PWE - Penn West Petroleum

[blainehodder]

Interesting factoid about energy investing in the past decade:

 

"There have been 42 10-baggers in the S&P 1500 this decade while 1 out of every 8 stocks in the S&P 1500 Energy sector is down 90%+ over the last decade."

 

Via

 

Doesn't this suggest that we are more likely to find 10-baggers in energy over the next decade?

 

WTI is above $60, bad hedges is gone. OBE can make plenty FCF (relative to its current market cap) and deleverage if WTI stabilize at $60. Oil does not even have to go to $70 to make OBE a 10-bagger from current price level. Is there any reason not to get in now, other than this is a hated stock?

 

What kind of logic is this? 10 baggers have mostly occured in tech and will continue to mostly occur in tech. 10 baggers are almost NEVER a result of multiple expansion and almost always a result of real economic growth (rev, eps, fcf). So no, OBE is not likely to be a 10 bagger. Nor is any other company that doesn't have massive reinvestment opportunities in high margin, high ROIC projects at scale. Energy does not offer massive reinvestment opportunities at near infinite returns on capital over long periods of time and never will. It can offer high jackpot wins in a short period of time, but when that happens the market attracts drilling and margins and prices get smoked. This is a commodity business. You think OBE will ramp revs by a factor of 5-10? You think any energy company will be a 10 bagger given the ease of entry, and ease of locking in economics over frack well life-cycles? If so, you need a damn good reason why that would be true.

 

If you want 10 baggers focus on things that scale up with high ROE, high margins, and high marginal ROIC. Multiples rarely go up by a factor of 10. They can add juice to returns, but to get a 10 bagger you need more than a 50% uptick in a multiple. You need growth. If we’re long-term investors, the ultimate source of our return will be the growth that the company generates in its business over a long period of time. Multiple expansion is just gravy on top.

 

I think the path to a 10 bagger in energy probably involves buying subscale competitors at low prices (plenty of those around now) and cutting costs. CNQ is an example of a company that has used accretive acquisitions and capital discipline to generate great returns for many years.

 

CNQ may generate decent returns by drilling for oil on the exchange and cutting costs in the coming 5-10 yrs, but a 10 bagger in a decade? CNQ hasn't generated ANY returns outside of the div for a decade and there is no reason to believe the next decade will be easier.

[Liberty]

Interesting factoid about energy investing in the past decade:

 

"There have been 42 10-baggers in the S&P 1500 this decade while 1 out of every 8 stocks in the S&P 1500 Energy sector is down 90%+ over the last decade."

 

Via

 

Doesn't this suggest that we are more likely to find 10-baggers in energy over the next decade?

 

WTI is above $60, bad hedges is gone. OBE can make plenty FCF (relative to its current market cap) and deleverage if WTI stabilize at $60. Oil does not even have to go to $70 to make OBE a 10-bagger from current price level. Is there any reason not to get in now, other than this is a hated stock?

 

What kind of logic is this? 10 baggers have mostly occured in tech and will continue to mostly occur in tech. 10 baggers are almost NEVER a result of multiple expansion and almost always a result of real economic growth (rev, eps, fcf). So no, OBE is not likely to be a 10 bagger. Nor is any other company that doesn't have massive reinvestment opportunities in high margin, high ROIC projects at scale. Energy does not offer massive reinvestment opportunities at near infinite returns on capital over long periods of time and never will. It can offer high jackpot wins in a short period of time, but when that happens the market attracts drilling and margins and prices get smoked. This is a commodity business. You think OBE will ramp revs by a factor of 5-10? You think any energy company will be a 10 bagger given the ease of entry, and ease of locking in economics over frack well life-cycles? If so, you need a damn good reason why that would be true.

 

If you want 10 baggers focus on things that scale up with high ROE, high margins, and high marginal ROIC. Multiples rarely go up by a factor of 10. They can add juice to returns, but to get a 10 bagger you need more than a 50% uptick in a multiple. You need growth. If we’re long-term investors, the ultimate source of our return will be the growth that the company generates in its business over a long period of time. Multiple expansion is just gravy on top.

 

I think the path to a 10 bagger in energy probably involves buying subscale competitors at low prices (plenty of those around now) and cutting costs. CNQ is an example of a company that has used accretive acquisitions and capital discipline to generate great returns for many years.

 

IMO the path to a 10 bagger in energy is either having geological knowledge that is superior to almost all market participants and identifying small opportunities that will be big, or being lucky speculating on highly leveraged plays (either with debt leverage, or high operating leverage). I call it speculation because the main factors are outside of the companies' control (the price of the commodity, how volatile it is, etc), so they could do everything right yet be crushed by an oil crash--though the reverse isn't as likely, it's also possible to have rising oil prices and have companies do so many stupid things that the stock barely profits from the tailwind, as we've seen.

[SharperDingaan]

At today’s CAD 0.90, a ‘ten-bagger’ is CAD 9.00 – or an EV of roughly CAD 1402. And that will occur at just 73% above the current EV of approximately CAD 811M. Expressed another way – a mere 25,500 boe/d of Cardium production at CAD 55K/flowing barrel. EXCLUDING any existing production from PR, Viking, DB, or gas sales.

 

Reported drilling results suggests that they could be there within 2-3 years.

Improving sentiment in the WCSB, could put them there a lot sooner.

 

To the WEB investor, this is just luck – as it has little to do with the company efforts.

The investor completely misses that the investment is a bet on the direction of the tide, not the company. And it attaches zero value to recognition of the opportunity, and ability to use it. You just need to be comfortable in your predictive ability, and that your chosen boat is unlikely to sink (BK).

 

You could just buy a major, in anticipation of earnings and multiple expansion;

or select any of a variety of other alternatives, according to risk tolerance.

 

Obviously, industry experience and investment expertise are helpful.

You don’t need to be an expert, but you do need to know your way around the basics of sedimentary geology, drilling/tar-sands mining, transport/collection, a reserve report, and o/g accounting.

 

Often, it is over-reach that gets folks into trouble.

You were following the crowd, and are supremely confident that you aren’t the patsy.

As popularity builds, systematically take $ off the table.

 

 

SD

 

[bizaro86]

Interesting factoid about energy investing in the past decade:

 

"There have been 42 10-baggers in the S&P 1500 this decade while 1 out of every 8 stocks in the S&P 1500 Energy sector is down 90%+ over the last decade."

 

Via

 

Doesn't this suggest that we are more likely to find 10-baggers in energy over the next decade?

 

WTI is above $60, bad hedges is gone. OBE can make plenty FCF (relative to its current market cap) and deleverage if WTI stabilize at $60. Oil does not even have to go to $70 to make OBE a 10-bagger from current price level. Is there any reason not to get in now, other than this is a hated stock?

 

What kind of logic is this? 10 baggers have mostly occured in tech and will continue to mostly occur in tech. 10 baggers are almost NEVER a result of multiple expansion and almost always a result of real economic growth (rev, eps, fcf). So no, OBE is not likely to be a 10 bagger. Nor is any other company that doesn't have massive reinvestment opportunities in high margin, high ROIC projects at scale. Energy does not offer massive reinvestment opportunities at near infinite returns on capital over long periods of time and never will. It can offer high jackpot wins in a short period of time, but when that happens the market attracts drilling and margins and prices get smoked. This is a commodity business. You think OBE will ramp revs by a factor of 5-10? You think any energy company will be a 10 bagger given the ease of entry, and ease of locking in economics over frack well life-cycles? If so, you need a damn good reason why that would be true.

 

If you want 10 baggers focus on things that scale up with high ROE, high margins, and high marginal ROIC. Multiples rarely go up by a factor of 10. They can add juice to returns, but to get a 10 bagger you need more than a 50% uptick in a multiple. You need growth. If we’re long-term investors, the ultimate source of our return will be the growth that the company generates in its business over a long period of time. Multiple expansion is just gravy on top.

 

I think the path to a 10 bagger in energy probably involves buying subscale competitors at low prices (plenty of those around now) and cutting costs. CNQ is an example of a company that has used accretive acquisitions and capital discipline to generate great returns for many years.

 

CNQ may generate decent returns by drilling for oil on the exchange and cutting costs in the coming 5-10 yrs, but a 10 bagger in a decade? CNQ hasn't generated ANY returns outside of the div for a decade and there is no reason to believe the next decade will be easier.

 

Sorry, I wasn't clear. I didn't mean I think CNQ is a ten-bagger in the next decade, that is extremely unlikely given their size/scale. As you note they are roughly flat over the last 10 years. They were a ten bagger the prior decade before the 2009 crash, however.

 

I was trying to explain how I think an energy 10 bagger happens. There are really only 2 ways that it has been done in the past. One is find a bunch of oil. That is a bit tricky, you have to have exceptional geology and exceptional luck. I've spent a lot of time doing oil exploration with a variety of smart people, and you can't just decide to succeed imo. I've worked with some people who are very good at it, and (like software engineering) there are some people who are 10-100x more valuable in this environment than others. Pretty hard for an outside investor to identify that type of talent.

 

The other way is more like value investing. Buy producing assets for less than they're worth. That's a pretty effective method in any business - it requires solid analysis and patience, but it can be done, and there are lots of cheap assets at present.  If you do this well, and can get a good price for your own stock, then you get the double benefit of trading shares at >NAV for assets selling at <NAV.

 

I think the altius model of project generation for royalties combined with a value investing asset buying bent could be hugely effective in Canada's oil patch. Maybe someday I'll raise some money and do it myself, as so far I haven't found anyone doing that yet that I feel comfortable investing with. 

[muscleman]

SD, there is no such a thing as the EV has to go up to X if production goes up to Y. You have to factor in the costs. What’s the all in cost and all in profit per barrel for PWE? It is clearly negative at the moment.

[SharperDingaan]

SD, there is no such a thing as the EV has to go up to X if production goes up to Y. You have to factor in the costs. What’s the all in cost and all in profit per barrel for PWE? It is clearly negative at the moment.

 

You have misinterpreted.

 

- At CAD 9.00, what is the approximate EV of OBE? About CAD 1,402 M.

- If JUST the Cardium asset were sold for CAD 1,402 M, and the sales metric was CAD 55K/flowing barrel, what quantity of liquids production would this asset have to have been producing? About 25,500 boe/d.

- What liquids production is Cardium currently doing? what net new production is drilling currently adding? How long would it take to get to the 25,500 boe/d, if results continued at the same pace.

 

- EV could be lower, and the production requirement upon sale less, if OBE simply paid down some debt.

- The 55K/flowing boe metric will be higher, if average initial liquids production is > 70%. And higher again, if OBE did not have to sell into today's asset market. The higher the metric, the less liquids production required to make the EV of CAD 1,402 M.

- OBE could be acquired before it reaches the 25,500 boe/d of liquids production. But the buyer would have to offer enough of a premium, that their offer exceeds the PV of that 25,500 boe/d in 'N' years.

 

As sentiment in the WCSB improves over time (assume improving egress), all these values increase.

Something temporarily spikes the price of oil, these values increase.

If/when FOMO takes place, these values increase.

 

Different POV

 

SD

 

 

[heth247]

SD, there is no such a thing as the EV has to go up to X if production goes up to Y. You have to factor in the costs. What’s the all in cost and all in profit per barrel for PWE? It is clearly negative at the moment.

 

Just to understand -- when you say "it is clearly negative at the moment", were you based on that OBE is not generating positive GAAP earning?

[Cigarbutt]

Maybe this should eventually belong to a separate thread.

Disclosure: I understand the 'torque' embedded in new PennWest and the potential reward but I'm not sophisticated enough to understand and/or manage the risk involved.

Disclosure: There may be a way to re-enter the space at some point with a basket approach or something and (thanks to KJP) have looked at royalties tied to mineral rights in the US and I find the following interesting:

...

I think the altius model of project generation for royalties combined with a value investing asset buying bent could be hugely effective in Canada's oil patch. Maybe someday I'll raise some money and do it myself, as so far I haven't found anyone doing that yet that I feel comfortable investing with.

The royalty dynamics seem to be different in Canada. I've tried to look at the potential ramifications tied to vanilla royalties or overriding royalties if the operating firms run into distress. Have you looked at PSK and FRU?

You come across as a competent and straight-shooter kind of person and would appreciate if, over the next few years, you take to time to share your thoughts and/or progress on this question.

[SharperDingaan]

SD, there is no such a thing as the EV has to go up to X if production goes up to Y. You have to factor in the costs. What’s the all in cost and all in profit per barrel for PWE? It is clearly negative at the moment.

 

Just to understand -- when you say "it is clearly negative at the moment", were you based on that OBE is not generating positive GAAP earning?

 

He's referring to the Consolidated Statement of Income which shows historical recurring quarterly losses.

He should be referring to the Consolidated Statement of Cashflow which shows historic recurring +ve cashflow from operating activities.

Alternatively he could have referred to FFO, which is also positive.

 

He should also be looking at forward income and FFO estimates, not historic ones.

Simply because stocks are purchased at a multiple of FORWARD earnings.

 

SD

[SharperDingaan]

Maybe this should eventually belong to a separate thread.

Disclosure: I understand the 'torque' embedded in new PennWest and the potential reward but I'm not sophisticated enough to understand and/or manage the risk involved.

Disclosure: There may be a way to re-enter the space at some point with a basket approach or something and (thanks to KJP) have looked at royalties tied to mineral rights in the US and I find the following interesting:

...

I think the altius model of project generation for royalties combined with a value investing asset buying bent could be hugely effective in Canada's oil patch. Maybe someday I'll raise some money and do it myself, as so far I haven't found anyone doing that yet that I feel comfortable investing with.

The royalty dynamics seem to be different in Canada. I've tried to look at the potential ramifications tied to vanilla royalties or overriding royalties if the operating firms run into distress. Have you looked at PSK and FRU?

You come across as a competent and straight-shooter kind of person and would appreciate if, over the next few years, you take to time to share your thoughts and/or progress on this question.

 

I hear you, but we typically do not invest in royalties.

Simply because we have the skill-set to invest directly instead.

 

I am not a textbook, and have no intention of being one.

I post on a thread to provide a date/time stamped historic record; that family/partners can refer to - and which we can use as a training tool.

Anyone is free to use the record as they wish, but everything else is proprietary.

 

PWE/OBE is a long thread, covering many years, and agreed - there are a lot of lessons in it. But it is just one of many other threads.

It is to the reader to do their own DD, and make their own notes. Not us.

 

Perhaps not what many would like to hear, but it is the more conservative way to go.

If you do not understand this type of investment, you really should not be trying to do it, or looking to rely upon its results.

It's OK to ask ;), but sorry, this isn't our thing.

 

SD

 

 

 

 

[heth247]

SD, there is no such a thing as the EV has to go up to X if production goes up to Y. You have to factor in the costs. What’s the all in cost and all in profit per barrel for PWE? It is clearly negative at the moment.

 

Just to understand -- when you say "it is clearly negative at the moment", were you based on that OBE is not generating positive GAAP earning?

 

He's referring to the Consolidated Statement of Income which shows historical recurring quarterly losses.

He should be referring to the Consolidated Statement of Cashflow which shows historic recurring +ve cashflow from operating activities.

Alternatively he could have referred to FFO, which is also positive.

 

He should also be looking at forward income and FFO estimates, not historic ones.

Simply because stocks are purchased at a multiple of FORWARD earnings.

 

SD

 

But I think @muscleman still has a good point which is we should consider the "all in cost" that should include the "depletion and depreciation" (D &D), instead of just looking at CFO or FFO. Ideally OBE should produce positive GAAP earning if their D&D is fully covered by profit.

 

Do you know why OBE's D&D number is so high ($25~27 boe)? Is it because of it is skewed by Peace river and Viking?  Do you know what is their D &D for Cadium alone? 

 

In addition, O&G company also talks about "Finding and development costs" (F&D), which I don't see it reported by OBE. Is it included as part of D&D?

 

 

 

[Cigarbutt]

Maybe this should eventually belong to a separate thread.

Disclosure: I understand the 'torque' embedded in new PennWest and the potential reward but I'm not sophisticated enough to understand and/or manage the risk involved.

Disclosure: There may be a way to re-enter the space at some point with a basket approach or something and (thanks to KJP) have looked at royalties tied to mineral rights in the US and I find the following interesting:

...

I think the altius model of project generation for royalties combined with a value investing asset buying bent could be hugely effective in Canada's oil patch. Maybe someday I'll raise some money and do it myself, as so far I haven't found anyone doing that yet that I feel comfortable investing with.

The royalty dynamics seem to be different in Canada. I've tried to look at the potential ramifications tied to vanilla royalties or overriding royalties if the operating firms run into distress. Have you looked at PSK and FRU?

You come across as a competent and straight-shooter kind of person and would appreciate if, over the next few years, you take to time to share your thoughts and/or progress on this question.

 

I hear you, but we typically do not invest in royalties.

Simply because we have the skill-set to invest directly instead.

 

I am not a textbook, and have no intention of being one.

I post on a thread to provide a date/time stamped historic record; that family/partners can refer to - and which we can use as a training tool.

Anyone is free to use the record as they wish, but everything else is proprietary.

 

PWE/OBE is a long thread, covering many years, and agreed - there are a lot of lessons in it. But it is just one of many other threads.

It is to the reader to do their own DD, and make their own notes. Not us.

 

Perhaps not what many would like to hear, but it is the more conservative way to go.

If you do not understand this type of investment, you really should not be trying to do it, or looking to rely upon its results.

It's OK to ask ;), but sorry, this isn't our thing.

 

SD

Thank you for the answer but I was not looking to be spoon-fed and the post was for bizaro. :-[

Sorry for the misunderstanding.

I continue to enjoy reading your posts although I typically don't understand 50% of the content, a situation I attribute to a lack of capacity on my part.

[SharperDingaan]

SD, there is no such a thing as the EV has to go up to X if production goes up to Y. You have to factor in the costs. What’s the all in cost and all in profit per barrel for PWE? It is clearly negative at the moment.

 

Just to understand -- when you say "it is clearly negative at the moment", were you based on that OBE is not generating positive GAAP earning?

 

He's referring to the Consolidated Statement of Income which shows historical recurring quarterly losses.

He should be referring to the Consolidated Statement of Cashflow which shows historic recurring +ve cashflow from operating activities.

Alternatively he could have referred to FFO, which is also positive.

 

He should also be looking at forward income and FFO estimates, not historic ones.

Simply because stocks are purchased at a multiple of FORWARD earnings.

 

SD

 

But I think @muscleman still has a good point which is we should consider the "all in cost" that should include the "depletion and depreciation" (D &D), instead of just looking at CFO or FFO. Ideally OBE should produce positive GAAP earning if their D&D is fully covered by profit.

 

Do you know why OBE's D&D number is so high ($25~27 boe)? Is it because of it is skewed by Peace river and Viking?  Do you know what is their D &D for Cadium alone? 

 

In addition, O&G company also talks about "Finding and development costs" (F&D), which I don't see it reported by OBE. Is it included as part of D&D?

 

O/G coy's are valued at a multiple of forward cash flow, not a multiple of earnings. D&D isn't relevant.

There are a variety of measures used for cash flow, one of which is FFO.

 

SD

 

[heth247]

But I think @muscleman still has a good point which is we should consider the "all in cost" that should include the "depletion and depreciation" (D &D), instead of just looking at CFO or FFO. Ideally OBE should produce positive GAAP earning if their D&D is fully covered by profit.

 

Do you know why OBE's D&D number is so high ($25~27 boe)? Is it because of it is skewed by Peace river and Viking?  Do you know what is their D &D for Cadium alone? 

 

In addition, O&G company also talks about "Finding and development costs" (F&D), which I don't see it reported by OBE. Is it included as part of D&D?

 

O/G coy's are valued at a multiple of forward cash flow, not a multiple of earnings. D&D isn't relevant.

There are a variety of measures used for cash flow, one of which FFO.

 

SD

 

Come on, I thought you could provide a better answer since you have followed PWE/OBE for so many years. If D&D isn't relevant, you should buy those shale companies.

 

I thought D&D give us some visibility of what their maint carpex is. For 2019 OBE is projected to do C$150M FFO and C$120M in capex (mostly for Cardium). If we just assume this $120M is all maint capex to keep 27000 boe/d production flat, then I have 120M/(27000x365)=$12.5 boe, which is roughly half of the $23~27 boe for D&D reported by OBE. Can you tell me why there is such a big difference? 

 

If we used the $12.5 boe number for D&D, then OBE would have been break even or slightly positive in GAAP earning for 3Q 2019.

 

 

[SharperDingaan]

D&D is affected by number of items.

Shale wells suffer high gas/water cuts during their early years, in addition to depletion. How much of a cut depends on the formation, and the 'manufacturing' method chosen. Price driven shut-in also has a temporary effect. OBE's D&D is high; primarily because they have prolific wells, with high gas/water cuts in the first year of production.

 

Over Q3, in a quarter of no drilling, liquids production fell by 2,242 boe/d.

The Dec-02 update indicates that current drilling is producing about 4,454 boe/d over 11 wells (405 boe/well), and that the gross cost of a well averages 4.25M. Recent comps suggest that 1H 2020 costs will be roughly 500K per well less. Gross cost is then further reduced through sale of the by-product gas cut. Hence maintenance Capex is roughly ((2242X4)/405)x (4.25-0.5)M, or 83M - before by-product sales. Quite a difference.

 

What matters is continuous drilling, and the cashflow to do it - not D&D.

An OBE Cardium well costs 4.25M to drill and produces an average initial 405 boe/d; production worth 22M, at 55K/flowing boe. Hence every incremental well > 5/quarter, adds 17.5M to EV. And if the liquids content is >70-72%, it's worth a lot more that 55K/flowing boe.

 

Point is O/G is not manufacturing, and not an apples to apples comparison.

Good luck.

 

SD

 

 

 

 

 

 

[muscleman]

But I think @muscleman still has a good point which is we should consider the "all in cost" that should include the "depletion and depreciation" (D &D), instead of just looking at CFO or FFO. Ideally OBE should produce positive GAAP earning if their D&D is fully covered by profit.

 

Do you know why OBE's D&D number is so high ($25~27 boe)? Is it because of it is skewed by Peace river and Viking?  Do you know what is their D &D for Cadium alone? 

 

In addition, O&G company also talks about "Finding and development costs" (F&D), which I don't see it reported by OBE. Is it included as part of D&D?

 

O/G coy's are valued at a multiple of forward cash flow, not a multiple of earnings. D&D isn't relevant.

There are a variety of measures used for cash flow, one of which FFO.

 

SD

 

Come on, I thought you could provide a better answer since you have followed PWE/OBE for so many years. If D&D isn't relevant, you should buy those shale companies.

 

I thought D&D give us some visibility of what their maint carpex is. For 2019 OBE is projected to do C$150M FFO and C$120M in capex (mostly for Cardium). If we just assume this $120M is all maint capex to keep 27000 boe/d production flat, then I have 120M/(27000x365)=$12.5 boe, which is roughly half of the $23~27 boe for D&D reported by OBE. Can you tell me why there is such a big difference? 

 

If we used the $12.5 boe number for D&D, then OBE would have been break even or slightly positive in GAAP earning for 3Q 2019.

 

Yep. D&D for an Oil and Gas operation is completely different from the D&D of a REIT. If SD and us can't agree on that, there is no point for me to come back to this thread. ;)

[Spekulatius]

I can’t believe that an E&P investor suggests ignoring D&D. D&D is one of the most important metrics as cash flow - D&D ~ FCF. You can’t ignore it especially with shale plays, because the wells deplete so fast. Why one would think otherwise is beyond me. The high D&D is one of the reasons why recovery in bankruptcy cases for E&P is so lousy, despite what looks like low cash flow multiples to EV value. The wells deplete Somerset - after 2 years most of the oil and gas is done, that one needs to keep drilling to replenish.

 

A building will ,last 50 years and even after that the land on it still will be there. Typically it’s written off after 20-30 years, plus there are escalators for rent which means economic depreciation is less than what’s reflected on the balance sheet.  Mot so for oil and gas wells. The only way you can ignore D&D is if an E&P totally stops drilling and just harvests the wells and liquidates.

[muscleman]

I can’t believe that an E&P investor suggests ignoring D&D. D&D is one of the most important metrics as cash flow - D&D ~ FCF. You can’t ignore it especially with shale plays, because the wells deplete so fast. Why one would think otherwise is beyond me. The high D&D is one of the reasons why recovery in bankruptcy cases for E&P is so lousy, despite what looks like low cash flow multiples to EV value. The wells deplete Somerset - after 2 years most of the oil and gas is done, that one needs to keep drilling to replenish.

 

A building will ,last 50 years and even after that the land on it still will be there. Typically it’s written off after 20-30 years, plus there are escalators for rent which means economic depreciation is less than what’s reflected on the balance sheet.  Mot so for oil and gas wells. The only way you can ignore D&D is if an E&P totally stops drilling and just harvests the wells and liquidates.

 

Yep. Value investors say, in the short term, the market is irrational, but over the long term, the market is gonna realize the value. After a few years and this sucker down over 97%, I guess that's enough to settle the debate for this thread. But clearly SD still doesn't learn the basics of value investing. What makes me feel sad is that other investors believed in his words and got dragged into it.

Regarding D&D, it is not only hard to estimate for Oil and gas, but also a lot of times outright fraudulent. Management team wants to keep their jobs, and be easy to raise equity, so they have to do some wild estimates for D&D, and later do a big write down. There is no such a problem for a REIT.

[SharperDingaan]

O&G is not comparable to a REIT. They are completely different business models.

If you don't 'get' that, you really should invest someplace else.

 

D&D means two things. 1) How much maintenance capex is required to maintain the business at current levels, and 2) what is the annual maintenance D&D charge against revenue. To determine base earnings, base EPS, and the base share price when multiplied by the industry multiple.

 

O/G shares are valued on FFO, not EPS. And it has been explained why that is the case.

If you cannot get past that, it's end of discussion.

 

We're the garbage men, could care less what others think, and we are not your financial advisor.

It is to readers to do their own DD; if a reader chooses not to - the risk is on the reader.

 

SD

 

 

 

 

 

 

 

 

[muscleman]

O&G is not comparable to a REIT. They are completely different business models.

If you don't 'get' that, you really should invest someplace else.

 

D&D means two things. 1) How much maintenance capex is required to maintain the business at current levels, and 2) what is the annual maintenance D&D charge against revenue. To determine base earnings, base EPS, and the base share price when multiplied by the industry multiple.

 

O/G shares are valued on FFO, not EPS. And it has been explained why that is the case.

If you cannot get past that, it's end of discussion.

 

We're the garbage men, could care less what others think, and we are not your financial advisor.

It is to readers to do their own DD; if a reader chooses not to - the risk is on the reader.

 

SD

 

Ok. I guess it is the end of the discussion then. Good luck!

[heth247]

D&D is affected by number of items.

Shale wells suffer high gas/water cuts during their early years, in addition to depletion. How much of a cut depends on the formation, and the 'manufacturing' method chosen. Price driven shut-in also has a temporary effect. OBE's D&D is high; primarily because they have prolific wells, with high gas/water cuts in the first year of production.

 

Over Q3, in a quarter of no drilling, liquids production fell by 2,242 boe/d.

The Dec-02 update indicates that current drilling is producing about 4,454 boe/d over 11 wells (405 boe/well), and that the gross cost of a well averages 4.25M. Recent comps suggest that 1H 2020 costs will be roughly 500K per well less. Gross cost is then further reduced through sale of the by-product gas cut. Hence maintenance Capex is roughly ((2242X4)/405)x (4.25-0.5)M, or 83M - before by-product sales. Quite a difference.

 

What matters is continuous drilling, and the cashflow to do it - not D&D.

An OBE Cardium well costs 4.25M to drill and produces an average initial 405 boe/d; production worth 22M, at 55K/flowing boe. Hence every incremental well > 5/quarter, adds 17.5M to EV. And if the liquids content is >70-72%, it's worth a lot more that 55K/flowing boe.

 

Point is O/G is not manufacturing, and not an apples to apples comparison.

Good luck.

 

SD

 

That's kind of answer I am looking for... thanks. However, I still have some questions.

 

You said "OBE's D&D is high; primarily because they have prolific wells, with high gas/water cuts in the first year of production." but they did not drill much in 2017-2018 but D&D are still high in the past two years, why? With this kind of D&D, they will never make positive GAAP earnings unless oil price is > $70.

 

You used Q3 2,242 boe/d decline to estimate their maint capex at $83M. But that assumes:

1) decline rate is 2242x4/27000=33%. Isn't that a bit high for OBE? I thought one thing OBE is supposed to be attractive is their low decline rate.

2) Their newly drilled cardium wells will always have such fantastic economics (405 initial production, $3.75M cost). Is that normal? What is their F&D cost to find those sweet spots to drill? Do they have plenty of them left?

 

[muscleman]

D&D is affected by number of items.

Shale wells suffer high gas/water cuts during their early years, in addition to depletion. How much of a cut depends on the formation, and the 'manufacturing' method chosen. Price driven shut-in also has a temporary effect. OBE's D&D is high; primarily because they have prolific wells, with high gas/water cuts in the first year of production.

 

Over Q3, in a quarter of no drilling, liquids production fell by 2,242 boe/d.

The Dec-02 update indicates that current drilling is producing about 4,454 boe/d over 11 wells (405 boe/well), and that the gross cost of a well averages 4.25M. Recent comps suggest that 1H 2020 costs will be roughly 500K per well less. Gross cost is then further reduced through sale of the by-product gas cut. Hence maintenance Capex is roughly ((2242X4)/405)x (4.25-0.5)M, or 83M - before by-product sales. Quite a difference.

 

What matters is continuous drilling, and the cashflow to do it - not D&D.

An OBE Cardium well costs 4.25M to drill and produces an average initial 405 boe/d; production worth 22M, at 55K/flowing boe. Hence every incremental well > 5/quarter, adds 17.5M to EV. And if the liquids content is >70-72%, it's worth a lot more that 55K/flowing boe.

 

Point is O/G is not manufacturing, and not an apples to apples comparison.

Good luck.

 

SD

 

That's kind of answer I am looking for... thanks. However, I still have some questions.

 

You said "OBE's D&D is high; primarily because they have prolific wells, with high gas/water cuts in the first year of production." but they did not drill much in 2017-2018 but D&D are still high in the past two years, why? With this kind of D&D, they will never make positive GAAP earnings unless oil price is > $70.

 

You used Q3 2,242 boe/d decline to estimate their maint capex at $83M. But that assumes:

1) decline rate is 2242x4/27000=33%. Isn't that a bit high for OBE? I thought one thing OBE is supposed to be attractive is their low decline rate.

2) Their newly drilled cardium wells will always have such fantastic economics (405 initial production, $3.75M cost). Is that normal? What is their F&D cost to find those sweet spots to drill? Do they have plenty of them left?

 

Hey, please don't tell me SD just convinced you into OBE.  :o

[SharperDingaan]

The 2017/2018 o/g environment was terrible, and progressively worsening. Production was being shut-in with little prospect for recovery. Economic shut-ins were truncating remaining amortization periods, and pulling D&D forward into the current period.

 

Q3 was used because it reflects the current D&D rate using short-cycle shale, and not historic water flood. 

The number is high because D&D is tied to oil production ... the more oil coming out the pipe - the higher the D&D. A 20%+ gas/water cut just means that where there used to be 100% oil coming out the pipe, there's now only 80% oil and 20% gas/water - it does NOT mean that you've sucked out 20% of the oil in the reservoir.

 

OBE has perhaps the biggest drilling inventory in the Cardium. The material portion of which is high quality in/around the bioturbated zone, and very likely in the 85%+ liquids. They are field rich, and cash poor - not the other way around.

 

To estimate liquids D&D, you need to model the individual wells against their engineering estimated decline curves.

The astute recognize that the methodology also presents opportunities

 

For many the biggest learning, is giving up on trying to substitute historic record for industry experience.

Squat, is still squat - no matter how much lipstick you put on the pig.

 

Good luck.

 

SD

 

 

 

[heth247]

Hey, please don't tell me SD just convinced you into OBE.  :o

 

No, it is not SD, but the assets OBE owns, that draw me into this stock. I think we all know that OBE has been a poor operator. But at the current price level (market cap of USD $50M), you are not betting that they have to turn into a great operator and grow the rev to make you money, you are betting that they can operate to keep rev flat or slightly down and debt down and be sold at some point (I think they will) when the macro turns.

 

I think SD has his unique way (sometimes confusing) of expressing his opinions and thoughts and most people (me included) feel difficult to understand him. But I don't think that should be the reason to dismiss conversation. I still value his knowledge in this industry and particularly in this company and want to try to figure out what he exactly means by his words. ;)

[heth247]

The 2017/2018 o/g environment was terrible, and progressively worsening. Production was being shut-in with little prospect for recovery. Economic shut-ins were truncating remaining amortization periods, and pulling D&D forward into the current period.

 

Q3 was used because it reflects the current D&D rate using short-cycle shale, and not historic water flood. 

The number is high because D&D is tied to oil production ... the more oil coming out the pipe - the higher the D&D. A 20%+ gas/water cut just means that where there used to be 100% oil coming out the pipe, there's now only 80% oil and 20% gas/water - it does NOT mean that you've sucked out 20% of the oil in the reservoir.

 

OBE has perhaps the biggest drilling inventory in the Cardium. The material portion of which is high quality in/around the bioturbated zone, and very likely in the 85%+ liquids. They are field rich, and cash poor - not the other way around.

 

To estimate liquids D&D, you need to model the individual wells against their engineering estimated decline curves.

The astute recognize that the methodology also presents opportunities

 

For many the biggest learning, is giving up on trying to substitute historic record for industry experience.

Squat, is still squat - no matter how much lipstick you put on the pig.

 

Good luck.

 

SD

 

Thanks. Do you follow Yangarra, another Cardium play? They are an excellent operator and have grown production year over year while making positive GAAP earnings, and is buying back stocks. I just compared their 3Q 2019. Their D&D was $27,833,000 for a 12,724 boe/d production rate. So that translates to 27,833,000/12724/90(days)=24.3 boe (my calculation, since they don't report this number), which is similar to OBE and sort of validate what you are saying, I guess.

 

I guess the problem with OBE is their SGA + interest payment + restructure/legal expenses are much higher than Yangarra. Hopefully interest will go down in 2020 since they are back to the 3:1 leverage ratio, and SGA/legal expenses also go down.