An anonymous director reports
OBSIDIAN ENERGY ANNOUNCES INCREASED 2021 PRODUCTION AND CAPITAL EXPENDITURE GUIDANCE WITH SECOND QUARTER 2021 RESULTS
Obsidian Energy Ltd. has released strong operating and financial results for the second quarter 2021.
Detailed information can be found in Obsidian Energy's unaudited interim consolidated financial statements and management's discussion and analysis (MD&A) as at and for the three and six months ended June 30, 2021, on the company's website, which will be filed on SEDAR and EDGAR in due course.
Key second quarter 2021 results
The economic environment continued to improve in the second quarter, resulting in higher FFO (funds from operations) and further debt reduction. Favourable weather and ground conditions allowed the company to accelerate all aspects of its development program including the rig release of three wells from the company's second half 2021 program.
2021 second quarter financial highlights
- Strong funds flow -- FFO was $42.3-million (57 cents per share) for the second quarter of 2021, an increase from the first quarter of 2021 ($36.3-million; 49 cents per share) and the second quarter of 2020 ($24.7-million; 34 cents per share). Higher commodity prices were partially offset by higher royalty rates and share-based compensation charges of $8.9-million, which was predominately due to the more than doubling of the company's share price between March 31, 2021, to June 30, 2021. Adjusting for the share-based compensation charges, FFO would have been $51.2-million (69 cents per share), representing a 107-per-cent increase when compared with the second quarter of 2020.
- Capital acceleration -- Capital expenditures in the second quarter of 2021 totalled $21.5-million (2020: $400,000) and were predominately spent on completing the remaining wells in the nine-well first-half development program as well as pad construction costs for the second half program. The company began its second half 2021 drilling operations earlier than anticipated and accelerated certain optimization projects due to favourable spring ground conditions.
- Debt reduction -- Continued strong financial results and the company's focus on debt reduction resulted in a decrease in net debt of 12 per cent to $435.7-million at June 30, 2021, compared with $495.7-million at June 30, 2020. This included $370.0-million drawn on the company's syndicated credit facility (down from $420.0-million at June 30, 2020), $57.3-million of senior notes and $8.4-million of a working capital deficiency.
- Continued low G&A (general and administrative) costs -- Second quarter 2021 general and administrative (G&A) costs were consistent with the first quarter of 2021 at $1.69 per boe (barrels of oil equivalent) compared with $1.36 per boe in 2020. Lower production volumes in 2021 combined with several temporary measures taken in 2020 in response to the low commodity price environment reduced costs in the comparable period in 2020.
- Operating cost management -- Net operating costs of $13.71 per boe during the second quarter of 2021 were higher than $8.51 per boe in the second quarter of 2020 and $13.52 per boe in the first quarter of 2021. Similar to G&A, operating costs were impacted by the return to normal activity levels in 2021 compared with 2020, where the company restricted discretionary spending and shut-in production as a result of the low commodity price environment in this period. During the second quarter of 2021, the company was impacted by high power prices, mostly due to extreme heat in several parts of North America that increased natural gas demand and prices, and completed more 2021 scheduled maintenance activity than originally planned in the quarter.
- Net income -- Net income of $322.5-million ($4.33 per share) in the second quarter of 2021 benefited from higher FFO and a $311.5-million impairment reversal within the company's Cardium asset due to higher forecasted commodity prices and strong drilling results. This compared with a net loss of $21.1-million (29 cents per share) in 2020, largely due to the lower commodity price environment at that time.
2021 second quarter operational highlights
- Improved production levels -- Performance from the company's first half 2021 drilling program and its base resulted in average production of 24,651 boe/d in the second quarter of 2021, a 6-per-cent increase over the first quarter of 2021 and ahead of internal estimates. As a result, the company have increased its average production guidance for the year to between 24,000 and 24,400 boe/d from 23,300 to 23,800 boe/d.
- Accelerated development program -- The company completed the first half development program with nine wells on production by mid-June. Careful pad design and facility planning allowed for extended operations into break up, accelerating drilling of the four-well East Crimson 6-21 pad into the first half of 2021.
- Continued strong drilling performance -- The company continued to demonstrate drilling efficiencies with estimated first half 2021 per well costs of $3.3-million (inclusive of construction, drilling, completions, equipping and tie-in costs to lease edge), representing a 2-per-cent decrease from the company's 2020 program average while increasing lateral length by 10 per cent as compared with the company's first half 2020 program. The company's 2021 drilling results include a new company pacesetter for wells with intermediate casing and a new company-best well lateral length.
- Increased 2021 development program -- With the continuation of a higher commodity price environment and base production improvements, the company added three incremental wells (gross) to the company's second half 2021 development program and expanded the company's optimization activities by $2.6-million.
- Reduction in decommissioning liabilities -- The company abandoned a total of 51 net wells during the second quarter of 2021 through participation in the area-based closure (ABC) program and the Alberta Site Rehabilitation Program (ASRP), where the company utilized $1.1-million of net grants. As a result of these efforts, the company's undiscounted, uninflated decommissioning liability was reduced by an estimated $4-million in the second quarter.
2021 development program update
In addition to completing the company's first half 2021 development program, the company finished construction of several pad sites in its second half 2021 program in June, allowing for an early start to the company's program.
The company's second half two-rig continuous drilling program is well under way with the rig release of both wells at the East Crimson 1-33 two-well pad in July. Fracture stimulation for these wells is complete, and the wells are expected to be on stream by the end of August. This rig also successfully drilled a third well at the existing 3-29 pad in East Crimson, with completion anticipated in mid-August, and has spud a fourth well at the company's 3-03 two-well pad in Crimson Lake.
In July, the company started drilling in its Central Pembina region, and are currently drilling the first well on the 7-17 Pembina Cardium unit No. 9 three-well pad. With the remaining wells on this pad to be drilled in August, the company expects completion of all wells by mid-September.
With an improved economic environment and higher FFO, the company has modestly increased its 2021 capital plan with the addition of three gross wells to its second half program and expanded optimization activities by $2.6 -illion. The company plans to drill 25 wells (22.0 net), up from 23 wells (20.3 net) in the company's second half 2021 program, predominantly in the company's Willesden Green and Pembina Cardium assets. Combined with the nine wells brought on production in the first half of the year (one of which was rig released in 2020), the company expects to bring 28 wells (25.0 net), up from 25 wells (22.8 net), on production in 2021. Consistent with previous guidance, the remaining seven wells (7.0 net) are expected on production early in the first quarter of 2022. The company's successful optimization program continued with $3.9-million invested in the second quarter (first quarter 2021: $2.9-million) out of a total of $10.6-million now allocated to capture highly attractive capital efficiencies in 2021.
During the first half of 2021, the company successfully abandoned a combined total of 158 net wells and 155 net kilometres of pipeline through participation in the ASRP, where it utilized $5.9-million of grants, and the ABC program. The company's second half decommissioning program is fully under way with four service rigs working on decommissioning well activity. With the support of approximately $28-million (gross) of ASRP grants and allocations from the program, the company anticipates 589 net wells and 702 net kilometres of pipelines will be abandoned in 2021 and 2022.
2021 updated guidance
With solid results from the company's base production and the company's 2021 development program to date, the company is revising its 2021 production guidance and increasing the company's capital expenditures for the remainder of the year, adding three incremental gross wells to the company's second half program and expanding its optimization activities. A minor change in 2021 guidance for net operating expenses was also made due to higher-than-expected power prices. The company's revised 2021 guidance includes $8.9-million of share-based compensation recorded in the second quarter (not included in the company's original 2021 guidance), which is reflected in the FFO and FCF metrics. The company continues to meaningfully reduce debt levels, which is expected to result in an improved annualized fourth quarter 2021 net debt to EBITDA ratio of 1.8:1 (assuming mid-point of operational guidance and West Texas Intermediate of $65 (U.S.)/bbl).
The company has the following financial oil and gas contracts in place on a weighted average basis as shown in the attached table.
Additionally, the company has the physical contracts in place as shown in the attached table.
Updated corporate presentation
For further information on these and other matters, Obsidian Energy will post an updated quarterly corporate presentation today on the company's website.
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