of the poor hedging).

[Joe689]

I lean toward the existing strategy as well.  Impressive discipline and results.  Just like the CEO said in his video.   

 

Where I am challenged is unlocking value.  "Lock" is a good word because you have to try things to unlock.  This company has NOT unlocked value yet.  They have a great lock pick but it has failed to unlock yet.  Maybe we need patience.  But patience has been given.

 

In a more practical sense, our unlocked value lies in our assets.  Our assets are 1M acres with almost 500 Cardium sections.  Impressive results are coming out of the Cardium.    At the size of our company,  we might need a couple decades before we can exploit all that land.  Couple decades might be good for management but most investors, especially in this oil environment, are short sighted.    To me, we need to farm out, JV, whatever.  Get someone to help us with the drilling!  Drill it now!    The long game decision did not unlock.

 

 

[StevieV]

I lean toward the existing strategy as well.  Impressive discipline and results.  Just like the CEO said in his video.   

 

Where I am challenged is unlocking value.  "Lock" is a good word because you have to try things to unlock.  This company has NOT unlocked value yet.  They have a great lock pick but it has failed to unlock yet.  Maybe we need patience.  But patience has been given.

 

In a more practical sense, our unlocked value lies in our assets.  Our assets are 1M acres with almost 500 Cardium sections.  Impressive results are coming out of the Cardium.    At the size of our company,  we might need a couple decades before we can exploit all that land.  Couple decades might be good for management but most investors, especially in this oil environment, are short sighted.    To me, we need to farm out, JV, whatever.  Get someone to help us with the drilling!  Drill it now!    The long game decision did not unlock.

 

I've had to be more patient than I would have liked already.  I will continue to be patient, but lack of patience has not yet been a problem.  Lack of results and stock price appreciation have been.

[Joe689]

The good news is that things will not be status quo.  Change is good. 

[SharperDingaan]

"We are just simple shareholders, and not affiliated with anyone; but our own thoughts are that we are now past the point of remaining independent. We crossed the threshold when the decision was made to not consolidate the share count."

 

You really like to sound important do you?

 

What are you going to do? Contact FrontFour and offer them your vote on your 10,000 shares if they agree to a useless share consolidation?

 

Cardboard

 

'WE' aren't going to do anything.

 

If OBE gets taken out we just get a smaller slice of a bigger and hopefully more valuable pie. If OBE stays independent we get a bigger slice of a smaller pie that is at least as valuable. But no matter what, the present value of the pie today will be decided by experts in their field, and the board will be acting in our (shareholder) best interest. That is all we can ask for, we're OK with that, and it is what we (the shareholder) pay the directors to do.

 

Agreed management has done some very good work -without it this company would have been bankrupt. All that shareholders can do is vote with their feet; stay if management has been adequately compensated, and their success has them guiding the company - sell when that isn't the case.

 

We hold all the investment designations that you would expect in an institution, have expertise in the o/g space, and hold a significant portfolio weighting in OBE for a HNW private client. As such, on a bulletin board, we voluntarily hold ourselves to the typical disclosure standard of a public investment fund. Significant buys/sells disclosed within a reasonable time frame.

 

How our disclosure or contributions are interpreted is not our concern; we simply express a viewpoint, and our basis for it. It is just one more, of the many different views in the market place, that are expressed every day.

 

SD

 

 

 

[DooDiligence]

"We are just simple shareholders, and not affiliated with anyone; but our own thoughts are that we are now past the point of remaining independent. We crossed the threshold when the decision was made to not consolidate the share count."

 

You really like to sound important do you?

 

What are you going to do? Contact FrontFour and offer them your vote on your 10,000 shares if they agree to a useless share consolidation?

 

Cardboard

 

'WE' aren't going to do anything.

 

If OBE gets taken out we just get a smaller slice of a bigger and hopefully more valuable pie. If OBE stays independent we get a bigger slice of a smaller pie that is at least as valuable. But no matter what, the present value of the pie today will be decided by experts in their field, and the board will be acting in our (shareholder) best interest. That is all we can ask for, we're OK with that, and it is what we (the shareholder) pay the directors to do.

 

Agreed management has done some very good work -without it this company would have been bankrupt. All that shareholders can do is vote with their feet; stay if management has been adequately compensated, and their success has them guiding the company - sell when that isn't the case.

 

We hold all the investment designations that you would expect in an institution, have expertise in the o/g space, and hold a significant portfolio weighting in OBE for a HNW private client. As such, on a bulletin board, we voluntarily hold ourselves to the typical disclosure standard of a public investment fund. Significant buys/sells disclosed within a reasonable time frame.

 

How our disclosure or contributions are interpreted is not our concern; we simply express a viewpoint, and our basis for it. It is just one more, of the many different views in the market place, that are expressed every day.

 

SD

 

 

Very elegantly stated.

[Cardboard]

Yup! Very elegantly stated lies and deception...

 

"We crossed the threshold when the decision was made to not consolidate the share count."

 

"'WE' aren't going to do anything."

 

When was that decision made and was it ever made? Do you have records of board discussions? Or you simply sent an e-mail to IR with your proposal and it just got ignored?

 

If one reviews the SEC filings from Kernaghan and FrontFour, share consolidation is never mentioned specifically. And FrontFour has a history of dealing with Canadian O&G companies that were trading well below share prices typically required by institutions to invest in.

 

It seems that it is only SD who has dreamed up this share consolidation option. Then he tells us that a decision was made (when?, by whom?), proposed by whom? And that once challenged as to what he will do about it since the so called decision went against his will, he says nothing...

 

Sure, you can hide behind your non-disclosure crap, client privilege and what else but, the fact remain that you are trying to pull on us a bunch of bs.

 

Cardboard

 

[Joe689]

In IR conversations that I have had, they specifically mention that share consolidation, buybacks, and dividends are always being considered.  It is there duty to consider them. 

 

With the financial market talent you have on the BOD, you would think they could cook something up to close the gap between book value.