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 Company has filed and been receipted for a preliminary short form prospectus with the securities commissions in each of the provinces of Canada, other than Québec, in connection with a “best efforts” marketed equity offering of subscription receipts (“Subscription Receipts“) for minimum gross proceeds of $12.5 million and maximum gross proceeds of $22.5 million (the “Offering“). Final pricing of the Subscription Receipts offered under the Offering (the “Offering Price“) and the determination of the number of Subscription Receipts to be sold pursuant to the Offering will be determined in the context of the market prior to the filing of the amended and restated form prospectus in respect of the Offering. If the Company receives the maximum proceeds, no Common Shares will be issued to the Vendor. If the Company receives less than the maximum proceeds, the Vendor will receive Common Shares valued at the Offering Price in payment of the balance of the purchase price of $43.5 million less customary adjustments payable at closing of the Acquisition; any Common Shares issued to the Vendor will be subject to a four-month hold period. The breakdown of the consideration payable at closing under the Agreement under the minimum and maximum Offering outcomes is as follows:
|($ millions)||Minimum Equity
|Consideration at Closing||$36.3||$36.0|
|Limited-Recourse Debt Proceeds||$16.0||$16.0|
|Equity Proceeds for Closing2||$11.6||$20.0|
|Value of Shares issued to Vendor||$8.7||Nil|
|Consideration at Closing||$36.3||$36.0|
(1) Estimated closing adjustments assuming closing occurs on or before November 15, 2021. Closing adjustments are $0.3 million lower if Common Shares are issued to Vendor.
(2) Prior to assuming the exercise of the Over-Allotment Option (as defined below).
- 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 the Bluesky formation
- Resource upside potential from the emerging Clearwater formation oil play
- Adds approximately 2,400 boe/d of current production
- Adds the following reserves:
- 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 approximately $37.00/boe
- Includes a decommissioning liability of approximately $25.0 million on an undiscounted, uninflated basis with an 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, have 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 capital expenditures of 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 the 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,
|$ 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.
The Equity Offering
The Offering is being conducted by lead agents and joint bookrunners, Raymond James Ltd. and Stifel Nicolaus Canada Inc. (the “Agents“). The Agents propose to sell, on a “best-efforts” marketed basis, Subscription Receipts at the Offering Price for minimum gross proceeds of $12.5 million and maximum gross proceeds of $22.5 million, prior to the exercise of any Over-Allotment Option (defined below). The Offering is subject to customary closing conditions, including, but not limited to, the execution of an agency agreement and the receipt of all necessary regulatory approvals, including the approval of the securities regulatory authorities and the Toronto Stock Exchange. The net proceeds from the Offering will be used to repay and permanently reduce on a pro rata basis the non-revolving term loan of the Company’s Facility and our Senior Notes. Funds will subsequently be redrawn from the revolving term loan of the Facility and loaned to the wholly-owned entity of Obsidian Energy to fund the Acquisition. In connection with the closing of the Acquisition, the Company has agreed to certain amendments to the Facility as outlined below.
The Company has granted the Agents an option (the “Over-Allotment Option“) to offer and sell that numbers of additional Subscription Receipts as is equal to 15 percent of the aggregate number of Subscription Receipts sold under the Offering on the same terms and conditions as the Offering. The Over-Allotment Option is exercisable at any time for a period of 30 days after the closing of the Offering.
The Subscription Receipts will be offered in all Canadian provinces, excluding Québec, by way of a short form prospectus, and in the United States on a private placement basis to a limited number of “accredited investors” pursuant to the registration exemption provided by Rule 506(b) of Regulation D under the United States Securities Act of 1933, as amended (the “U.S. Securities Act“).
The gross proceeds from the sale of Subscription Receipts pursuant to the Offering will be held in escrow pending the completion of the Acquisition. If all conditions to the completion of the Acquisition are satisfied or waived (other than funding the portion of the purchase price therefor to be financed with the net proceeds of the Offering) and Obsidian Energy has confirmed the same to the Agents before 5:00 p.m. (Calgary time) on December 31, 2021, the net proceeds from the sale of the Subscription Receipts will be released from escrow to Obsidian Energy, and each Subscription Receipt will automatically be exchanged for one Common Share for no additional consideration and without any action on the part of the holder. If: (i) the Acquisition is not completed at or before 5:00 p.m. (Calgary time) on December 31, 2021; (ii) the Agreement is terminated in accordance with its terms; or (iii) the Company advises the Agents or formally announces to the public by way of a news release or otherwise that it does not intend to proceed with the Acquisition then the purchase price for the Subscription Receipts will be returned pro rata to subscribers, together with a pro rata portion of interest earned on the escrowed funds. There can be no assurance as to whether or when the Offering may be completed, or as to the actual size or terms of the Offering.
The Offering is expected to close during the week of November 15, 2021.
No securities regulatory authority has either approved or disapproved of the contents of this news release. The Subscription Receipts and underlying Common Shares, have not been and will not be registered under the U.S. Securities Act or any state securities laws. Accordingly, the securities described herein may not be offered or sold within the “United States” unless registered under the U.S. Securities Act and applicable state securities laws or pursuant to exemptions from such registration requirements. This news release does not constitute an offer to sell or a solicitation of an offer to buy any securities of Obsidian Energy in any jurisdiction in which such offer, solicitation or sale would be unlawful.
Senior Credit Facility and Senior Notes
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.