PWE - Penn West Petroleum

[Cardboard]

Pay 2P+ or get laughed at.... seriously, where have you guys been?

 

You have CPG selling at about half of 2P and WCP at 3/4. These companies have both much higher netbacks than OBE: 50% better. Then producing 80 to 90% light oil, medium and NGL's. No hedge issues.

 

OBE also avoided discussing the all important recycle ratio in their press release which probably did not surpass 1.5 times.

 

Cardboard

[SharperDingaan]

Pay 2P+ or get laughed at.... seriously, where have you guys been?

 

You have CPG selling at about half of 2P and WCP at 3/4. These companies have both much higher netbacks than OBE: 50% better. Then producing 80 to 90% light oil, medium and NGL's. No hedge issues.

 

OBE also avoided discussing the all important recycle ratio in their press release which probably did not surpass 1.5 times.

 

Cardboard

 

FF is in a box. They claim they can do better - but with OBE allready selling at about 1/2 2P, they will have to go up to at least the 3/4 2P of WCP. Problem is that very few will consider the netbacks, and estimated 2018 depletion has already been recovered - so unless FF wants to claim that they will get ZERO additional production for the Cardium and other fields, for the rest of the year; they are going to have to start at around 2P. Sure FF could weasel, but 'junior' needs to demonstrate that he's not all big hat and no cattle.

 

If nothing else, the Q4 2017 earnings release should be entertaining!

 

SD

 

[Pelagic]

Pay 2P+ or get laughed at.... seriously, where have you guys been?

 

You have CPG selling at about half of 2P and WCP at 3/4. These companies have both much higher netbacks than OBE: 50% better. Then producing 80 to 90% light oil, medium and NGL's. No hedge issues.

 

OBE also avoided discussing the all important recycle ratio in their press release which probably did not surpass 1.5 times.

 

Cardboard

 

FF is in a box. They claim they can do better - but with OBE allready selling at about 1/2 2P, they will have to go up to at least the 3/4 2P of WCP. Problem is that very few will consider the netbacks, and estimated 2018 depletion has already been recovered - so unless FF wants to claim that they will get ZERO additional production for the Cardium and other fields, for the rest of the year; they are going to have to start at around 2P. Sure FF could weasel, but 'junior' needs to demonstrate that he's not all big hat and no cattle.

 

If nothing else, the Q4 2017 earnings release should be entertaining!

 

SD

 

FF is a hedge fund, I don't think they're in the business of acquiring companies. They've laid out their case as to how they think OBE's management could better monetize existing assets and utilize capex and it's our choice as shareholders to either support them or to support management's plans. I don't think anyone is expecting FF to make an offer for the company and I don't think they have the ability to do so even if they wanted to.

 

OBE certainly can do better, recent well results prove that. OBE spent $70mm on the Cardium water flood program that provided very little in absolute boe/d results. Decline dropped from 15% to 5% which is great but when you consider total Cardium production is only around 10,000 boe/d we spent $70 million on water flood to gain 1,000 boe/d per year. Spending that same $70 million on production wells in the Cardium, which is what FF and many other shareholders have advocated, would have likely added significantly more to production. Case in point recent well results for $14 million producing roughly 2,000 boe/d.

 

Valuation in terms of a buyout offer is relevant if/when such an offer is presented but I don't think it is what FF currently envisions for the company. Their focus primarily revolves around capital allocation and secondarily, the BOD's rather anemic stockholdings. If OBE can achieve similar results in the Cardium to those that they released last month they should be on track to generate meaningful cash flow from new, unhedged, light oil production.

[bizaro86]

Bbl/d is a terrible metric to evaluate waterflood vs new drills. You should use NPV or IRR or something. Of course that is hard from the outside.

 

New drills have their peak production right after they start up. So 1000 bbl/d of new production will start declining and never stop, usually on a hyperbolic basis.

 

A waterflood is just the opposite. Because it reduces decline, the production attributable to a waterflood actually grows over time. Using your numbers (5% decline) you'd get 10k, 9.5k, 9k, 8.6k, 8.1k with waterflood vs (15% decline) 10k, 8.5k, 7.2k, 6.1k, 5.2k.

 

So by the 4th year of the waterflood the marginal production is now nearly 3000 bbld/d up from 1000 bbl/d, whereas 1000 bbl/d of new drills will have declined quite a bit.

 

I'm not saying these guys are doing a good job or that their waterflood was the right decision, just that bbl/d isn't the right mental model to evaluate that. I don't own it, because I think there are other names that are better and cheaper.

[Gilp]

bizaro86, that's interesting. Can you mention which companies you think are better and cheaper?

[Pelagic]

Bbl/d is a terrible metric to evaluate waterflood vs new drills. You should use NPV or IRR or something. Of course that is hard from the outside.

 

New drills have their peak production right after they start up. So 1000 bbl/d of new production will start declining and never stop, usually on a hyperbolic basis.

 

A waterflood is just the opposite. Because it reduces decline, the production attributable to a waterflood actually grows over time. Using your numbers (5% decline) you'd get 10k, 9.5k, 9k, 8.6k, 8.1k with waterflood vs (15% decline) 10k, 8.5k, 7.2k, 6.1k, 5.2k.

 

So by the 4th year of the waterflood the marginal production is now nearly 3000 bbld/d up from 1000 bbl/d, whereas 1000 bbl/d of new drills will have declined quite a bit.

 

I'm not saying these guys are doing a good job or that their waterflood was the right decision, just that bbl/d isn't the right mental model to evaluate that. I don't own it, because I think there are other names that are better and cheaper.

 

I understand the value of the water flood program compounds over time, which is how the company sold it initially, and were they in a better cash position or exclusively developing the Cardium it might make more sense. However, it's not accurate to compare water flood results to non-waterflood without also accounting for the money that was spent and what it could have produced in terms of new production, foregone production if you will. I think given the well results they recently announced, their water flood program appears to be inferior relative to new drilling. Whether those results can be replicated remains to be seen.

 

I believe the initial production they recently announced was around 2,800 boe/d from the 4 well pad so I used 2,000 boe/d to account for some of the initial production decline in my previous post.

 

$70 million buys you 5 such new production 4 well pads. Let's assume each well produces around 250 boe/d for 1,000 boe/d per pad, less than half of what they recently reported for the sake of being conservative with our estimates. That's still 5,000 boe/d of new production that was foregone for the water flood program.

 

Assuming a 15% decline the production foregone for water flooding would be 5k, 4.25k, 3.6k, 3k, 2.6k. Adding those rates to the non-water flood production (10k, 8.5k, 7.2k, 6.1k, 5.2k) then multiplying by 365 gives us a rough estimate of total production over the 5 year period. I come up with 16.5mm boes for the water flood program vs a total of 20.2mm boes for the non-water flood and new production. Admittedly production in the 5th year is still higher with water flood is still higher 8.1k vs. 7.8k.

 

Breaking it down water flood is 10k, 9.5k, 9k, 8.6k, 8.1k and non-wf with new production is 15k, 12.75k, 10.8k, 9.1k, 7.8k

 

I tried to be fairly conservative in my estimates of new production, I think in fairness if comparing water flood to non-water flood results the cost of the water flood has to be accounted for and that money would have likely been spent on new production.

 

I don't think water flood programs should be avoided entirely in favor of new drilling, I just think FF has a point when they argue for increased development in the core areas and top line production growth is something the market seems to reward. As you point out it's a question of IRR which the company has a better handle on when it comes to specific drilling sites but if we do use total production to compare the two, WF comes up short over a 5 year period but shows its value over a longer time frame.

 

In practical terms specific to OBE, being able to increase light oil production 50% in one year with a concerted drilling effort in Cardium is a real possibility assuming a few more well results like those initially announced that are in line with their costs and production. I have to think this would have had a more pronounced effect on the stock price than the water flood results did. It looks like though we get wf and hopefully new production this year.

 

[bizaro86]

For sure, I agree you need to compare apples to apples, ie, what use of limited capital is best. I haven't looked at this company in any depth, and don't have an opinion whether this was better or worse than spending the same capital on drilling.

 

If two options were otherwise equal, I would choose the waterflood because the low decline/long tail makes it easier to sustain cash flow going forward.

 

Re:what I like: I like Surge and CVE on the oil side, and Peyto and Pine Cliff for gas. Bonavista and Crescent Point are both cheaper as well, although Bonavista has relatively high leverage.

[Cardboard]

"Assuming a 15% decline the production foregone for water flooding would be 5k, 4.25k, 3.6k, 3k, 2.6k. Adding those rates to the non-water flood production (10k, 8.5k, 7.2k, 6.1k, 5.2k) then multiplying by 365 gives us a rough estimate of total production over the 5 year period. I come up with 16.5mm boes for the water flood program vs a total of 20.2mm boes for the non-water flood and new production. Admittedly production in the 5th year is still higher with water flood is still higher 8.1k vs. 7.8k."

 

Now redo the math with the current corporate decline rate of 23% and more like 30% on these new wells since OBE has already a lower than normal decline rate due to Peace River and existing waterfloods. And a 30% decline rate is overtime. In its first year, a new well can lose 75% of initial production.

 

You guys are falling in the FrontFour and Eric Nuttal trap of chasing growth at any cost. Look at the chart of TOU and RRX who have followed this model and you will realize that the last year does not look much better. These guys with their 40-45% corporate decline rate are on a deadly hamster wheel.

 

While growing production per share makes for sensational news releases, the market has changed and no longer responds favourably. You need profitable growth and balance sheet discipline to now get rewarded. There is a lot of scrutiny around all numbers nowadays.

 

Cardboard 

 

 

[SharperDingaan]

And this is precisely the point.

 

We have a group of shareholders insisting on short-term versus long term metrics, to maximise near term value; a strategy that can only be monetized through a near term intent to sell - nothing wrong in that. However, the proponents are adament they can do better, that management is 'incompetent'; yet can't even put up a bid at these low price levels - to put the company into 'play,' and maximise the price they seek?

 

We have a board with a fiduciary duty to maximize shareholder value over the long-term. They have an obligation to listen to stakeholders; and to our eyes they have done, and ARE DOING exactly that. No foul, whether some shareholders want to hear it or not.

 

We have majority rule for a reason.

Convince the MAJORITY of votes than the MINORITY view is the way to go, and the boards mandate can easiliy be changed to maximization of short term value - specifically, a sale of the company. But if the MINORITY is unable to tolerate 'NO' - to be credible they need to put up a bid. Evidence sincerity, or come accross as whining brats - simple choice.

 

Of course; we want the highest price possible, the same as everyone else.

We just dont have a need to feel 'popular'.

 

SD

 

 

 

[Pelagic]

"Assuming a 15% decline the production foregone for water flooding would be 5k, 4.25k, 3.6k, 3k, 2.6k. Adding those rates to the non-water flood production (10k, 8.5k, 7.2k, 6.1k, 5.2k) then multiplying by 365 gives us a rough estimate of total production over the 5 year period. I come up with 16.5mm boes for the water flood program vs a total of 20.2mm boes for the non-water flood and new production. Admittedly production in the 5th year is still higher with water flood is still higher 8.1k vs. 7.8k."

 

Now redo the math with the current corporate decline rate of 23% and more like 30% on these new wells since OBE has already a lower than normal decline rate due to Peace River and existing waterfloods. And a 30% decline rate is overtime. In its first year, a new well can lose 75% of initial production.

 

You guys are falling in the FrontFour and Eric Nuttal trap of chasing growth at any cost. Look at the chart of TOU and RRX who have followed this model and you will realize that the last year does not look much better. These guys with their 40-45% corporate decline rate are on a deadly hamster wheel.

 

While growing production per share makes for sensational news releases, the market has changed and no longer responds favourably. You need profitable growth and balance sheet discipline to now get rewarded. There is a lot of scrutiny around all numbers nowadays.

 

Cardboard

 

In fairness I did start with roughly a third, 1,000boe/d vs. the 2,800boe/d they announced, in my calculations to account for initial production losses and the likelihood that other well results won't be on par with these results. The corporate decline rate includes their production outside the Cardium as well, I was simply trying to focus on their Cardium asset and what their water flood program last year for $70mm accomplished relative to what could have been accomplished with new drilling. Some water flooding was probably necessary but to spend almost their entire Cardium budget on wf without drilling a single new well in H1 '17 was excessive. Long term the wf program has done a lot to prove the value of their Cardium asset, but it also comes at the cost of cash flow from new production that could have been developed last year. The money has already been spent so it's a moot point, I'd just like to see more focus on meaningfully increasing light oil production, something that seems well within their capabilities given recent well results.

 

For some reason OBE's site is inaccessible right now so I can't see their corporate presentation with what they budgeted this year for Cardium development. Still, I'm trying to provide a picture of what the Cardium asset *could* look like in 2019 and 2020

 

10k boe/d currently at a 5% decline rate. Let's say they're adding production at the rate I used above ($14mm for 1000boe/d) I know this falls right in the range of what they say is the capital efficiency for the Cardium $14,000/boe. And in the sake of conservatism we'll say new production comes with a 20% decline rate and assume no further water flooding is done. And we'll say they spend $70mm on development this year and next - I have a feeling this will be more come their Q4 report.

 

$70mm gets us 5 of their 4 well pads each producing 1,000boe/d or put another way, 20 new wells each producing 250boe/d which is in line with a lot of their existing Cardium production.

 

Exit 2018 with 9.5k boe/d + 5k in new production - 14.5k, exit 2019 with 9k (@ 5% decline) 4k (@ 20% decline) and 5k added for 18k Cardium production. Exit 2020 with 8.5k (@ 5%), 7.2k (@ 20%) plus an added 5k for a total of 20.7k.

 

I don't see any of these production assumptions as being extreme, I've tried to be fairly conservative with them, and the result is a relatively straightforward path to doubling their production in the Cardium within 3 years spending roughly $70mm a year. I don't know what management's plan is and how it compares to this, nor do I think we have enough insight into their other plays like the Viking and Mannville to get a sense of how a Cardium focused growth strategy compares to one more weighted towards them, I'm simply putting forward one option. 

 

 

 

 

[Joe689]

And this is precisely the point.

 

We have a group of shareholders insisting on short-term versus long term metrics, to maximise near term value; a strategy that can only be monetized through a near term intent to sell - nothing wrong in that. However, the proponents are adament they can do better, that management is 'incompetent'; yet can't even put up a bid at these low price levels - to put the company into 'play,' and maximise the price they seek?

 

We have a board with a fiduciary duty to maximize shareholder value over the long-term. They have an obligation to listen to stakeholders; and to our eyes they have done, and ARE DOING exactly that. No foul, whether some shareholders want to hear it or not.

 

We have majority rule for a reason.

Convince the MAJORITY of votes than the MINORITY view is the way to go, and the boards mandate can easiliy be changed to maximization of short term value - specifically, a sale of the company. But if the MINORITY is unable to tolerate 'NO' - to be credible they need to put up a bid. Evidence sincerity, or come accross as whining brats - simple choice.

 

Of course; we want the highest price possible, the same as everyone else.

We just dont have a need to feel 'popular'.

 

SD

 

In the end, I think we come out with better direction and focus.  This lack of clarity on what type of investment this is, is hurting us.  We need the multiyear plan.  And what assets fit with that plan, and what assets do not.  One the biggest problems in my mind is that each asset serves a different investment purpose.  The company calls it "optionality" but it really means we are all over the place.

 

I think this would be a focused 3 year plan:  The Cardium is our crown jewel, it is our largest asset and is best suited for returning money to shareholders.  Three years from now, we expect to have at least doubled Cardium production and reinstate a hefty dividend.  We have run way for 10 years.    To help get us to this point, we plan on disposing our other assets, and putting their proceeds straight to Cardium production growth.    This may take some time because we want to get a fair price for these assets.  We are not liquidating them. And we plan to continue to hedge 50% in a systematic fashion to guarantee our capital plans.

 

Even with this sloppy statement of mine, at least I know where we are headed in a more focused manner.  It is not smoke and mirrors on what assets we like and what we do not like.    It also defines the investor type that would be interested in this name.    Big investors do not know what they are investing in right now.... Only investors that are currently interested are value investors because of sum of its parts.

 

At the time of the current plan, there was still much uncertainty.  I do not think French wanted to make a "call".  I think now, we have some more clarity and stability in oil prices, and maybe he will make the "call" now.  Take charge, and give us an ambitious, clear plan, and lets get to it.  If he cannot do that, FF has a strong chance of taking over.  Think FF is serving its purpose of putting pressure on.

[Joe689]

Back to FrontFour's possible intentions.  Recall,

 

"The appointment was accompanied with the same standstill agreement executed by our latest Board addition, Mr. Edward (Ed) H. Kernaghan. Despite extensive negotiations, FrontFour was unwilling to execute the agreement"

 

 

Why would FrontFour not sign an agreement that governed a bidder of a company till the end of 2018?  Maybe they do have other intentions.

 

 

[SharperDingaan]

https://www.bloomberg.com/news/articles/2017-12-12/activist-frontfour-is-said-to-push-for-sale-of-obsidian-energy

The date for this was Dec-12-2017. The activist fund believes the company could fetch C$2.75 to C$3 a share at auction, or almost double where it traded Tuesday, said the person, who asked not to be identified because the matter is private.

 

And today we have an independently determined 2P at around C$ 2.60.

They are probably really regreting this interview now.

 

SD

 

Back to FrontFour's possible intentions.  Recall,

 

"The appointment was accompanied with the same standstill agreement executed by our latest Board addition, Mr. Edward (Ed) H. Kernaghan. Despite extensive negotiations, FrontFour was unwilling to execute the agreement"

 

 

Why would FrontFour not sign an agreement that governed a bidder of a company till the end of 2018?  Maybe they do have other intentions.

[Pelagic]

https://www.bloomberg.com/news/articles/2017-12-12/activist-frontfour-is-said-to-push-for-sale-of-obsidian-energy

The date for this was Dec-12-2017. The activist fund believes the company could fetch C$2.75 to C$3 a share at auction, or almost double where it traded Tuesday, said the person, who asked not to be identified because the matter is private.

 

And today we have an independently determined 2P at around C$ 2.60.

They are probably really regreting this interview now.

 

SD

 

Back to FrontFour's possible intentions.  Recall,

 

"The appointment was accompanied with the same standstill agreement executed by our latest Board addition, Mr. Edward (Ed) H. Kernaghan. Despite extensive negotiations, FrontFour was unwilling to execute the agreement"

 

 

Why would FrontFour not sign an agreement that governed a bidder of a company till the end of 2018?  Maybe they do have other intentions.

 

I'm not sure they're interested in a total sale of the company. Saying what it could be worth in total if it was sold and pushing for a sale are two separate things. Their press release in January pushes for streamlining OBE's assets to focus on the Cardium.

 

https://www.prnewswire.com/news-releases/long-term-shareholder-frontfour-capital-expresses-concerns-regarding-obsidian-energy-ltd-300583722.html

 

FrontFour believes that a significant overhaul of Obsidian is necessary, including the streamlining of the portfolio via dispositions, and the high grading of the capital program to drive robust light oil and liquids growth within Obsidian's dominant Cardium position and vast Mannville footprint.  Obsidian has the potential to be a standout light oil growth player and Cardium champion through a dramatic transformation that we believe will unlock significant value for all shareholders. To this end, FrontFour is currently considering all available options, including seeking changes to the composition of the Board at Obsidian's 2018 Annual Meeting.

 

[Joe689]

FF is simply out of patience.  Bad timing because management/BOD is half way to following through of their master plan.  Their master plan was aiming for a multibagger through careful development of all core assets,  producing the max value.  Albeit not quickly. 

 

I think the company will be forced to give them a carrot (streamline their assets) to get them to go away for now.  If not, FF is about to propose a board change.    It would have a good chance of succeeding.    In that case, mgmt is fired, and the company pursues "strategic alternatives".

 

It boils down to half the shareholders wanting instant gratification (FF) (bad choice of words as many have waiting for years), and the other half willing to give it the time it takes to get max value (KERNAGHAN).

 

Bad time for partisanship with the annual meeting approaching with an activist. 

 

Current leadership has quite the dilemma on their hands.  Ways I see this playing out:

 

1.  Leadership gives in, sells an asset, and accelerates production growth.  FF is now happy.  Max value goes down but shares rise.

2.  Leadership presses, operational results, guidance, new plan saves them.  FF then either looses support or goes away.

3.  If neither 1 or 2, FF turns aggressive, and at a minimum proposes new directors.

 

I guess I give equal likelihood to all these scenarios.  Sadly if 3 occurs, it will be very poor news short term.   

 

Management swung and missed with Operational Update and RR report, I think it would quite a gamble for them to think Q4 report will break the SP lull.

 

 

[SharperDingaan]

Our own thoughts are that management needs to 'lay out the plan'.

Show us the what (strategy), why X is chosen over Y, how we're going to get there, and the time frame (when). The operational plan (drilling, dispositions, WF, discount rates, etc), and the financial plan (RS, share issuance, etc.). Basically what objectors need to beat, net of NPV adjustments.

 

Ultimately OBE needs to decide on the shareholder base.

Long term view, consolidate and speak to institutions. Or short term view, continue to trade as a penny stock and speak to day traders. They can't do both. Our own thoughts are that they would be better served going institutional.

 

FF has some good ideas (land sales) - but they are not the only ideas. OBE has a lot of levers.

As long-term shareholders our criteria is where this goes; do we end up with a RS, a sale/receipt of paper, or more of the same? Ultimately its show me the money time.

 

If there's a bid, great.

If there's nothing ... the lack of action speaks to the degree of 'conviction' in the short term agitation.

But we aren't going to be waiting until the AGM.

 

Pop the boil, and lets all move on.

 

SD

 

 

 

 

[Cardboard]

The keys are in Kernaghan's hands. They will decide what happens next.

 

If you review proxy fights in Canada, FrontFour has zero chance of getting anywhere without Kernaghan's support as they would be siding with management if not. All it would do is to cost the company money to fight them and FF likely realize that it is costly for them also if they lose since they cannot recuperate their fees.

 

Go review Eagle Energy's last year proxy fight and you will see what I mean. I had thought that this one had a very good chance of succeeding and it came just shy. Management had in place a bad plan with high cost debt, G&A/boe was crazy high, insider ownership was low and the challengers had a very sensible plan to offer.

 

Now if you have a large active shareholder such as Kernaghan siding with management and a company properly managed forget about it.

 

Cardboard

[Joe689]

Neither of whom have increased their holdings since the last couple dips below $1.  At least, not more than 1% that would trigger a filing.

 

This story is just so odd..

 

wonder how many shares Rick George's estate now owns.  And what side they are on.  Probably the son's side?

[Joe689]

Oh boyyyy.... another crazy day in the market.

 

CPG getting nailed today after earrings.  Most CA E&P earrings especially VET looked good yet they are getting nailed. CPG had "one" analyst on the call. Boy we have got to be at  rock bottom.  But I have said that before....

 

As for OBE, it might not matter how good Q4 was, nobody is going to care.  Sometimes it takes the company to wake up the market.  Like June '16.  These companies need to start consolidating to unlock value.  Some companies paying down debt, raising debt, providing income, drilling, hedging, not hedging.  All plans equally be treated like dog sh*it

 

OK, rant done.  Good luck to all in this crazy market.

 

 

[zippy1]

I used to live in Dallas area.  I vaguely remembers 1997-1998 when there was a wave of consolidation on oil companies affecting many church friends.

 

I am wondering whether the current one is as bad in west Canada?

 

 

[bizaro86]

I wasn't in Dallas then so can't compare,  but roughly half of my friends in the oil patch here (Calgary) have been laid off in the last 3 years. I would say 25% of those have found new jobs who have decided to stay.

[Joe689]

Hoping we get an updated plan tomorrow.  A "shareholder plan",  providing a direct path to increasing share price!

[zippy1]

Q4 out

1:3 reverse split

No change in 2018 guidance

Our total 2018 guidance remains unchanged:

 

2018 Annual Guidance

 

Production 29,000 to 30,000 boe per day

 

Production Growth Rate (1) 5%

 

Operating Costs $13.00 - $13.50 per boe

 

General & Administrative $2.00 - $2.50 per boe

https://finance.yahoo.com/news/obsidian-energy-announces-end-2017-113000441.html

[Joe689]

Continued strong execution but no surprises.  This is a sharp operational team.  The slightly revised their plan to more drilling in the Cardium.  They seem confident and not even bothered by FF.  This company has no plans on selling out in any fashion.  The RS is needed and hopefully by June, we are above $1 and get it done in a non-vulnerable way. 

[StevieV]

"This is a sharp operational team."

 

I am not so impressed by management.  They need to drill more producing wells in the Cardium and curtail the dumb hedging program.  The company produces too few barrels.  At their size, they need to grow faster, and can.  Once they get up to 50,000 BOE or so, they can work on other things.

 

The hedging is fighting the last battle.  The prices are too low, and the backwardation too steep for their program.

 

They land and wells are there.  They need a shift in strategy.