OBSIDIAN ENERGY LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS
For the three months ended March 31, 2022
This management's discussion and analysis of financial condition and results of operations ("MD&A") of Obsidian Energy Ltd. ("Obsidian Energy", the "Company", "we", "us", "our") should be read in conjunction with the Company's unaudited interim condensed consolidated financial statements for the three months ended March 31, 2022 and the Company's audited consolidated financial statements and MD&A for the year ended December 31, 2021. The date of this MD&A is May 3, 2022. All dollar amounts contained in this MD&A are expressed in millions of Canadian dollars unless noted otherwise.
Throughout this MD&A and in other materials disclosed by the Company, we adhere to generally accepted accounting principles ("GAAP"), however the Company also employs certain non-GAAP measures to analyze financial performance, financial position, and cash flow, including funds flow from operations, netback, gross revenues, net operating costs, net debt and free cash flow. Additionally, other financial measures are also used to analyze performance. These non-GAAP and other financial measures do not have any standardized meaning prescribed by International Financial Reporting Standards ("IFRS") and therefore may not be comparable to similar measures provided by other issuers. The non-GAAP and other financial measures should not be considered to be more meaningful than GAAP measures which are determined in accordance with IFRS, such as net income and cash flow from operating activities, as indicators of our performance.
This MD&A also contains oil and natural gas information and forward-looking statements. Please see the Company's disclosure under the headings "Non-GAAP and Other Financial Measures", "Oil and Natural Gas Information", and "Forward-Looking Statements" included at the end of this MD&A.
Quarterly Financial Summary
(millions, except per share and production amounts) (unaudited)
Three months ended
Production revenues Cash flow from operating activities
Mar. 31 2022 $ 203.7
Dec. 31 2021 $ 149.8
Sep. 30 2021 $ 124.5
June 30 2021 $ 111.0
Mar. 31 2021 $ 92.2
Dec. 31 2020 $ 72.8
Sep. 30 2020
June 30 2020
83.9
62.6
65.5
42.2
28.4
11.1
$ 75.4 $ 48.2 34.8 2.1
Basic per share (1)
Diluted per share (1)
Funds flow from operations (2)
1.03 1.00 78.6
0.81 0.78 80.0
0.88 0.85 59.3
0.57 0.55 42.3
0.39 0.37 36.3
0.15 0.15 26.4
0.47 0.03 0.47 0.03 30.4 24.7
Basic per share (3)
0.97
1.04
0.79
0.57
0.49
Diluted per share (3)
0.94
1.00
0.77
0.55
0.48
Net income (loss)
23.8
21.7
46.6
322.5
23.2
0.36 0.36 0.2
0.41 0.34 0.41 0.34 (3.2) (21.1)
Basic per share
0.29
0.28
0.62
4.33
0.32
0.01 (0.04) (0.29)
Diluted per share
$ 0.28
$ 0.27
$ 0.60
$ 4.23
$ 0.31
$ 0.01
$ (0.04) $ (0.29)Production Light oil (bbl/d) Heavy oil (bbl/d) NGLs (bbl/d) Natural gas (mmcf/d) Total (boe/d)
11,114
11,155
10,314
10,836
10,014
10,055
5,789
3,237
2,688
2,660
2,788
2,895
2,432
2,310
2,213
2,162
2,056
2,087
60
58
54
54
50
52
10,952 12,800 2,823 1,966 2,244 2,278 54 53
29,407
26,352
24,164
24,651
23,225
23,644
25,031
25,872
(1) Supplemental financial measure. See "Non-GAAP and Other Financial Measures".
(2) Non-GAAP financial measure. See "Non-GAAP and Other Financial Measures".
(3) Non-GAAP financial ratio. See "Non-GAAP and Other Financial Measures".
Cash flow from Operating Activities, Funds Flow from Operations and Free Cash Flow
Three months ended March 31
(millions, except per share amounts) Cash flow from operating activities Change in non-cash working capital Decommissioning expenditures Onerous office lease settlements Deferred financing costs Financing fees paid Restructuring charges (1) Transaction costs
2022
2021
$
83.9
$ 28.4
(18.0) 10.3
8.5 3.3
2.3 2.3
(0.7) (1.0)
- 4.1
2.5 (2.0)
0.1 0.1
Other expenses (1)
- (9.2)
Funds flow from operations (2) Capital expenditures Decommissioning expenditures Free Cash Flow (2)
78.6 36.3
(103.4) (29.5)
(8.5) (3.3)
$
(33.3)
$
3.5
Per share - funds flow from operations (3)
Basic per share
Diluted per share
$ $
0.97 $ 0.49
0.94 $ 0.48
(1) Excludes the non-cash portion of restructuring and other expenses.
(2) Non-GAAP financial measure. See "Non-GAAP and Other Financial Measures".
(3) Non-GAAP financial ratio. See "Non-GAAP and Other Financial Measures".
In Q1 2022, funds flow from operations and cash flow from operating activities were significantly higher compared to Q1 2021 due to 27 percent (approximately 6,200 boe per day) higher production volumes and higher commodity prices. In the second half of 2021 and into 2022, the Company increased development activities in response to higher commodity prices which led to higher production levels in 2022. Additionally, in Q4 2021, the Company acquired the remaining 45 percent interest of the Peace River Oil Partnership ("PROP") from our joint venture partner which increased production levels by approximately 2,400 boe per day.
These results were partially offset by higher share-based compensation charges in Q1 2022 of $22.7 million related to certain share based incentive plans, primarily due to the significant increase in the Company's share price and resultant mark-to-market charge (March 31, 2022 share price close of $11.08 compared to December 31, 2021 share price close of $5.21).
Business Strategy
Our strategy is focused on maintaining moderate production growth, operational excellence, improving our debt leverage and delivering top quartile total shareholder returns. We believe our plan to focus development activity on our Cardium and Peace River assets will generate value for all stakeholders. Our industry leading Cardium position with a deep inventory of high return wells offers a predictable, liquids weighted, production profile that is capable of generating growth and sustainable free cash flow. Additionally the Company's consolidation of the 100 percent interest in PROP combined with our recent success of adding to our substantial land position in Peace River results in an asset base with compelling Bluesky development and significant Clearwater potential for future heavy oil production growth and cash flow generation, offering further value for stakeholders.
During Q1 2022, our drilling program had four drilling rigs active which resulted in 15 wells (14.5 net) drilled in our Willesden Green and Pembina areas and an additional four wells (4.0 net) in our Peace River area. The strong results of our recent development program contributed to Q1 2022 production of 29,407 boe per day, our highest quarterly production level since 2018.
In conjunction with our plan to complete a debt refinancing during the first half of 2022 incorporating senior and subordinated debt, we are reevaluating our second half program and look to appropriately balance production growth, debt repayment and return of capital as we move forward through 2022.
In Q1 2022, we continued our participation in the Alberta Site Restoration Program ("ASRP"), focusing on inactive fields in Northern Alberta. Our decommissioning activity in 2021 and 2022 will benefit from over $37 million (gross) of ASRP grants, of which approximately $26.6 million (net) have been utilized since inception through to the end of Q1 2022.
Business Environment
The following table outlines quarterly averages for benchmark prices and Obsidian Energy's realized prices for the previous eight quarters.
Q1 2022
Q4 2021
Q3 2021
Q2 2021
Q1 2021
Q4 2020
Q3 2020
Q2 2020
Benchmark prices WTI oil ($US/bbl)
Edm mixed sweet par price (CAD$/bbl)
Western Canada Select (CAD$/bbl)
$ 94.29 115.64 100.99
$
NYMEX Henry Hub ($US/mmbtu) AECO Index (CAD$/mcf)
Foreign exchange rate ($US/CAD$)
4.95 4.74 1.27
77.19 93.36 78.82 5.83 4.66 1.26
$ 70.56 $ 83.77 71.80 4.01 3.60 1.26
66.07 $ 77.30 67.01 2.83 3.09 1.23
57.84 $ 66.61 57.45 3.56 3.15 1.27
42.66 $ 50.29 43.46 2.53 2.77 1.30
40.93
$ 27.85
49.83 29.55
42.41 22.42
2.00 1.72
2.24 1.99
1.33 1.39
Benchmark differentials
WTI - Edm Light Sweet ($US/bbl) WTI - WCS Heavy ($US/bbl)
(2.96) (14.53)
(3.10) (14.64)
(4.08) (13.58)
(3.11) (11.49)
(5.24) (12.47)
(4.07) (9.31)
(3.51) (6.14)
(9.08) (11.47)
Average sales price (1)
Light oil (CAD$/bbl)
117.91
92.55
84.27
Heavy oil (CAD$/bbl)
84.77
51.76
60.87
NGLs (CAD$/bbl)
68.09
59.46
52.79
Total liquids (CAD$/bbl)
101.72
80.07
75.55
76.97 48.58 42.79 66.95
67.34 40.48 41.04 58.27
50.76
50.84 29.20
30.00
29.54 5.98
24.61
22.11 11.65
43.14
43.06 24.18
Natural gas (CAD$/mcf)
$ 4.96
$
5.05
$
3.89 $
3.21 $ 3.21
$
2.81 $
2.40
$ 2.14
(1)Excludes the impact of realized hedging gains or losses.
Oil
In Q1 2022, WTI averaged US$94.29 per barrel and increased steadily throughout the period with March settling at approximately US$108 per barrel. The increase was mainly due to concerns regarding overall supply compounded by the conflict in Ukraine and the sanctions that followed on Russian oil exports.
In Q1 2022, both Mixed Sweet Blend ("MSW") and Western Canada Select ("WCS") differentials strengthened during the period as inventory levels in Western Canada were drawn down. For the quarter, the WCS differential averaged US$14.53 per barrel and MSW differential averaged US$2.96 per barrel off WTI.
The Company has the following oil contracts in place on a weighted average basis:
Notional
WTI
Term | volume | Pricing |
April 2022 | 8,183 bbl/d | $121.81/bbl |
May 2022 | 4,000 bbl/d | $133.42/bbl |
In addition, PROP Energy 45 Limited Partnership, our wholly owned limited recourse subsidiary that purchased 45 percent of the PROP units from a third party on November 24, 2021, entered into the following financial hedges in conjunction with the acquisition financing:
Notional
WTI
Heavy Oil - WCS Differential
Term | volume | Pricing |
Q2 2022 | 1,121 bbl/d | US$65.11/bbl |
Q3 2022 | 593 bbl/d | US$63.26/bbl |
Q4 2022 | 606 bbl/d | US$62.30/bbl |
Q2 2022 | 801 bbl/d | US($15.43)/bbl |
Natural Gas
NYMEX Henry Hub natural gas averaged US$4.95 per mmbtu for Q1 2022 reaching a high of US$6.70 per mmbtu in February as a result of higher demand due to cold weather and US LNG exports.
In Alberta, AECO 5A followed a similar trend to NYMEX Henry Hub averaging $4.74 per mcf for Q1 2022. AECO natural gas prices were impacted by cold weather in February, reaching a high of $6.15 per mcf before settling in the $4.00 per mcf range in March.
The Company has the following natural gas hedges in place on a weighted average basis:
Notional
Term | volume | Pricing |
April 2022 | 21,326 mcf/d | $4.43/mcf |
May - October 2022 | 26,065 mcf/d | $4.74/mcf |
OBSIDIAN ENERGY FIRST QUARTER 2022 |
Average Sales Prices
Three months ended March 31
2022
2021
% changeLight oil (per bbl)
$
117.91 $
67.34 75
Heavy oil (per bbl)
84.77
40.48 109
NGLs (per bbl)
68.09
38.20 78
Total liquids (per bbl)
101.72
58.27 75
Risk management loss (per bbl)
(10.07)
(3.82) 164
Total liquids price, net (per bbl)
91.65
54.45 68
Natural gas (per mcf)
Risk management gain (per mcf)
Natural gas net (per mcf)
4.96 0.02 4.98
3.21 55
- 3.21
Weighted average (per boe)
Risk management loss (per boe)
77.07 (6.58)
44.21 (2.44)
Weighted average net (per boe)
$
70.49
$
41.77
- 55 74 170 69
RESULTS OF OPERATIONS
Production
Three months ended March 31
Daily production
2022
Light oil (bbls/d) 11,114
Heavy oil (bbls/d) 5,789
NGLs (bbls/d) 2,432
Natural gas (mmcf/d) 60
Total production (boe/d)
29,407
2021 | % change |
10,014 | 11 |
2,788 | 108 |
2,056 | 18 |
50 | 20 |
23,225 | 27 |
Production levels have increased in Q1 2022 compared to the prior period due to strong results from the Company's development program. Additionally, in Q4 2021 the Company acquired the remaining 45 percent interest in PROP which contributed 2,400 boe per day of primarily heavy oil production. In the comparable period of 2021, production results were impacted by minimal development activity as the Company had recently restarted drilling activity as commodity price started to improve at that time.
The Company has completed our 2021 development program with all wells on production by the end of Q1 2022. From our 2022 development program four wells (3.8 net) were on production by the end of the quarter with strong results.
Average production within the Company's key development areas and within the Company's Legacy asset area was as follows:
Three months ended March 31
Daily production (boe/d) (1) | 2022 | 2021 | % change |
Cardium | 21,878 | 19,056 | 15 |
Peace River | 6,469 | 3,012 | 115 |
Alberta Viking | 690 | 794 | (13) |
Legacy | 370 | 363 | 2 |
Total | 29,407 | 23,225 | 27 |
(1)Refer to "Supplemental Production Disclosure" for details by product type.
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Obsidian Energy Ltd. published this content on 04 May 2022 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 04 May 2022 11:20:02 UTC.
