Obsidian Energy (OBE): addresses the maturities of its short-term debt

Obsidian Energy (NYSE:OBE) looked at the maturities of its short-term debt through debt refinancing which included unsecured notes with a high interest rate of 11.95%. The interest rate on these notes is a bit telling, but the overall interest cost for Obsidian should will be only US$1 per boe next year.

At current strip prices, Obsidian should be able to return to net cash by the end of 2023, not including potential expenses for share buybacks and/or dividends.

This report uses an exchange rate of 1.00 USD = 1.28 USD.

Debt refinancing

Obsidian has been successful in meeting its short-term debt maturities with its recent offering of unsecured notes and new credit facilities. Previously, most of Obsidian’s debt matured at the end of November 2022, with the exception of its small limited recourse PROP loan which matured at the end of December 2022.

This comes at a high cost, however, with its US$100 million of new notes due July 2027 carrying a high interest rate of 11.95%. These notes are also issued at 98% of par, so Obsidian receives gross proceeds of $98 million before financing costs.

Obsidian is also entering into new credit facilities with availability of US$160 million. These are US$137 million revolving syndicated credit facilities, with an initial renewal period ending in July 2023 and an initial maturity period ending in July 2024. The loan matures in December 2022.

This illustrates the value of not having short-term debt maturities. Had Obsidian’s old debt matured at the end of 2023, it would have been on track to pay it all off via cash flow. This would have saved Obsidian Energy US$60 million in interest costs (over the life of the notes).

2022 Outlook Update

Obsidian now expects an average production of around 32,000 BOEPDs in 2022 after increasing its capital budget. The increase in the capex budget for 2022 will mainly impact 2023 production.

Current strip prices are currently around US$98 for WTI oil. At this price, I would expect Obsidian to generate $701 million in revenue after covers.

Obsidian is thus expected to generate an EBITDAX of US$425 million in 2022 at current strip prices.

After capital expenditures, decommissioning expenditures, interest and financing costs, Obsidian may be able to reduce its net debt by US$150 million in 2022. This would leave it with net debt of US$173 million. at the end of 2022.

Outlook 2023 updated

Obsidian now expects average production of around 37,500 BOEPDs in 2023. This would allow it to generate $735 million in revenue with the current 2023 band of WTI oil at $86.

Obsidian’s projected EBITDAX for 2023 is US$438 million at WTI oil of $86.

Obsidian currently expects around $207 million in capital expenditures. After interest charges and decommissioning expenses, it may be able to generate around US$208 million of positive cash flow in 2023.

That would give it about $35 million in net cash at the end of 2023, before any potential outlays for stock buybacks and/or dividends.

Conclusion

Obsidian Energy has dealt with the short-term debt maturity problem that has plagued it for years. It paid a high rate of interest on its new unsecured notes, but the overall impact of interest charges on its cash flow is expected to be relatively modest, at around $1 per boe in 2023.

At strip prices, Obsidian should be able to achieve net cash by the end of 2023, before the impact of share buybacks and/or dividends. In a long-term (post-2023) WTI oil scenario at $75, Obsidian’s estimated value is US$12-14 per share. With its short-term debt maturities supported, Obsidian is better able to make longer-term plans and more fully realize its potential value.