- Acquisition to provide additional production and reserves, full operational and funding control
- Increased third quarter funds flow from operations from higher commodity prices and dedicated focus on managing cost structure
Calgary, Alberta – OBSIDIAN ENERGY LTD. (TSX: OBE) (OTCQX: OBELF) (“Obsidian Energy“, the “Company“, “we“, “us” or “our“) is pleased to announce it has entered into a purchase and sale agreement (the “Agreement“) to acquire the remaining 45 percent partnership interest in the Peace River Oil Partnership (“PROP“) asset from our joint venture partner (the “Vendor“), through a wholly-owned subsidiary (the “Acquisition“). Total consideration paid will be $43.5 million prior to closing adjustments with an effective date of July 1, 2021. The Acquisition will be funded by a combination of cash and, if necessary, Obsidian Energy common shares (“Common Shares“) issued to the Vendor.
“With this acquisition, we will have 100 percent interest and full operating and funding control of PROP,” said Stephen Loukas, Obsidian Energy’s Interim President and CEO. “This acquisition allows us to better execute future development programs in the area, maximize cost efficiencies and further optimize production. In addition, improved economic returns from higher oil prices makes future development of the Peace River area highly compelling, and allows us to access the depth of our existing inventory and the resource potential of this asset.”
The cash consideration for the Acquisition will be funded by a $16.3 million limited-recourse loan secured by the 45 percent interest in PROP, which will be acquired pursuant to the Acquisition and proceeds from a new equity offering (the “Offering“). If the Company receives gross proceeds of less than $22.5 million pursuant to the Offering, the Vendor will receive common shares in the capital of Obsidian Energy (“Common Shares“) valued at the price at which the Offering is conducted in payment of the balance of the purchase price of $43.5 million less customary adjustments payable at closing of the Acquisition; any Common Shares issued to the Vendor will be subject to a four-month hold period.
- Increases Obsidian Energy’s ownership interest to 100 percent in PROP, resulting in full operational and funding control to efficiently execute the Company’s development plan in the area. PROP’s characteristics include:
- A large, contiguous cold-flow heavy oil resource developed with multi-leg horizontal wells targeting Bluesky formation
- Resource upside potential from the emerging Clearwater formation oil play
- Adds approximately 2,400 boe/d of current production
- Adds the following reserves1:
- Proved developed producing (“PDP“) reserves of 3.497 million boe resulting in a purchase price of $12.44/boe;
- Proved (“1P“) reserves of 4.760 million boe resulting in a purchase price of $9.14/boe;
- Proved plus probable (“2P“) reserves by 6.746 million boe resulting in a purchase price of $6.45/boe;
- Contributes a third quarter 2021 estimated netback of $37.00/boe
- Includes a decommissioning liability of approximately $25.0 million on an undiscounted, uninflated basis with a high asset liability rating of approximately 4.5 times
ACQUISITION LIMITED-RECOURSE LOAN
Obsidian Energy has received a term sheet in respect of a $16.3 million limited-recourse loan (the “Loan“) with a Calgary-based institutional lender. The Loan will bear an interest rate of 10.5 percent, has security limited to the 45 percent partnership interest in PROP to be acquired by Obsidian Energy through a wholly-owned subsidiary, and a maturity of December 31, 2022. Under the terms of the Loan, we are required to hedge our production, based on WTI, on the 45 percent of production acquired at the following levels:
- Fourth quarter 2021 (from closing date): 90 percent of net after royalty production,
- First quarter 2022: 80 percent net after royalty production,
- Second quarter 2022: 70 percent net after royalty production, and
- Third and fourth quarter 2022: 40 percent net after royalty production.
We expect the Loan to be repaid by the end of the third quarter of 2022 given the hedge profile and our ability to repay the Loan up to a maximum of approximately $1.6 million per month without penalty from the acquired asset’s free cash flow.
PRELIMINARY THIRD QUARTER 2021 RESULTS
In association with the Acquisition, Obsidian Energy is providing preliminary unaudited third quarter 2021 results. The third quarter of 2021 benefitted from higher pricing for both oil and natural gas, which improved our funds flow from operations to approximately $59.3 million or $0.79 per basic per share. Our second half development program advanced quickly with approximately $45.1 million, drilling 11 (10.2 net) operated wells, which brought three (3.0 net) wells on production in the quarter. A further eight (7.2 net) wells were brought on production in October.
Net operating costs continued to improve, decreasing from $13.71 per boe in the second quarter 2021 to $13.28 per boe in the third quarter 2021. We maintained our strong G&A record with third quarter 2021 costs of approximately $1.82 per boe, up slightly from $1.69 per boe in the second quarter of 2021. Our strong well results and fourth quarter capital expenditure program have laid the foundation for production growth and positive results in the fourth quarter of 2021. The Company’s net debt at September 30, 2021 is estimated to be $428.1 million, comprised of $340.0 million drawn against our $440 million senior credit facility (“Facility“), $58.9 million of senior notes and approximately a $29.2 million working capital deficiency. Our Facility has been repaid by $55 million since the beginning of the year, and we have $95 million of available borrowing capacity at September 30, 2021. Obsidian Energy’s full third quarter 2021 results are expected to be released on November 8, 2021.
ACQUISITION SUMMARY AND PRO-FORMA 2021 GUIDANCE
Total Net Consideration
36.0 – 36.3
|Acquired Production (Q3/21)||boe/d||2,400|
|Drilling Locations (2P)||net booked||8|
|Total Decommissioning Liability||$ millions||25.0|
|(1) “Reserve Life Index” or “RLI” is calculated by dividing reserves volumes by estimated production from the Partnership Interest Reserves Report. RLIs are not necessarily comparable between different issuers as there may be variation in calculation methodology. Management views RLI as a useful measure of the length of time the reserves would be produced at the estimated rate of production. See “Oil and Gas Metrics” in Advisories|
The following table summarizes Obsidian’s pro-forma guidance for 2021 after giving effect to the Acquisition, assuming that the Acquisition closes in the first half of November 2021 and based on the preliminary unaudited third quarter and nine-month 2021 results set out in the table below. Using mid-point of our post-acquisition guidance, we expect fourth quarter 2021 production to average approximately 26,730 boe/d, generating funds flow from operations of approximately $88 million.
Third Quarter 2021
Nine Month 2021 Results
|Production1||boe/d||24,164||24,017||24,600 – 24,800|
|% Oil and NGLs||%||63%||64%||64%|
|Capital Expenditures2||$ millions||45.1||96.1||141 – 143|
|Decommissioning Expenditures3||$ millions||1.6||5.4||8|
|Net Operating Costs||$/boe||13.28||13.50||12.95 – 13.15|
|General & Administrative||$/boe||1.82||1.73||1.70 – 1.80|
|Based on midpoint of above guidance|
|WTI Range||US$/bbl||70.56||64.87||75.00 – 80.00|
|Funds Flow from Operations4, 5, 6||$ millions||59.3||137.9||223 – 228|
|Free Cash Flow2, 4, 5, 6||$ millions||12.6||36.4||72 – 77|
|Net Debt||$ millions||428.1||428.1||404 – 409|
(1) Mid-point of guidance range: 10,660 bbl/d light oil, 2,900 bbl/d heavy oil, 2,205 bbl/d NGLs and 53.6 mmcf/d natural gas.
(2) Includes capital cost updates for PROP Q4 drilling at 100% OBE.
(3) Decommissioning expenditures do not include grants and allocations to be utilized by the Company under the ASRP.
(4) Includes approximately $15 million of estimated charges for full year 2021 related to the deferred share units, preferred share units and non-treasury incentive plan cash compensation amounts which are based on the Company’s closing share price on September 30, 2021 of $4.51 per share. The charge is primarily due to the Company’s increased share price in 2021 compared to the closing price on December 31, 2020 of $0.87 per share.
(5) Includes actual WTI and natural gas prices for the first nine months of 2021. Pricing assumptions outlined are forecasted for the fourth quarter of 2021. Risk management (hedging) adjustments incorporated into 2021 guidance as at October 26, 2021.
(6) Includes actual AECO prices for the first nine months of 2021 and AECO forward strip pricing as of October 26, 2021.
Pursuant to the Agreement, Obsidian Energy will acquire the remaining 45 percent interest in PROP for aggregate consideration of $43.5 million, prior to closing adjustments, which are anticipated to reduce the consideration payable at closing to approximately $36 million.
In connection with the closing of the Acquisition, the Company has agreed with our syndicate of bank lenders to certain required consents and amendments to our Facility. The Company also agreed with our lenders to reduce the outstanding obligations under the Facility in aggregate by $25.0 million through a repayment of outstanding amounts under the non-revolving term facility with the net proceeds from the Offering (less the pro rata amount of such proceeds repayable to the holders of the Senior Notes), with the amount of any shortfall being funded by way of a draw under the revolving facility. Pro forma our September 30, 2021 Facility balance, we estimate we will have approximately $70 million of available borrowing capacity under the Facility post-closing of the Acquisition. All other material terms of the Facility remain the same with the next borrowing base redetermination scheduled for November 30, 2021 and a term out date of November 30, 2022. At December 31, 2021, the Facility commitment amount will be reduced such that the Company will begin 2022 with $35 million of available capacity under the Facility as previously disclosed.
The Company has agreed with holders of our Senior Notes to corresponding and substantively the same consents and amendments as approved by its syndicate of lenders in connection with the closing of the Acquisition.
At the closing of the Acquisition, the Company will also repay approximately $3.3 million of the Senior Notes, which will leave approximately US$43.7 million outstanding with a maturity date of November 30, 2022. In 2022, we plan to refinance our debt structure with the objective of incorporating senior and subordinated debt in the structure in order to provide the Company a stable capital source that provides operational liquidity and a longer-term maturity profile.