2023-03-04 06:51:09 ET

Summary

• Obsidian may be able to grow production by around 7% in 2023 while generating US$80 million in free cash flow at current strip.
• Much of this free cash flow may go toward share repurchases.
• Obsidian could repurchase around 10% of its public float while reducing its net debt to US$215 million, a leverage of 0.7x.
• Obsidian's estimated value is US$9 in a long-term US$75 WTI oil scenario.
• This would be approximately 0.8x its PDP PV-10 at that oil price.

Obsidian Energy (OBE) looks capable of generating around US$80 million in free cash flow at current strip (high-$70s WTI oil). Much of that free cash flow may go towards share repurchases as it has authorized a normal course issuer bid that allows it to repurchase up to 10% of its public float.

Obsidian's 2023 production is now expected to be a fair bit lower than its preliminary 2023 forecast from June 2022 , although it still expects around 7% production growth from 2022 levels . Compared to when I looked at Obsidian in December 2022 , Obsidian's projected 2023 free cash flow is essentially unchanged, with stronger oil prices and narrower differentials helping to offset the reduced production levels.

I now estimate Obsidian's value at approximately US$9 per share in a long-term US$75 WTI oil environment assuming that it repurchases 10% of its public float at an average share price near its current share price. This valuation would also be consistent with a 0.8x multiple to its PDP PV-10 at US$75 WTI oil.

This report uses US dollars unless otherwise mentioned and an exchange rate of US$1.00 to CAD$1.35.

Share Buyback

Obsidian's Board of Directors authorized a normal course issuer bid that was approved by the TSX in February 2023. This allows Obsidian to repurchase up to 8.074 million shares (10% of its public float) during a 12 month period beginning February 27, 2023.

Obsidian is also required to maintain at least CAD$65 million (US$48 million) of liquidity when it repurchases shares. It had CAD$105 million (US$78 million) borrowed under its credit facility at the end of 2022. This credit facility has a CAD$175 million (US$130 million) borrowing base, so share repurchases will be mostly funded by free cash flow generation, unless Obsidian expands its debt capacity.

2023 Outlook Based On Guidance

The current strip for 2023 is now in the high-$70s for WTI oil. At current strip, Obsidian is projected to generated US$562 million in revenues before hedges.

Obsidian has hedges covering some of its natural gas production, but doesn't have any oil hedges. Obsidian's 2023 hedges have an estimated value of US$9 million at current strip prices.

Obsidian is now projected to generate US$313 million EBITDAX in 2023 based on its guidance and current strip prices.

Thus Obsidian could generate around US$80 million in free cash flow in 2023 at current strip. Obsidian's capex budget is around US$196 million, while it also has US$20 million in decommissioning expenditures, while interest costs could be around US$17 million.

Obsidian had approximately US$235 million in net debt at the end of 2022. If it completes its normal course issuer bid, it may end 2023 with around US$215 million in net debt. This assumes that it repurchases 8.074 million shares at an average price near its current share price.

Notes On Valuation

Using a 3.0x EV/EBITDAX multiple, Obsidian's value is estimated at approximately $9.00 per share in a long-term (after 2023) $75 WTI oil and CAD$4.00 AECO scenario. This assumes that Obsidian repurchases 8.074 million shares at an average share price near current levels and ends 2023 with around US$215 million in net debt.

This is a roughly CAD$1.2 billion (US$890 million) enterprise value. To put this in perspective, Obsidian's PDP reserves have a PV-10 that is approximately CAD$1.41 billion (US$1.045 billion) at US$75 WTI oil and CAD$3.00 (US$2.22) per GJ AECO.

At US$75 WTI oil and CAD$4.00 (US$2.96) per Mcf AECO, Obsidian's PDP PV-10 may be around CAD$1.5 billion (US$1.11 billion) instead.

Thus a value of US$9 per share would basically value Obsidian at a 0.8x multiple to PDP PV-10 at US$75 WTI oil.

Conclusion

Obsidian Energy may be able to generate US$80 million in free cash flow in 2023 while growing its 2023 production by around 7% compared to 2022. Obsidian once expected stronger production growth in 2023, but rising costs have reduced the number of wells it expects to drill.

Obsidian may use most of that free cash flow on share repurchases, which could reduce its outstanding share count to around 74 million to 75 million. A 0.8x multiple to PDP PV-10 at US$75 WTI oil would then make Obsidian worth approximately US$9 per share with that share count.

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