Quarterly / Earnings Reports | First Quarter (1Q) Update

Obsidian Reports Q1 2019 Results; Ramps Up Cardium Focus

Share Print Bookmark    |    Friday,May 10,2019

Obsidian Energy detailed its Q1 2019 results.

All figures are in Canadian dollars unless otherwise stated.

Michael Faust, Interim President and CEO commented “Stepping into my role at Obsidian Energy, I am focusing my attention on three main areas. First, I will ensure we continue to deliver strong and repeatable well results from our Cardium asset, focused on growing our light oil production, consistent with the recent performance of the first 19 well program. Second, I will prioritize the strength of our balance sheet by ensuring we are spending within funds flow from operations and seek to divest non-core properties, if the market conditions are favorable, to reduce our overall leverage profile. My third priority will be to conduct a thorough review of our cost structure to identify areas for improvement, aiming to bring our costs in line with peers. This initiative will be focused on both capital expenditures and expenses. This will include streamlining internal processes, improving operational productivity, and enhancing capital efficiencies. Details of the cost reduction initiatives will be presented at the Annual General Meeting.”

Demonstrating Cardium Deliverability

During the first quarter of 2019, the Company drilled, completed and equipped five Cardium wells (5.0 net). Of the 2019 wells that we have drilled to date, we are particularly excited about our 12-18, three well pad, which has averaged initial production rates over the first 30 days (“IP30”) of 620 boe per day per well and approximately 83 percent oil. The 12-18 pad is the most northern pad drilled in the Crimson area, further demonstrating the extent of our Willesden Green inventory. Over the past nine months, the Company has drilled 19 Cardium wells (19.0 net) averaging an IP30 of 538 boe per day per well and approximately 86 percent oil.

The next phase of the program will resume after spring break-up and continue until March 2020. We have all our locations ready to license with the construction of the first two pads expected to commence as soon as road conditions and weather permits.

Increasing our Cardium Focus in the 2019 Capital Program

The Cardium continues to deliver strong results as evidenced by the recently announced operational results and our quarterly production rates. As part of our disciplined capital allocation review, management has elected to remove $7 million of capital previously earmarked for two Deep Basin wells and reallocate this capital to our Cardium asset adding two additional wells. The Company now plans to drill a total of 18 Cardium wells in 2019, reaffirming its focus on the short cycle, light oil and highest margin asset in our portfolio.

At this time, the total planned capital of $120 million for 2019 remains unchanged, with the Board approving a second half 2019 capital spend, including decommissioning expenditures, of $75 million. Of the approved second half capital spend, approximately $50 million will be allocated to drilling 13 primary Cardium wells. The capital program remains flexible, with the ability to increase development activity should pricing allow.

Updated Capital Program Details:

There are no changes to the full year production and cost guidance figures. A review of the figures is outlined in the table below:

Q1 Production Beat and Improved Liquids Weighting

Obsidian Energy delivered strong operational results in the first quarter 2019, highlighted by average oil production of 16,472 bbl per day and average total production of 27,651 boe per day. Both figures are ahead of our pre-released target ranges for the quarter. The production beat is attributed to the Cardium program’s strong production rates and was achieved in spite of considerably colder temperatures observed in February.

The Company’s liquids production weighting also improved in the first quarter of 2019 to 67 percent liquids, a three percent increase over the fourth quarter of 2018. This shift was the result of our gas weighted legacy production that was shut-in toward the end of 2018 and early 2019. The Company plans to further rationalize the portfolio to focus the Company towards light oil and higher margin production.

Strong Cash Flow Generation

With continued positive operational momentum and significant improvements in Canadian benchmark prices, first quarter of 2019 funds flow from operations (“FFO“) was $36 million or $0.07 per share, a $38 million increase over the previous quarter.

Operating netbacks in the first quarter of 2019 were $18.98 per boe, a $17.00 per boe increase compared to the fourth quarter of 2018. The increase was largely driven by crude oil differential improvements, underpinned by the Company’s focus on its light oil, low operating cost Cardium development program which resulted in a realized field netback in the first quarter of 2019 of $28.08 per boe, an increase of $16.87 per boe compared to the previous quarter.

Financial and Operating Highlights

• FFO totaled $36 million ($0.07 per share) for the first quarter of 2019 compared to negative $2 million ($nil per share) in the fourth quarter of 2018 and $35 million ($0.07 per share) in the first quarter of 2018.
• Average production was 27,651 boe per day compared to 29,905 boe per day in the fourth quarter of 2018 and 29,443 boe per day in the first quarter of 2018. Production decreased from the fourth quarter of 2018 mainly attributable to the Company’s shut-in program of low net operating income legacy wells, which led to lower gas volumes, as well as the Alberta Government’s mandated curtailment. Currently, we do not expect curtailment restrictions to impact our go forward production forecast for the reminder of the year.
• Capital expenditures, excluding decommissioning liabilities, totaled $34 million, which included drilling five development wells in Willesden Green, completion activities to bring the remaining wells on production from the Company’s 2018 capital program and various optimization/maintenance activities.
• Operating costs were $13.49 per boe in the first quarter of 2019, despite extreme cold weather across Alberta in February which resulted in increased power, repair and maintenance costs. Operating costs per boe were also higher than the fourth quarter of 2018 due to one-time costs saving initiatives in that quarter.
• General and administrative costs were $2.01 per boe in the first quarter of 2019 compared to $2.33 per boe in the first quarter of 2018. The Company has been successful on a number of cost reductions initiatives which led to the improvement from the comparable period.
• Net Debt totaled $497 million, including $378 million drawn on our syndicated credit facility and $80 million of senior notes. On March 31, 2019, Senior Debt to Adjusted EBITDA, as calculated under the Company’s credit agreement was 2.9:1.
• Subsequent to March 31, 2019, the Company entered into crude oil swaps on 950 barrels per day for the third quarter of 2019 at $83.47 per barrel and on 550 barrels per day for the fourth quarter of 2019 at $82.10 per barrel. All trades were completed in Canadian dollars.

The table below outlines select metrics in our key development and legacy areas for the three months ended March 31, 2019 and excludes the impact of hedging:

The table below provides a summary of our operated activity in the third quarter.

Hedging Program and Strategy Updates

The Board of Directors and management have completed a fulsome review of our hedging strategy and believe that a conservative hedging strategy will help provide certainty to our cash flow and capital programs for 2019 and 2020. This combined with our capital flexibility improves our ability to live within FFO, while offering investors continued upside exposure to improving commodity prices. At current prices, the program economics are robust, and as such, the Company has begun building a hedging position for the second half of 2019 and will work towards building a 2020 position. The Company plans to take hedging contracts on a Canadian dollar basis to limit foreign exchange management and where liquidity exists, hedge Canadian differentials to protect wellhead pricing.

Currently, the Company has the following crude oil hedges in place:

The Company has no currency or gas hedges currently in place.