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Obsidian Energy Ltd.
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TD Comments On OBE 2018 BudgetObsidian Energy Ltd. (OBE-T) C$1.44 Strong Cardium Results Drive Higher Capex - Viking Sale Shelved Event: This morning, Obsidian announced an expanded 2018 budget, and that the company will not dispose of its Alberta Viking assets at this time. Impact: POSITIVE The 2018 capital program will now target $175mm (up from $125mm), with the incremental $50mm to be entirely directed to the Willesden Green Cardium. Obsidian will drill an additional 13 primary wells, which will all be flanked by recently drilled offset wells which have exceeded internal expectations. The capital will be spent in H2/18, which will predominantly impact 2019 volumes. The company expects 2019 to be impacted by an additional 2.3 mBOE/d on an annual basis, which is encouragingly 26% above the current type curve on an IP365 basis. Obsidian also announced several royalty dispositions for a total $7.5mm (~20x cash flow). Citing offers below internal views of intrinsic value (and likely recent industry transaction metrics), the company has opted not to sell its Alberta Viking position at this time. Recall, they had expected to have a definitive agreement in place by the end of Q2/18. While it is unfortunate that the company did not monetize the Alberta Viking assets as previously guided to, Obsidian remains in dialogue with China Investment Corporation regarding the potential sale of its Peace River assets. As of May 31, Obsidian has roughly $130mm of liquidity on its credit facility, which we view as sufficient to support the expanded program and weather near-term commodity weakness. In 2019, we foresee a positive step change in free cash flow generation given the liquids weighting, the impact from the 2018 Willesden Green program, and the rolling off of out of the money hedges (2019E FCF at strip pricing of $34mm). TD Investment Conclusion: We view today's announcement as reflective of the success of the Willesden Green program, and continue to view Obsidian's position and concentration in the Cardium as enviable. We had anticipated that this announcement would accompany a Viking disposition, however, we believe that the balance sheet is capable of supporting this period of outspending cash flow, especially as currently punitive hedges roll off in 2019. Our $2.25 target and BUY rating are |
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