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Obsidian Q4

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   |    Tuesday,March 31,2020

(“Obsidian Energy“, the “Company“, “we“, “us” or “our“) is pleased to announce our year-end 2019 financial and operational results, development program updates, and an update on our US listing. All figures are in Canadian dollars unless otherwise stated. Obsidian Energy’s audited consolidated financial statements and Management’s Discussion and Analysis (“MD&A“) as at and for the year-ended December 31, 2019 can be found on our website at www.obsidianenergy.com. The documents will also be filed on SEDAR and EDGAR in due course.

 

FINANCIAL AND OPERATING HIGHLIGHTS

 

Three months ended December 31

Year ended December 31

 
 

2019

2018

2019

2018

 

FINANCIAL1 (millions, except per share amounts)

                 

Cash flow from Operations

 

49

 

19

 

77

 

99

 

Basic and Diluted ($/share)

 

0.67

 

0.26

 

1.06

 

1.36

 

Funds Flow from Operations2

 

54

 

(2)

 

160

 

92

 

Basic and Diluted ($/share)

 

0.74

 

(0.03)

 

2.20

 

1.26

 

Net loss

 

(544)

 

(113)

 

(788)

 

(305)

 

Basic and Diluted ($/share)

 

(7.45)

 

(1.56)

 

(10.81)

 

(4.22)

 

Capital expenditures

 

34

 

41

 

103

 

168

 

Net Debt2

 

495

 

497

 

495

 

497

 

Average sales price3

                 

Light oil ($/bbl)

 

70.57

 

37.88

 

68.99

 

66.60

 

Heavy oil ($/bbl)

 

41.80

 

7.70

 

38.82

 

33.07

 

NGL ($/bbl)

 

31.42

 

24.99

 

20.77

 

36.69

 

Natural gas ($/mcf)

 

2.55

 

2.46

 

1.79

 

2.21

 

Netback2 ($/boe)

                 

Sales price

 

45.67

 

23.42

 

41.60

 

39.45

 

Risk management gain (loss)

 

0.66

 

(3.84)

 

(0.66)

 

(6.10)

 

 

Net sales price

 

46.33

 

19.58

 

40.94

 

33.35

 

Royalties

 

(3.79)

 

(2.33)

 

(3.11)

 

(3.40)

 

Operating expenses4 

 

(12.75)

 

(11.82)

 

(13.42)

 

(13.89)

 

Transportation

 

(2.56)

 

(3.45)

 

(2.76)

 

(3.39)

 

Netback2 ($/boe)

 

27.23

 

1.98

 

21.65

 

12.67

 
                   

OPERATIONS

                 

Daily Production

                 

Light oil (bbls/d)

 

12,246

 

11,429

 

11,966

 

11,342

 

Heavy oil (bbls/d)

 

3,718

 

4,784

 

3,965

 

4,885

 

NGL (bbls/d)

 

2,095

 

2,788

 

2,153

 

2,410

 

Natural gas (mmcf/d)

 

52

 

65

 

53

 

62

 

Total production5 (boe/d)

 

26,639

 

29,905

 

26,901

 

28,953

 
   

(1)

Effective June 5, 2019, the Company consolidated its common shares based on seven old common shares outstanding for one new common share. All figures in the table have been updated to reflect the 7:1 consolidation.

(2)

The terms Funds Flow from Operations (“FFO“) and their applicable per share amounts, “Net Debt”, and “Netback” are non-GAAP measures. Please refer to the “Non-GAAP Measures” advisory section below for further details.

(3)

Before risk management gains/(losses).

(4)

Includes the benefit of processing fees totaling $8 million for 2019 (2018 – $11 million).

(5)

Please refer to the “Oil and Gas Information Advisory” section below for information regarding the term “boe”.

MESSAGE TO SHAREHOLDERS

We are pleased to announce our full year 2019 operating and financial results which met or exceeded our 2019 guidance metrics. Our 2019 average production was 26,901 boe/d, within our guidance range of 26,750 to 27,250 boe/d. We came in below guidance on capital, operating and general and administrative expenses as a result of several efficiencies, specifically cost reduction and restructuring initiatives that took place throughout the year.

Our capital execution was strong in 2019, as we continued to build on our success in the Willesden Green area of the Cardium, with the drilling of 19 net operated Cardium locations (96% working interest). These wells delivered strong initial rates and continue to produce as expected (IP60: 385 boe/d, 79% light oil per well). Our capital expenditures were $103 million, below our guidance of $108 million, as we were successful in reducing our costs per well to $3.7 million for the year – averaging $3.5 million for the second half of the year – with an average horizontal length of over 2,630 meters. These costs are inclusive of all construction, drilling, completions, equipping, and gathering system expenditures.

We made significant progress in the management of our decommissioning liabilities. In 2019 we participated in the AER’s Area Based Closure (“ABC”) program, which allowed the Company to efficiently deliver 189 net well abandonments and 1,139 km of pipeline abandonments. Through completed work, asset divestitures, and using information obtained from government estimates and internal analysis, our undiscounted asset retirement obligation (“ARO“) liability at year-end 2019 was reduced by 27% to $621 million from $847 million.

The Company met or exceeded all key performance targets in 2019 as we continued to focus on development execution and completed numerous cost reduction initiatives.

Metric

2019 Guidance Range

    2019 Results

Production1 (boe/d)

26,750 to 27,250

26,901

Capital Expenditures ($millions)

108

103

Decommissioning Expenditures ($millions)

12

14

Operating Costs ($/boe)

13.50 – 13.75

13.42

General & Administrative ($/boe)

2.10 to 2.35

2.03

   

(1)

See production and highlights table for production details

This momentum has carried into the first quarter of 2020 in which we have successfully completed 10 new Willesden Green Cardium wells, including wells with the best initial rates recorded to-date in the program.

Moving forward into 2020 there are several significant improvements to the underlying business which will result in positive go-forward benefits to cash flow:

  • Continued strong performance of our high netback Willesden Green focused development program;
  • Approximately $7 million in annual-lease savings from the amended office lease agreement;
  • Approximately $6 million in annual transportation run-rate savings as off-market midstream and transportation commitments expire during 2020; and
  • A full year contribution from the 2019 cost-savings initiatives.

 

STRONG FOURTH QUARTER AND FULL YEAR RESULTS

  • FFO in the fourth quarter of 2019 totaled $54 million, which is the highest quarterly total the Company has delivered in three years, driven by the Company’s relentless focus on cost reduction, high-level execution of our drilling program, commodity prices and continued operations excellence throughout our operated asset base.
  • Average production for the fourth quarter of 2019 was 26,639 boe/d, driven by the production from 14 gross operated wells drilled in the second half of the year in the Willesden Green area. Additionally, the Company’s weighting to light oil production increased by six percent year-over-year due to the development focus on light oil in the Cardium.
  • Capital expenditures totaled $34 million, excluding decommissioning expenditures, as the Company continued its focus on primary development in Willesden Green, drilling eight new wells in the quarter. All operated wells rig-released in 2019 were brought on production prior to the end of the year, except for a drilled well added to our program in December.
  • Operating costs were $12.75/boe in the fourth quarter of 2019 compared to $11.82/boe in the fourth quarter of 2018 and $14.65/boe in the third quarter of 2019. On a full-year basis, operating costs improved to $13.42/boe in 2019 compared to $13.89/boe in 2018, as the Company maintained its focus on per barrel operating costs against a reduced 2019 total produced volume.
  • General and administrative costs were $1.68/boe in the fourth quarter of 2019 compared to $1.95/boe in the fourth quarter of 2018.  The decrease is related to restructuring as the Company right-sized the organization to reflect our focused development activities in the Cardium. These actions also contributed to a reduction on a full year basis with general and administrative costs of $2.03/boe in 2019 compared to $2.24/boe in 2018.
  • FFO totaled $54 million for the fourth quarter of 2019 compared to $29 million in the third quarter of 2019, with the increase partially due to higher production volumes as the Company brought on production 13 gross operated wells from our second half 2019 Cardium development program. Additionally, higher netbacks as a result of the increase in realized prices and lower operating costs contributed to the fourth quarter result. Full year FFO was $160 million compared to $92 million in 2018.
  • Net debt was $495 million at December 31, 2019, compared to $497 million from the prior year as the Company continued to live within FFO. The December 31, 2019 figure includes $399 million drawn on the syndicated credit facility and $62 million of outstanding senior notes. On December 31, 2019, Senior Debt to Adjusted EBITDA, as calculated under the Company’s credit agreement, was 2.57:1 compared to a 4.25:1 covenant limit.  Although FFO exceeded capital expenditures in 2019, net debt remained consistent to last year due to office lease costs, restructuring related expenses and the financial statement impact of the new lease accounting requirements under IFRS 16.

 

Production Volumes by Product and Producing Region – Three Months Ended December 31, 2019

 

Area

Production
(boe/d)

Light Oil
(bbls/d)

Heavy Oil
(bbls/d)

NGLs

(bbls/d)

Gas
(mmcf/d)

Cardium

20,950

11,782

28

2,041

43

Alberta Viking

849

205

45

27

4

Peace River

4,230

70

3,487

4

4

Key Development Areas

26,029

12,057

3,560

2,072

51

Legacy Areas

610

189

158

23

1

Key Development & Legacy Areas

26,639

12,246

3,718

2,095

52

Operating Cost and Netbacks by Producing Region – Three Months Ended December 31, 2019

 

Area

Operating Cost

 ($/boe)

Netback

($/boe)

Cardium

12.45

29.13

Alberta Viking

12.17

16.26

Peace River

10.22

21.06

Key Development Areas

12.08

27.39

Legacy Areas

41.12

(8.64)

Key Development & Legacy Areas

12.75

26.57

 

2020 DEVELOPMENT AND ENVIRONMENTAL PROGRAM UPDATE

At the end of the first quarter of 2020, we are experiencing significant volatility in global oil markets due to OPEC and Russia abandoning quotas and increasing production levels, significant demand destruction as a result of the global spread of the COVID-19 virus and, potential lack of storage forcing production shut-ins. At the time oil prices fell sharply, Obsidian Energy had executed the vast majority of our first quarter drilling program, which is now completed. We have flexibility in our portfolio to manage remaining capital expenditures through the balance of 2020 with a view to preserving liquidity and long-term shareholder value. If the current oil price environment continues, we anticipate no development capital spending for the balance of 2020.

Early in the first quarter, given initially strong oil prices, we advanced our capital plans which increased our forecasted first half spend to $54 million, including a production-efficient optimization program of $4 million and decommissioning expenditures of $8 million. This plan included the rig-release of nine wells in the Willesden Green area, completion of ten wells (including our additional December 2019 drill), and acceleration of 2020 decommissioning activity to address well sites that require frozen conditions for efficient abandonment.

Our operations in the first quarter have proceeded on schedule and within our cost estimates, despite the severe cold encountered during the month of January. Drilling and completions activities have finished successfully, with production from all new wells anticipated to be fully online in April, subject to any commodity price related curtailment we implement.  Early deliverability results from the first five wells to date have been particularly strong, with initial results significantly exceeding our prior results for the area.  The two wells currently on-stream delivered IP10 rates of 1,134 boe (85% light oil) and 1,101 boe (77% light oil), respectively, representing the two strongest oil-equivalent rates since the inception of our primary Cardium program.  These two wells demonstrated very similar completions flowback rates to three other new wells in the vicinity that will be brought on stream in April.

Obsidian Energy is actively reviewing our portfolio considering the current commodity price outlook and has shut-in volumes deemed temporarily uneconomic to produce and has lowered our first half 2020 production estimate by 600 boe/d. This reduction is composed almost entirely of heavy oil and associated gas production in the Peace River area.  Including these actions, the Company expects average production for the first half of 2020 to be within guidance of 26,500 – 27,100 boe/d. The Company will continue to optimize the production base against the anticipated volatile commodity price environment and is prepared to shut-in additional volumes should we deem it economically prudent.  In addition, the Company has identified in excess of $10 million in operating and general and administrative reductions over our original 2020 plan and will continue to seek opportunities to lower costs in all aspects of our business.

We are continuing our participation in the ABC program for 2020. Our focus in the first quarter of 2020 has been in the Sousa and Lennard Creek fields in Northwest Alberta, where working in frozen conditions allowed our work to be conducted most efficiently.  We have abandoned 149 wells and 138 km of pipelines year to date.

First Half 2020 Production and Cost Guidance

Metric

Guidance Range

Production (boe/d) 1 2 3

26,500 – 27,100

Capital Expenditures ($millions)

46

Decommissioning Expenditures ($millions)

8

Operating Costs ($/boe)

11.90 – 12.30

General & Administrative ($/boe)

1.70- 1.90

(1)

Adjusted for January 2020 Carrot Creek Disposition of 115 boe/d (85% light oil)

(2)

Adjusted for production shut-ins of 600 boe/d due to current oil pricing.

(3)

Mid-point of guidance 12,700 bbls/d light oil, 3,200 bbls/d heavy oil, 2,200 bbls/d NGLs and 52,000 mcf/d natural gas

2020 HEDGING PROGRAM

In 2020, the Company has the following hedges in place:

 

January

February

March

April

May

June

WTI (C$/bbl)

76.61

78.98

78.58

78.11

77.92

77.41

Total (bbl/day)

8,250

7,750

7,000

4,000

3,000

2,000

             
             
 

January

February

March

Q2

Q3

Q4

(C$/GJ)

2.40

2.33

1.59

1.60

Total (GJ/day)

23,000

18,000

25,000

24,000

NYSE LISTING AND OTC LISTING

The significant change in the macro economic environment has contributed to a reduction in the Company’s share price. As a result, we no longer meet the listing requirements of the NYSE and will be delisted April 1, 2020. To facilitate trading for our US based shareholders, we will begin trading on the OTCQB effective April 2, 2020. If our share price improves to average over US$0.25 per share for 30 consecutive days, we will move to the OTCQX market. The move in listing from the NYSE to the OTCQB is expected to result in on-going cost savings of approximately $1 million per year at this time.


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