Obsidian Energy Announces Strong Third Quarter Results And 2018 Budget

Announced Date :  Nov 10, 2017


Obsidian Energy ltd. (Obsidian Energy) is pleased to announce its financial and operational results for the third quarter ended September 30, 2017 and 2018 Budget.
David French, President & CEO commented, "I am quite proud of the Obsidian Energy team in the third quarter, successfully executing our busiest drilling campaign in years and generating quality results across our key development areas. We are excited about the outlook for the Company and determined to continue operational delivery into 2018.

Deep Basin results are liquids rich and wells are flowing strong while choked back

We are encouraged with the results of our first foray into the Deep Basin. Our three Mannville wells are producing a combined 2,000 boe per day with average liquids rates of approximately 60 bbl per mmcf. These liquid yields are substantially above expectations and improve the already attractive play economics. We look forward to further 2018 development.

The Q3 program is beating forecast and reaffirms production guidance

Second half projects in the Cardium, Alberta Viking, and Peace River are delivering strong rates and reinforcing the value of our disciplined project funding and execution. As a result of production management and new well delivery, we are forecasting full year 2017 production at the high end of our 30,500 – 31,500 boe per day guidance range.

Waterflood performance is impressive

Waterflood investment is starting to bear fruit with meaningful decline mitigation across our Cardium assets. The base decline in our total Cardium business is only five percent year to date resulting from waterflood and base optimization projects initiated in 2016.

2018 delivers five percent growth at 80 percent reinvestment

We anticipate five percent production growth in 2018 while investing only 80 percent of Funds Flow from Operations. We have the operational flexibility and drill ready prospects to deliver north of five percent by adjusting our second half program as commodity prices allow. We have clear downside protection and growth confidence through our robust hedge book. Our Board has approved a $135 million 2018 budget which leverages the primary drilling opportunity set within our portfolio. We have targeted our capital to be short cycle focused while maintaining our base decline rate through efficient, low cost waterflood management.

Our 2018 plan offers a solid and scalable liquids weighted growth profile, and the third quarter and 2018 outlook are great signs for what is ahead of us as a Company."

Funds Flow from Operations for the third quarter was $40 million, reflecting lower realized pricing due to a decrease in the CAD/USD exchange rate, which was partially offset by lower operating costs.

Average liquids sales prices were $45.05 per boe and average natural gas sales prices were $2.35 per mcf. Realized natural gas prices were at a premium to AECO in the quarter, resulting from a portion of our volumes marketed at alternative sales points. We expect our gas realizations to maintain a slight premium to AECO through 2018.

Third quarter operating costs were $12.26 per boe, net of carried expenses. As expected, operating costs were lower than the second quarter of 2017 due to lower maintenance and turnaround activity. We continue to target annual 2017 operating costs of approximately $13.00 to $13.50 per boe, net of carried expenses.

Invested $55 million of capital expenditures across our key development areas and remain on track to meet full year 2017 capital guidance. 

Total Net Debt was approximately $410 million at the end of the third quarter, including $251 million drawn on our $410 million revolving credit facility and $113 million of Senior Notes. 

Realized $2.24 per boe of realized commodity gains in the quarter, driven by our strong crude oil and natural gas swap positions.

Production Update

Average corporate production for the third quarter was 30,166 boe per day, consistent with the second quarter of 2017.

Base production continues to exceed expectations, driven by continued waterflood response across our Cardium acreage and reliability of our base infrastructure and gathering systems. We ran a successful campaign this year to optimize existing wellbores, which has contributed nearly 800 boe per day to our base production. The Company did not encounter any meaningful production impact resulting from the third-party service restrictions in the quarter.

Cardium Drilling Update

Our three well horizontal pad in PCU #9 came on production in October, and early rate indications are above type curve, currently producing nearly 200 boe per day, per well. We are currently drilling our four horizontal producers in Willesden Green and expect the pad to turn over to production prior to year-end.

We continue to see positive indications of Gas Oil Ratio ("GOR") suppression and decline mitigation in our Cardium development area. Our decline rate has shallowed to approximately five percent this year, from approximately 20 percent in 2016. The observed oil rate decline shallowing is driven by our low-cost waterflood optimization and base management projects that began in the third quarter of 2016.

Alberta Viking Drilling Update

Our 10 well Alberta Viking program continues to exceed expectations, with initial production results confirming early flowback rates. All 10 wells are on production, including the 100/2-18 well with a peak IP of 704 boe per day and producing day IP30 of 295 boe per day. We continue to evolve our development strategy in the area to enhance overall economics; including trucking clean oil through design change at our multi-well batteries and optimizing stage count to maximize capital efficiency. 

Peace River Drilling Update 

Our second half 2017 Peace River program returned to the heart of the Harmon Valley South field, and preliminary results of the program are encouraging. Daily total production from the first nine wells of our second half 2017 program is currently averaging approximately 190 boe per day, per well. At present, 10 of 12 second half wells are on production, and two under facility construction. Obsidian Energy set another record in the third quarter for meters drilled with a single bit and bottom hole assembly, whereby we drilled 17,278 meters of open hole for an overall cost of $76 per meter drilled. 

Deep Basin Drilling Update 

We successfully drilled our three well Mannville program in the third quarter, with one well on production as of September 30, 2017 and the remaining two wells by the end of October. This is the Company's first foray into our significant Deep Basin position and we designed a program that tests different Upper Mannville targets. The overall program is delivering value meaningfully ahead of expectations, driven by significant initial liquids rates and high pressure from the second and third wells in the program. While the first well encountered lower permeability and pressure than expected, our second and third wells moved to a high-pressure portion of the reservoir and have significant initial liquids rates. These wells are showing free condensate rates of 35 bbl per mmcf and overall liquids rates of 60 bbl per mmcf, more than double type curve expectations. We estimate the value uptick from the strong liquids rates will increase rates of return by approximately 20 percent. We are maximizing the liquids potential of these wells by utilizing a down-hole choke mechanism to stabilize gas rates at approximately 4,000 mcf per day. Our average working interest on these wells is 80 percent.

Updated Hedging Position

We continued our active hedging program and began to extend our hedge book into the second quarter of 2019. We also took advantage of the October decline in the CAD relative to the USD and hedged approximately two thirds of our foreign exchange exposure on our 2018 USD WTI hedges.

Our liquids exposure, net of royalties, is hedged approximately 65 percent through 2018 and our natural gas exposure, net of royalties, is hedged approximately 40 percent through the end of 2018. We have expanded our 2018 hedge volumes to capitalize on recent price improvements that support a fully funded 2018 capital program.

Disposition Highlights Subsequent to the Third Quarter

The Company entered into an agreement in late October for the sale of our royalty interests in Eastern Alberta for $40 million. The transaction capitalizes on the premium valuation associated with royalty assets and puts us in a solid liquidity position heading into 2018. Proceeds from the transaction will be used to reduce borrowings on our syndicated credit facility and therefore has a neutral effect on 2018 Funds Flow from Operations.

This royalty interest transaction is expected to close prior to the end of 2017 and is subject to closing adjustments customary in transactions of this nature.

2017 Guidance

We remain confident in our ability to demonstrate self-funded double-digit percent growth from the fourth quarter of 2016 to the fourth quarter of 2017, adjusted for A&D, and believe production will be near the high end of our full year 2017 guidance of 30,500 – 31,500 boe per day.

2018 Outlook

We are excited about the outlook for the Company, which combines a predictable, low decline asset base with a robust development opportunity set. Our extensive portfolio optionality allows us to shift capital allocation in response to various commodity price scenarios and deliver a returns focused capital program entirely supported by Funds Flow from Operations.

We plan to deliver approximately five percent production growth relative to full year 2017, adjusted for 2017 A&D activity. This will be accomplished by continuing our second half 2017 momentum, drilling producing wells through the first quarter of 2018. Our 2018 program is approximately 60 percent weighted to first half of 2018 and we maintain the operational flexibility to accelerate spending based on the commodity price outlook within the year. Furthermore, our hedge position provides certainty to our cash flow outlook whereby our capital program can withstand more than a 10 percent decline in Canadian dollar realized oil and gas pricing relative to current strip prices before exceeding our Funds Flow from Operations.

Our 2018 capital investment of $135 million includes $86 million associated with development and existing wellbore optimization, $25 million of infrastructure and corporate capital, $10 million of decommissioning expenditures and $14 million of capital associated with meeting the AER Directive 84 requirements for Hydrocarbon Emission Controls and Gas Conservation in the Peace River area. We are on track to meet the AER requirements and the Company will gather, process, and sell natural gas from its Peace River operations beginning in September 2018. We do not expect a material cash flow stream from natural gas in this area.

Our 2018 plans have an increased focus on shorter cycle opportunities within our portfolio. Our development capital program is approximately 50 percent weighted to the Cardium, employing a quicker payout program that balances primary drilling with targeted low capital integrated waterflood opportunities. The remainder of our development capital program has allocations of 10-15 percent each between our Deep Basin, Alberta Viking and Peace River Assets, and an additional 15 percent to capital efficient volume optimization of existing wellbores throughout our key development areas. The projected capital efficiency of our 2018 Development capital is approximately $15,000 per boe per day, based on the 12 month forward production associated with each project.

Cardium Development

We plan to spend approximately $44 million to develop our high netback, low decline Cardium asset, drilling eight horizontal producers (gross operated wells) amongst our Pembina and Willesden Green assets. Continuing our approach from the last several years, we place our horizontal wells in the bioturbated rock just below the upper good quality reservoir to ensure we access both reserves in the cleaner intervals, as well as tapping into undrained reservoir in the lower bioturbated interval. Six of our horizontal wells are in Pembina and two are in Willesden Green.

Additionally, we expect to spend approximately $5 million on integrated waterflood and optimization opportunities. This includes supporting our Pembina drills with inexpensive conversions of low producing vertical wells to injection, rather than new drills, employing a hybrid approach between our Type I & Type IV waterflood inventory. Our Cardium budget will also allocate approximately $12 million to Non-Operated primary drilling by our working interest partners in the area, and $4 million to land consolidation opportunities and seismic data. This shorter cycle focused Cardium program limits spending on new injection while still optimizing our waterflood fields and mitigating decline on horizontal wells.

Deep Basin Development

We plan to spend approximately $11 million to continue development of our Deep Basin position in 2018. Using the learnings from our 2017 development program and targeting high pressure areas of the reservoir with strategic positions close to our operated processing facilities, we plan to drill three wells through the year. Given the negative outlook for natural gas pricing in Alberta, we have high-graded our 2018 inventory to target liquids rich locations that generate robust rates of return.

Peace River Development

The Peace River area continues to be a key development area for the Company. Designing simpler wells to mitigate risk and increasing the length of individual legs to drill faster has driven cost savings that attract capital, despite the expected JV operating and capital cost carry expiry by year-end 2017. We plan to invest approximately $8 million to drill five (2.75 net) primary cold flow wells in 2018.

Alberta Viking Development

The Company plans to invest approximately $9 million to drill six wells in our Alberta Viking development area. All six wells are close to our 10 well program from 2017, and we expect similar production results. We expect slightly enhanced economics on our 2018 program using multi well pads close to existing infrastructure and by continuing to truck clean oil which enhance netbacks by approximately $1.50/bbl.

Optimization of Existing Wellbores

We plan to spend approximately $14 million on the optimization of existing well bores within our portfolio. This capital consists of over 50 individual projects to enhance field production by reactivating or re-fracking existing wells, debottlenecking, consolidating batteries, and testing additional zone potential in old vertical wells. This is some of the most capital efficient spend in our 2018 budget, projected at less than $10,000 per boe, per day. Our 2017 optimization projects contributed volumes at approximately $6,500 per boe, per day. We do not expect the same quantum of capital to be allocated to optimization past 2018.

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