Obsidian Energy (TSX: OBE) reported favorable outcomes from its first half of 2024 development program, driven by strong heavy oil well performance. The company also completed a significant acquisition in Peace River, expanding its land holdings by over 25% and boosting production by more than 20%.
This acquisition and strong development results are expected to enhance Obsidian’s value by approximately US$0.50 per share. However, an ongoing dispute with the Woodland Cree First Nation has led to 4,500 BOEPD in shut-in production, which currently caps Obsidian’s valuation estimate at US$8.50 to US$9.50 per share.
Should the dispute be resolved soon with minimal long-term effects, the value estimate could increase to between US$9.00 and US$10.00 per share.
Peace River Acquisition
Obsidian announced a CAD$76 million (US$55 million) acquisition of Peace River assets, funded through debt. This acquisition adds 1,700 BOEPD (100% oil) and 148 net sections of land to Obsidian’s portfolio.
At a production level of US$75 WTI oil, the netback is estimated at CAD$22 million (US$16 million) annually. This acquisition, expected to close by mid-July 2024, increases Obsidian’s land with Bluesky and Clearwater heavy oil rights to over 680 net sections.
The northern part of the acquired Peavine land borders Obsidian’s Clearwater Dawson field, which transitioned from appraisal to active development earlier this year. Encouraged by the initial results, Obsidian added four net wells to its first half of 2024 program.
The Peavine acquisition includes 108 net sections of land with 103 identified locations. Additionally, the Gift Lake acquisition comprises 40 net sections with 96 identified locations, with plans to appraise this area later in 2024.
Obsidian’s Peace River Position
Obsidian allocated CAD$46 million (US$34 million) of the purchase price to base production value and CAD$30 million (US$22 million) to undeveloped land value. Only 7% of the acquired 148 net sections are currently producing, leaving significant room for future development.
Positive Development Program Results
Obsidian’s first half of 2024 development program has exceeded expectations, achieving production over 35,500 BOEPD despite the 4,500 BOEPD shut-in due to the Harmon Valley South blockade. Without the blockade, production would approximate 40,000 BOEPD.
Notably, Obsidian’s Clearwater Dawson field averaged 1,330 barrels of oil per day in the last 30 days, surpassing initial projections and supporting the company’s 2026 growth targets.
Woodland Cree First Nation Dispute
The dispute with the Woodland Cree First Nation threatens Obsidian’s Peace River growth. Negotiations for a new economic relationship began in Q2 2023 but deteriorated, leading to opposition from the Woodland Cree First Nation in February 2024. They cited concerns over prior earthquakes, while Obsidian argues the dispute centers around economic issues like service contracts.
In May 2024, the dispute escalated to a blockade near Obsidian’s Walrus field, shutting in 1,275 barrels of oil per day. The blockade moved to the Harmon Valley South field six days later, affecting 4,500 BOEPD.
Obsidian obtained a court order to remove the blockade, but enforcement by the RCMP is pending. The company also filed a contempt of court application against Chief Isaac Laboucan-Avirom.
This dispute significantly impacts Obsidian’s production and development in Peace River, though the recent acquisition offers additional development opportunities.
2024 Outlook
Obsidian raised its full-year production guidance to 36,400 BOEPD (69% liquids) and reduced its 2024 capital expenditure budget by CAD$15 million (US$11 million). The new guidance includes 800 BOEPD from the recent acquisition and accounts for a 200 BOEPD reduction due to the blockades.
Extended blockades beyond May could further reduce full-year production by 350 to 375 BOEPD monthly.
Based on current strip prices (US$78 to $79 WTI oil), Obsidian projects US$570 million in oil and gas revenues for 2024, with hedges valued at US$11 million. This results in an estimated US$41 million in free cash flow, considering the reduced capex budget and higher interest costs from the acquisition.
Significant Development Milestones
Obsidian Energy has achieved significant development milestones, reaching over 35,500 BOEPD in production despite 4,500 BOEPD shut-in due to the Woodland Cree First Nation blockade.
The recent Peace River acquisition adds 1,700 BOEPD and substantial future development potential. However, the ongoing dispute remains a critical issue, impacting a significant portion of Obsidian’s Peace River assets.
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