GREENWICH, Conn., Jan. 17, 2018 /PRNewswire/ — FrontFour Capital Group LLC together with its affiliates (“FrontFour”) today commented on recent developments related to Obsidian Energy Ltd. (“Obsidian” or the “Company”) (TSX/NYSE: OBE). FrontFour and its principals are significant long-term shareholders of Obsidian, collectively beneficially owning over 28 million outstanding shares, representing approximately 5.7% of Obsidian’s outstanding capital.
As previously disclosed in its Schedule 13D filing of November 20, 2017, on October 5, 2017, after significant dialogue with Obsidian CEO David French on the Company’s development plan within the Willesden Green Cardium, as well as with numerous Obsidian directors in reaction to Obsidian’s analyst day presentation and SEC lawsuit, FrontFour sent to the board of directors (the “Board”) of Obsidian a letter outlining its significant concerns with Obsidian’s capital plan, strategic direction and value proposition to investors. FrontFour’s specific concerns included but were not limited to:
(i) the belief that Obsidian’s capital program was highly flawed and has negatively impacted Obsidian’s current valuation due to an emphasis on an integrated waterflood approach to developing the Cardium as opposed to a shorter cycle strategy focused on more rapidly growing Obsidian’s light oil production;
(ii) the decision to spend minimal capital on drilling and completing new wells in the Cardium and Viking during the first half of 2017, resulting in sequential declines in light oil production throughout the year;
(iii) Obsidian’s positioning of the Peace River joint venture as a continued core focus of capital deployment post expiry of the remaining capital carry in lieu of spending capital to grow its light oil and liquids production; and
(iv) Obsidian’s inability to dispose of or improve the operations within its non-core legacy gas-weighted production.
Due to these concerns and in light of our significant long-term shareholdings in Obsidian, FrontFour also requested board representation. Despite FrontFour’s tireless efforts over the last three months to come to an amicable agreement with Obsidian’s management team and Board on the addition to the Board of ONE mutually agreed upon independent nominee proposed by FrontFour, we have been unable to come to an agreement that would avoid a needlessly costly and distracting proxy fight. It became apparent to FrontFour during our negotiations that the Board is divided on strategy and that certain directors are entrenched, which is surprising given their aversion to share ownership and long-term track record of underperformance.
We welcomed Obsidian’s January 15, 2018 press release, which featured strong primary well performance out of the bioturbated interval within the Willesden Green Cardium and an accelerated 2018 Cardium program via the reallocation of capital from vertical waterflood injectors. Both initiatives are consistent with our private suggestions to management and our dialogue with the Board. We note that the Company made no mention of this approach in their recently released 5-year capital plan, which is less than seven months old. We believe that continued shareholder engagement is necessary, especially in light of Obsidian’s ill-timed hedging strategy of selling essentially ALL of its 2018 light oil production via fixed price swaps at prices of ~$52 per barrel, which has led to material mark to market losses. This decision has created additional headwinds to equity performance as Obsidian has continued to underperform its peers, who are benefitting from the recent increase in crude prices. Despite Obsidian’s vast resource base, it is clear that investors are struggling to find the equity compelling relative to its peers given the Company’s below average growth rate, underwater hedge program, muddled capital plan, and lack of dividend.
FrontFour believes that a significant overhaul of Obsidian is necessary, including the streamlining of the portfolio via dispositions, and the high grading of the capital program to drive robust light oil and liquids growth within Obsidian’s dominant Cardium position and vast Mannville footprint. Obsidian has the potential to be a standout light oil growth player and Cardium champion through a dramatic transformation that we believe will unlock significant value for all shareholders. To this end, FrontFour is currently considering all available options, including seeking changes to the composition of the Board at Obsidian’s 2018 Annual Meeting.
FRONTFOUR CAPITAL GROUP LLC
FrontFour Capital Group LLC, located in the United States at 35 Mason Street, Greenwich, CT 06830, was formed in December 2006. FrontFour Capital Group LLC is registered with the Securities & Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended.