Obsidian Energy Stock: Production May Reach 12,000 Bpd By Late 2024 (NYSE:OBE)

Obsidian Energy (NYSE: OBE)(TSX:OBE:CA) Q2 2024 results were solid, with production averaging 35,773 BEPD despite the negative impact of 1,550 BEPD due to bottlenecks.

Obsidian’s dispute with the Woodland Cree First Nation was resolved by an agreement that it runs through the end of 2025. This allows Obsidian to achieve significant growth in heavy oil production in the second half of the year, although weaker oil prices may limit its free cash flow.

Obsidian appears to be a fairly solid value right now, with an estimated upside of $8.50 per share in a longer-term oil scenario of $75. Risks include reduced free cash flow in the near term (due to weaker oil prices) and relatively high credit facility utilization following the Peace River acquisition.

This report uses US dollars unless otherwise noted, along with an exchange rate of $1.00 to $1.35.

Dispute Resolution

The obsidian was inside a dispute with the Woodland Cree First Nation, but reached an agreement in early to mid-June with the help of a mediator. Terms of the deal were not released, but the deal ended the blockades and allowed Obsidian to restart production affected by Peace River. The agreement is valid until the end of 2025.

The blockages ended up reducing Obsidian production in Q2 2024 by about 1,550 BEPD, which translates into an impact of about 385 BEPD for the full year.

Obsidian previously incorporated a 200 BOEPD full-year impact of the blockages into its production guidance. We noted that the blockades would need to be lifted by the end of May to limit the impact to 200 BOEPD and that there is a risk of a larger impact on production throughout the year.

Outlook 2H 2024

Obsidian averaged 35,773 BOEPD in Q2 2024 despite the impact of blockades. I’m currently modeling 2H 2024 production at 37,400 BOEPD, which would put it nearly 200 BOEPD below the midpoint of its full-year guidance. That 200 BOEPD difference reflects the additional impact of blockades lasting from early to mid-June.

Obsidian production growth is fueled by heavy oil, which could rise to around 11,400 bpd in 2H 2024 thanks to its Peace River acquisition and development efforts.

The current band for 2H 2024 is around $71 to $72 WTI oil. At that oil price, Obsidian could generate about US$291 million in 2H 2024 revenue after hedges. Obsidian was not covered by oil after August, but has some AECO hedges until March 2025.

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This results in a projection of $155 million in second half 2024 EBITDAX for Obsidian.

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Based on Obsidian’s full-year capex budget, approximately US$120 million is expected in 2H 2024. Obsidian also expects approximately US$20 million in combined decommissioning and interest costs for 2H 2024.

Thus, Obsidian can generate around $15 million in free cash flow in 2H 2024. It had net debt of around $320 million at the end of Q2 2024, so the free cash flow could reduce its net debt to approximately $305 million by the end of 2024. This does not take into account potential expenses to repurchase more shares.

Obsidian’s net debt at the end of 2024 is expected to be around 1.0x annualized EBITDAX in 2H 2024, which seems reasonable. However, Obsidian had more than 80% utilization of its credit facility at the end of Q2 2024 after paying for the Peace River acquisition, so it will likely want to draw that down.

Estimated rating

We now estimate the value of Obsidian at approximately $8.50 per share. This is based on $75 WTI oil post-2025 and a multiple of around 3.0x EV/EBITDAX at Obsidian production levels in 2H 2024.

This also assumes the current band (of around $66 WTI oil in 2025), with Obsidian’s value adjusted for the relatively lower projected free cash flow next year.

At 2H 2024 production levels, Obsidian should be able to generate approximately $340 million in full-year EBITDAX at $75 oil.

Obsidian had discussed increasing production to 42,000 BOEPD in 2025 and 50,000 BOEPD in 2026, but due to lower strip prices, we assumed it would scale back its growth plans in favor of generating more free cash flow.

Results from the Peace River obsidian continue to be encouraging, with the Dawson 5-27 Pad averaging an IP-30 of 293 barrels of oil per day per well (over two wells). Early results for the three Dawson 13-13 Pad wells implied IP-15 of 336 barrels of oil per day per well.

Conclusion

Obsidian Energy is expected to increase its heavy oil production to about 12,000 bpd by Q4 2024. It previously expected to increase heavy oil to 24,000 bpd by 2026, but may lower its growth expectations for to prioritize free cash generation if oil prices remain weak. At the current 2025 WTI oil price of around $66, Obsidian can achieve mid-$40s (US$) for its heavy oil.

Still, the obsidian stockpile should have a decent upside even without a significant increase in production. We estimate its value at $8.50 per share in a long-term $75 WTI oil scenario based on 2H 2024 production levels.