Obsidian Energy Ltd 6-K, filed Nov 8, 2021
Obsidian Energy Ltd. (OBE)
About this 6-K
Obsidian Energy Ltd filed this 6-K on November 8, 2021.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 6-K
REPORT OF FOREIGN PRIVATE ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16
OF THE SECURITIES EXCHANGE ACT OF 1934
For the month of November 2021
Commission File Number 1-32895
Obsidian Energy Ltd.
(Translation of registrant’s name into English)
Suite 200, 207 – 9th Avenue SW
Calgary, Alberta T2P 1K3
Canada
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.)
Form 20-F ☐ Form 40-F ☒
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1) ☐
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7) ☐
DOCUMENTS INCLUDED AS PART OF THIS FORM 6-K
See the Exhibit Index hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on November 8, 2021.
| OBSIDIAN ENERGY LTD. | ||
| By: | /s/ Stephen Loukas | |
| Name: | Stephen Loukas | |
| Title: | Interim President and Chief Executive Officer | |
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EXHIBIT INDEX
| Exhibit |
Description | |
| 99.1 | News Release, dated November 8, 2021 | |
| 99.2 | Management’s Discussion and Analysis for the three and nine months ended September 30, 2021 | |
| 99.3 | Financial Statements for the three and nine months ended September 30, 2021 | |
| 99.4 | Quarterly Certification of the Chief Executive Officer under Canadian law | |
| 99.5 | Quarterly Certification of the Chief Financial Officer under Canadian law | |
Exhibit 99.1
Obsidian Energy Announces Third Quarter Results with Continued Increasing Funds Flow from Operations
• Successful drilling results to date in the second half 2021 drilling program
• Continued debt pay down and higher funds flow from operations
• Acquisition of remaining Peace River Oil Partnership ownership subsequent to the quarter
CALGARY, November 8, 2021 - OBSIDIAN ENERGY LTD. (TSX – OBE, OTCQX – OBELF) (“Obsidian Energy”, the “Company”, “we”, “us” or “our”) is pleased to report strong operating and financial results for the third quarter 2021.
| Three Months Ended September 30 |
Nine Months Ended September 30 |
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| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| FINANCIAL (millions, except per share amounts) |
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| Cash flow from operations |
65.5 | 34.8 | 135.8 | 68.3 | ||||||||||||
| Basic per share ($/share) |
0.88 | 0.47 | 1.83 | 0.93 | ||||||||||||
| Diluted per share ($/share) |
0.85 | 0.47 | 1.78 | 0.93 | ||||||||||||
| Funds flow from operations1 |
59.3 | 30.4 | 137.9 | 91.4 | ||||||||||||
| Basic per share ($/share)1 |
0.79 | 0.41 | 1.86 | 1.25 | ||||||||||||
| Diluted per share ($/share)1 |
0.77 | 0.41 | 1.81 | 1.25 | ||||||||||||
| Net income (loss) |
46.6 | (3.2 | ) | 392.3 | (771.9 | ) | ||||||||||
| Basic per share ($/share) |
0.62 | (0.04 | ) | 5.28 | (10.55 | ) | ||||||||||
| Diluted per share ($/share) |
0.60 | (0.04 | ) | 5.14 | (10.55 | ) | ||||||||||
| Capital expenditures |
45.1 | 4.6 | 96.1 | 45.6 | ||||||||||||
| Decommissioning expenditures |
1.6 | 0.6 | 5.4 | 8.8 | ||||||||||||
| Net debt1 |
428.1 | 478.9 | 428.1 | 478.9 | ||||||||||||
| OPERATIONS |
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| Daily Production |
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| Light oil (bbl/d) |
10,314 | 10,952 | 10,389 | 12,084 | ||||||||||||
| Heavy oil (bbl/d) |
2,688 | 2,823 | 2,712 | 2,811 | ||||||||||||
| NGL (bbl/d) |
2,213 | 2,244 | 2,144 | 2,254 | ||||||||||||
| Natural gas (mmcf/d) |
54 | 54 | 53 | 53 | ||||||||||||
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| Total production2 (boe/d) |
24,164 | 25,031 | 24,017 | 25,995 | ||||||||||||
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| Average sales price3 |
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| Light oil ($/bbl) |
84.27 | 50.84 | 76.35 | 43.14 | ||||||||||||
| Heavy oil ($/bbl) |
60.87 | 29.54 | 49.94 | 19.99 | ||||||||||||
| NGL ($/bbl) |
52.79 | 22.11 | 43.64 | 18.73 | ||||||||||||
| Natural gas ($/mcf) |
3.89 | 2.40 | 3.44 | 2.25 | ||||||||||||
| Netback1 ($/boe) |
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| Sales price |
56.21 | 32.74 | 50.11 | 28.43 | ||||||||||||
| Risk management gain (loss) |
(0.93 | ) | (0.42 | ) | (1.27 | ) | 2.98 | |||||||||
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| Net sales price |
55.28 | 32.32 | 48.84 | 31.41 | ||||||||||||
| Royalties |
(5.99 | ) | (1.42 | ) | (4.56 | ) | (1.48 | ) | ||||||||
| Net operating expenses1 |
(13.28 | ) | (11.36 | ) | (13.50 | ) | (10.65 | ) | ||||||||
| Transportation |
(2.41 | ) | (2.13 | ) | (2.05 | ) | (2.01 | ) | ||||||||
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| Netback1 ($/boe) |
33.60 | 17.41 | 28.73 | 17.27 | ||||||||||||
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| (1) | The terms funds flow from operations (“FFO”) and their applicable per share amounts, “net debt”, “netback” and “net operating costs” are non-GAAP measures. Please refer to the “Non-GAAP Measures” advisory section below for further details. |
| (2) | Please refer to the “Oil and Gas Information Advisory” section below for information regarding the term “boe”. |
| (3) | Before risk management gains/(losses). |
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 nine months ended September 30, 2021 on our website at www.obsidianenergy.com, which will be filed on SEDAR and EDGAR in due course.
KEY THIRD QUARTER 2021 RESULTS
We benefitted from favourable commodity prices in the third quarter, resulting in FFO, free cash flow generation and further debt reduction. Production levels continued to be strong, supported by a combination of our 2021 development program results and continued outperformance of our base production. Our development program was extremely active with 11 operated wells (10.2 net) rig released during the period, the majority of which were brought on production in October.
2021 Third Quarter Financial Highlights
| • | Strong Funds Flow – FFO was $59.3 million ($0.79 per share) for the third quarter of 2021, an increase from the second quarter of 2021 ($42.3 million; $0.57 per share) and the third quarter of 2020 ($30.4 million; $0.41 per share). Higher commodity prices and continued strong production performance drove the increase. |
| • | Capital Development Program Growth – We entered the third quarter with momentum with our capital expenditures totalling $45.1 million (2020: $4.6 million) over the quarter. Our development activities were predominately focused on the Cardium formation in the Willesden Green and Pembina areas with 11 wells (10.2 net) rig released and three wells (3.0 net) on production during the quarter. |
| • | Continued Debt Reduction – Continued strong free cash flow generation resulted in a decrease in net debt to $428.1 million as at September 30, 2021, compared to $478.9 million at September 30, 2020. This included $340.0 million drawn on our syndicated credit facility (down from $395.0 million as at September 30, 2020), $58.9 million of senior notes and $29.2 million of a working capital deficiency. |
| • | Solid G&A Costs – Third quarter 2021 general and administrative (“G&A”) costs were $1.82 per boe compared to $1.40 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. |
| • | Maintained Operating Costs – Net operating costs of $13.28 per boe were lower than the second quarter of 2021 ($13.71 per boe) but higher than the third quarter of 2020 ($11.36 per boe). Similar to G&A, operating costs reflect the return to normal activity levels in 2021 compared to 2020, where the Company restricted discretionary spending and shut-in production due to the low commodity price environment. |
| • | Higher Net Income – Net income of $46.6 million ($0.62 per share) in the third quarter of 2021 benefitted from higher FFO and a net impairment reversal of $22.3 million. This compared to a net loss of $3.2 million ($0.04 per share) in 2020, largely due to the lower commodity price environment at that time. |
2021 Third Quarter Operational Highlights
| • | Increased Production Guidance – Continued strong performance from our base volumes and new well additions over 2021 resulted in average production of 24,164 boe/d in the third quarter of 2021. With two drilling rigs active in our Cardium assets, we brought three new wells on production in September, and expect to bring an additional 14 (13.0 net) wells on production in the fourth quarter and 13 (12.6 net) wells in the first quarter of 2022. Based on these results, we recently increased our full-year 2021 production guidance to between 24,300 and 24,500 boe/d, prior to the Peace River Oil Partnership (“PROP”) acquisition. |
| • | Return to Peace River Area – The Company resumed development drilling in our Peace River asset in conjunction with our recent proposed acquisition (see “Highlights Subsequent to the Quarter”) |
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| combined with the strong commodity price environment. Four infill development wells are planned for the fourth quarter, which are expected to be on stream by the end of January 2022. |
| • | Accelerated 2022 Development Program – The early start to our second half 2021 development program in June allowed the Company to accelerate our 2022 development program with the planned acceleration of three Cardium (2.8 net) wells into December 2021. Our 2022 program will benefit by maintaining access to the drilling rigs, minimizing mobilization costs and continuing drilling into 2022. |
| • | Reduction in Decommissioning Liabilities – A total of 80 net wells and 27 net kilometres of pipeline was abandoned during the third quarter of 2021 through participation in the Area Based Closure (“ABC”) program and the Alberta Site Rehabilitation Program (“ASRP”). We spent $1.6 million and utilized $2.9 million of net grants in the third quarter. |
Production Volumes by Product and Producing Region
Three Months Ended September 30, 2021
| Area |
Production (boe/d) |
Light Oil (bbl/d) |
Heavy Oil (bbl/d) |
NGLs (bbl/d) |
Gas (mmcf/d) |
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| Cardium |
19,807 | 9,988 | 60 | 2,127 | 46 | |||||||||||||||
| Viking |
822 | 177 | 122 | 49 | 3 | |||||||||||||||
| Peace River |
2,974 | — | 2,449 | 2 | 3 | |||||||||||||||
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| Key Development Areas |
23,603 | 10,165 | 2,631 | 2,178 | 52 | |||||||||||||||
| Legacy Areas |
561 | 149 | 57 | 35 | 2 | |||||||||||||||
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| Key Development & Legacy Areas |
24,164 | 10,314 | 2,688 | 2,213 | 54 | |||||||||||||||
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Highlights Subsequent to the Quarter
| • | Acquired Remaining Interest in Peace River – Subsequent to the quarter, we entered into a purchase and sale agreement (the “Agreement”) to acquire the remaining 45 percent partnership interest in the Peace River Oil Partnership (“PROP”) asset from our joint venture partner (the “Vendor”), through a wholly-owned subsidiary (the “Acquisition”). Based on the purchase price of $43.5 million, consideration at closing is expected to be approximately $36 million. The Acquisition has an effective date of July 1, 2021 with closing expected during the week of November 15, 2021. |
| • | Commenced Equity Offering – The Acquisition will be partially funded through a “best efforts” marketed equity offering of subscription receipts for gross proceeds of up to $22.5 million at $4.40 per subscription receipt. The remainder of the cash funding will be from a limited recourse debt financing against the acquired interest. |
| • | Amended Senior Credit Facility and Senior Note Repayment – In connection with the Acquisition, we have agreed to reduce our aggregate syndicated credit facility commitment amount by $25 million to $415 million at closing of the transaction. At the same time, the Company will repay approximately $3.3 million of its senior notes, which will leave approximately US$43.7 million outstanding with a maturity date of November 30, 2022. |
| • | Extended Employment Contract – The Company extended Stephen Loukas’s employment contract as Interim President and CEO to December 31, 2022, subject to the option to terminate, if mutually agreeable to both parties, on July 1, 2022. |
We refer you to our recent release dated November 2, 2021 for more details about the PROP Acquisition and its associated transactions.
2021 DEVELOPMENT PROGRAM UPDATE
Our second half development program advanced substantially with the drilling of 11 wells (10.2 net) and three gross/net wells brought on production in the quarter. Subsequent to the quarter, development activity has been significant with an additional five wells (4.8 net) rig-released and eight wells (7.2 net) brought on stream. On October 27, we announced the acceleration of three wells from our 2022 program to ensure
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uninterrupted drilling into 2022, allowing us to secure access to the drilling rigs and to minimize mobilization costs.
| • | Willesden Green: Subsequent to our October 27 update, we rig released our ninth Cardium well in our second half program – the final of four wells (4.0 net) on the 6-22 Faraway pad. The wells are expected to undergo fracturing operations during the second week of November and be on production in mid-December. Drilling is underway on the first of two wells on our 4-17 Faraway pad site prior to finishing the year with one well at our existing 1-25 Crimson pad and an accelerated 2022 well at our 8-3 Faraway pad. These final four wells (4.0 net) are anticipated to be on production in early February of 2022. |
Results for our earlier second-half 2021 wells are as follows:
| ○ | 3-3 pad – IP30 rates for the two wells averaged 494 boe/d (70 percent light oil) |
| ○ | 3-29 pad – IP30 rate for the well was 201 boe/d (84 percent light oil) |
| ○ | 1-33 pad – IP30 rate on the first well was 218 boe/d (71 percent light oil); following a pump repair, the second well averaged 372 boe/d (66 percent light oil) over the past 22 days |
| • | Pembina: We rig-released an additional Cardium well (0.9 net) since our last update, bringing the total to five Cardium wells (4.5 net) as part of our second half program. The first well at the 7-17 pad has produced at an average rate of 310 boe/d (69 percent light oil) for the 15 days post-cleanup. The remaining two wells have minor interventions underway with continuous production expected to begin in mid-November. The three remaining Pembina Cardium wells (2.8 net) from the 2021 program will be drilled in November and early December and are expected to be completed and brought on production in January 2022. In December 2021, we anticipate rig releasing the first of two additional, accelerated wells (1.8 net), with the second well finishing drilling in early January. |
The two vertical non-Cardium wells (1.5 net) rig-released in October continue to produce at strong rates. The first well averaged 331 boe/d (97 percent light oil) over its first twenty-five days. The second well produced at an average of 222 boe/d (95 percent light oil) over its 10 days of production post-cleanup.
| • | PROP: As part our 2021 development program, the Company is returning to drilling in our Peace River asset in the fourth quarter of 2021 with a four-well program (at 100 percent working interest post Acquisition). These wells target the Bluesky formation from our existing pads: three wells at the 6-31 pad and one at the 14-25 pad. Production from the four wells is expected to be on stream by the end of January 2022. |
A summary of this year’s completed and planned activity in our development program is as follows, with assumptions that the Acquisition is closed and our interest now at 100 percent:
| Operated Wells Rig Released Gross (net) |
Operated Wells On Production Gross (net) | |||||||||
| Q1 2021 |
6 (6.0 | ) | 3 (3.0 | )1 | ||||||
| Q2 2021 |
3 (3.0 | ) | 6 (6.0 | ) | ||||||
| Q3 2021 |
11 (10.2 | ) | 3 (3.0 | ) | ||||||
| Q4 2021E |
16 (15.5 | ) | 14 (13.0 | ) | ||||||
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| TOTAL |
36 (34.7 | ) | 26 (25.0 | )2 | ||||||
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| (1) | On-stream count includes 1 well rig-released in 2020. |
| (2) | 2 wells (1.9 net) spud in 2021 are expected to be rig released in 2022. |
Including these 2 wells, 13 wells (12.6 net) from the 2021 program will start production in the first quarter of 2022.
Additional details regarding the status of our 2021 development program can be found in our recent operations update release.
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2021 UPDATED GUIDANCE
As per our PROP Acquisition news release of November 2, 2021, we updated our pro-forma guidance for 2021 after giving effect to the Acquisition, assuming the Acquisition closes during the week of November 15, 2021, and incorporating our third quarter and nine-month 2021 results. Using the mid-point of our post-acquisition guidance, we expect fourth quarter 2021 production to average approximately 26,730 boe/d, generating funds flow from operations of approximately $88 million.
| 2021E Post-Acquisition Guidance |
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| Production1 |
boe/d | 24,600 – 24,800 | ||||
| % Oil and NGLs |
% | 64 | % | |||
| Capital Expenditures2 |
$ millions | 141 – 143 | ||||
| Decommissioning Expenditures3 |
$ millions | 8 | ||||
| Net Operating Costs |
$/boe | 12.95 – 13.15 | ||||
| General & Administrative |
$/boe | 1.70 – 1.80 | ||||
| Based on midpoint of above guidance |
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| WTI Range |
US$/bbl | 75.00 – 80.00 | ||||
| Funds Flow from Operations4, 5, 6 |
$ millions | 223 – 228 | ||||
| Free Cash Flow2, 4, 5, 6 |
$ millions | 72 – 77 | ||||
| Net Debt |
$ millions | 404 – 409 | ||||
| (1) | Mid-point of guidance range:10,660 bbl/d light oil, 2,900 bbl/d heavy oil, 2,205 bbl/d NGLs and 53.6 mmcf/d natural gas. |
| (2) | Includes capital cost updates for PROP Q4 drilling at 100% OBE and otherwise excludes acquisitions |
| (3) | Decommissioning expenditures do not include grants and allocations to be utilized by the Company under the ASRP. |
| (4) | Includes approximately $15 million of estimated charges for full year 2021 related to the deferred share units, preferred share units and non-treasury incentive plan cash compensation amounts which are based on the Company’s closing share price on September 30, 2021 of $4.51 per share. The charge is primarily due to the Company’s increased share price in 2021 compared to the closing price on December 31, 2020 of $0.87 per share. |
| (5) | Includes actual WTI and natural gas prices for the first nine months of 2021. Pricing assumptions outlined are forecasted for the fourth quarter of 2021. Risk management (hedging) adjustments incorporated into 2021 guidance as at October 26, 2021. |
| (6) | Includes actual AECO prices for the first nine months of 2021 and AECO forward strip pricing as of October 26, 2021. |
HEDGING UPDATE
The Company has the following financial oil and gas contracts in place on a weighted average basis:
| Term |
Notional Volume | Pricing (CAD) | ||||||
| Oil - WTI |
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| October 2021 |
7,750 bbl/d | $ | 92.59/bbl | |||||
| November 2021 |
6,500 bbl/d | $ | 100.39/bbl | |||||
| December 2021 |
500 bbl/d | $ | 100.00/bbl | |||||
| Natural Gas - AECO |
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| October 2021 |
23,695 mcf/d | $ | 2.70/mcf | |||||
| November 2021 – March 2022 |
25,591 mcf/d | $ | 4.63/mcf |
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Additionally, the Company has the following physical contracts in place:
| Notional Volume |
Term | Pricing (CAD) | ||||||||
| Heavy Oil Differential1 – USD |
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| 550 bbl/d | Oct – Dec 2021 | US$ | 26.00/bbl | |||||||
| (1) | Hedged on a USD basis and inclusive of WCS differential, quality, and transportation charges. |
ADDITIONAL READER ADVISORIES
OIL AND GAS INFORMATION ADVISORY
Barrels of oil equivalent (“boe”) may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of crude oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of crude oil as compared to natural gas is significantly different from the energy equivalency conversion ratio of 6:1, utilizing a conversion on a 6:1 basis is misleading as an indication of value.
TEST RESULTS AND INITIAL PRODUCTION RATES
Test results and initial production rates disclosed herein, particularly those short in duration, may not necessarily be indicative of long term performance or of ultimate recovery. Readers are cautioned that short term rates should not be relied upon as indicators of future performance of these wells and therefore should not be relied upon for investment or other purposes. A pressure transient analysis or well-test interpretation has not been carried out and thus certain of the test results provided herein should be considered to be preliminary until such analysis or interpretation has been completed.
NON-GAAP MEASURES
Certain financial measures including FFO, FFO per share-basic, FFO per share-diluted, free cash flow, netback, net operating costs and net debt, included in this release do not have a standardized meaning prescribed by IFRS and therefore are considered non-GAAP measures; accordingly, they may not be comparable to similar measures provided by other issuers. FFO is cash flow from operating activities before changes in non-cash working capital, decommissioning expenditures, office lease settlements, the effects of financing related transactions from foreign exchange contracts and debt repayments and certain other expenses and is representative of cash related to continuing operations. FFO is used to assess the Company’s ability to fund its planned capital programs. See “Calculation of Funds Flow from Operations” below for a reconciliation of FFO to cash flow from operating activities, being its nearest measure prescribed by IFRS. Free cash flow is funds flow from operations less capital and decommissioning expenditures. Netback is the per unit of production amount of revenue less royalties, net operating costs, transportation expenses and realized risk management gains and losses, and is used in capital allocation decisions and to economically rank projects. Net operating costs are calculated by deducting processing income and road use recoveries and is used to assess the Company’s cost position. Processing fees are primarily generated by processing third party volumes at the Company’s facilities. In situations where the Company has excess capacity at a facility, it may agree with third parties to process their volumes as a means to reduce the cost of operating/owning the facility. Road use recoveries are a cost recovery for the Company as we operate and maintain roads that are also used by third parties. Net debt is the total of long-term debt and working capital deficiency and is used by the Company to assess its liquidity. These non-GAAP measures are further described and defined in the MD&A. See the MD&A for reconciliations of netback, net operating costs and net debt to the nearest GAAP measures, as applicable.
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CALCULATION OF FUNDS FLOW FROM OPERATIONS
| Three months ended September 30 |
Nine months ended September 30 |
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| (millions, except per share amounts) | 2021 | 2020 | 2021 | 2020 | ||||||||||||
| Cash flow from operating activities |
$ | 65.5 | $ | 34.8 | $ | 135.8 | $ | 68.3 | ||||||||
| Change in non-cash working capital |
(9.1 | ) | (11.1 | ) | (1.1 | ) | (1.0 | ) | ||||||||
| Decommissioning expenditures |
1.6 | 0.6 | 5.4 | 8.8 | ||||||||||||
| Onerous office lease settlements |
2.3 | 2.4 | 7.0 | 7.4 | ||||||||||||
| Deferred financing costs |
(1.7 | ) | — | (4.4 | ) | — | ||||||||||
| Financing fees paid |
— | — | 4.4 | — | ||||||||||||
| Realized foreign exchange loss – debt maturities |
— | — | 0.3 | — | ||||||||||||
| Restructuring charges1 |
0.1 | — | (1.8 | ) | 0.3 | |||||||||||
| Transaction costs |
— | 2.9 | — | 2.9 | ||||||||||||
| Other expenses1 |
0.6 | 0.8 | (7.7 | ) | 4.7 | |||||||||||
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| Funds flow from operations |
$ | 59.3 | $ | 30.4 | $ | 137.9 | $ | 91.4 | ||||||||
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| Per share |
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| Basic per share |
$ | 0.79 | $ | 0.41 | $ | 1.86 | $ | 1.25 | ||||||||
| Diluted per share |
$ | 0.77 | $ | 0.41 | $ | 1.81 | $ | 1.25 | ||||||||
| (1) | Excludes the non-cash portion of restructuring and other expenses. |
ABBREVIATIONS
| Oil |
Natural Gas | |||||
| bbl |
barrel or barrels | mcf | thousand cubic feet | |||
| bbl/d |
barrels per day | mmcf | million cubic feet | |||
| boe |
barrel of oil equivalent | mmcf/d | million cubic feet per day | |||
| boe/d |
barrels of oil equivalent per day | AECO | Alberta benchmark price for natural gas | |||
| MSW |
Mixed Sweet Blend | NGL | natural gas liquids | |||
| WTI |
West Texas Intermediate | |||||
FUTURE-ORIENTED FINANCIAL INFORMATION
This release contains future-oriented financial information (“FOFI”) and financial outlook information relating to the Company’s prospective results of operations, operating costs, expenditures, production, Funds Flow from Operations, Free Cash Flow, Net Operating Costs and Net Debt, which are subject to the same assumptions, risk factors, limitations, and qualifications as set forth below under “Forward-Looking Statements”. The Company’s actual results, performance or achievement could differ materially from those expressed in, or implied by, such FOFI, or if any of them do so, what benefits the Company will derive therefrom. The Company has included this FOFI in order to provide readers with a more complete perspective on the Company’s business as of the date hereof and such information may not be appropriate for other purposes.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this document constitute forward-looking statements or information (collectively “forward-looking statements”) within the meaning of the “safe harbour” provisions of applicable securities legislation. Forward-looking statements are typically identified by words such as “anticipate”, “continue”, “estimate”, “expect”, “forecast”, “budget”, “may”, “will”, “project”, “could”, “plan”, “intend”, “should”, “believe”, “outlook”, “objective”, “aim”, “potential”, “target” and similar words suggesting future events or future performance. In addition, statements relating to “reserves” or “resources” are
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deemed to be forward-looking statements as they involve the implied assessment, based on certain estimates and assumptions, that the reserves and resources described exist in the quantities predicted or estimated and can be profitably produced in the future. In particular, this document contains forward-looking statements pertaining to, without limitation, the following: that we will file the unaudited interim consolidated financial statements and MD&A on SEDAR and EDGAR in due course; the anticipated closing date of the Acquisition; our expected fourth quarter of 2021 and first quarter of 2022 drilling program and anticipated results thereof, including, but not limited to, the locations and number of wells and the impact of the drilling program impact on mobilization costs and continued drilling; our increase to our full-year 2021 production guidance; the anticipated timing of certain fracturing operations; the timing of certain wells coming onto production; and the Corporation’s pro-forma guidance for 2021 and anticipated results for the fourth quarter of 2021.
With respect to forward-looking statements and FOFI contained in this document, the Company has made assumptions regarding, among other things: that the Company does not dispose of or acquire material producing properties or royalties or other interests therein other than stated herein (provided that, except where otherwise stated, the forward-looking statements and FORI contained herein (including our guidance set out under “2021 Updated Guidance”) do not assume the completion of any transaction other than the Acquisition); the impact of regional and/or global health related events, including the ongoing COVID-19 pandemic, on energy demand and commodity prices; that the Company’s operations and production will not be disrupted by circumstances attributable to the COVID-19 pandemic and the responses of governments and the public to the pandemic; global energy policies going forward, including the continued ability of members of OPEC, Russia and other nations to agree on and adhere to production quotas from time to time; our ability to qualify for (or continue to qualify for) new or existing government programs created as a result of the COVID-19 pandemic (including the CEWS and ASRP) or otherwise, and obtain financial assistance therefrom, and the impact of those programs on our financial condition; our ability to execute our plans as described herein and in our other disclosure documents and the impact that the successful execution of such plans will have on our Company and our stakeholders; future capital expenditure and decommissioning expenditure levels; future operating costs and G&A costs; future crude oil, natural gas liquids and natural gas prices and differentials between light, medium and heavy oil prices and Canadian, WTI and world oil and natural gas prices; future hedging activities; future crude oil, natural gas liquids and natural gas production levels, including that we will not be required to shut-in production due to low commodity prices or the further deterioration of commodity prices; future exchange rates and interest rates; future debt levels; our ability to execute our capital programs as planned without significant adverse impacts from various factors beyond our control, including extreme weather events, wild fires, infrastructure access and delays in obtaining regulatory approvals and third party consents; our ability to obtain equipment in a timely manner to carry out development activities and the costs thereof; our ability to market our oil and natural gas successfully to current and new customers; our ability to obtain financing on acceptable terms, including our ability (if necessary) to continue to extend the revolving period and term out period of our credit facility, our ability to maintain the existing borrowing base under our credit facility, our ability to renew or replace our syndicated bank facility and our ability to finance the repayment of our senior notes on maturity; and our ability to add production and reserves through our development and exploitation activities.
Although the Company believes that the expectations reflected in the forward-looking statements and FOFI contained in this document, and the assumptions on which such forward-looking statements and FOFI are made, are reasonable, there can be no assurance that such expectations will prove to be correct. Readers are cautioned not to place undue reliance on forward-looking statements and FOFI included in this document, as there can be no assurance that the plans, intentions or expectations upon which the forward-looking statements are based will occur. By their nature, forward-looking statements and FOFI involve numerous assumptions, known and unknown risks and uncertainties that contribute to the possibility that the forward-looking statements and FOFI contained herein will not be correct, which may cause our actual performance and financial results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements and FOFI. These risks and uncertainties include, among other things: the possibility that the Company will not be able to continue to successfully execute our business plans and strategies in part or in full, and the possibility that some or all of the benefits that the Company anticipates will accrue to our Company and our stakeholders as a result of the successful execution of such plans and strategies do not materialize; the possibility that
8
the Company is unable to complete one or more of the potential transactions being pursued, on favorable terms or at all , including but not limited to the Acquisition and the financings being undertaken in connection therewith; the possibility that the Company ceases to qualify for, or does not qualify for, one or more existing or new government assistance programs implemented in connection with the COVID-19 pandemic and other regional and/or global health related events or otherwise, that the impact of such programs falls below our expectations, that the benefits under one or more of such programs is decreased, or that one or more of such programs is discontinued; the impact on energy demand and commodity prices of regional and/or global health related events, including the ongoing COVID-19 pandemic, and the responses of governments and the public to the pandemic, including the risk that the amount of energy demand destruction and/or the length of the decreased demand exceeds our expectations; the risk that the significant decrease in the valuation of oil and natural gas companies and their securities and the decrease in confidence in the oil and natural gas industry generally that has been caused by the COVID-19 pandemic persists or worsens; the risk that the COVID-19 pandemic adversely affects the financial capacity of the Company’s contractual counterparties and potentially their ability to perform their contractual obligations; the possibility that the revolving period and/or term out period of our credit facility and the maturity date of our senior notes is not further extended (if necessary), that the borrowing base under our credit facility is reduced, that the Company is unable to renew our credit facilities on acceptable terms or at all and/or finance the repayment of our senior notes when they mature on acceptable terms or at all and/or obtain debt and/or equity financing to replace one or both of our credit facilities and senior notes; the possibility that we breach one or more of the financial covenants pursuant to our agreements with our lenders and the holders of our senior notes; the possibility that we are forced to shut-in production, whether due to commodity prices failing to rise or decreasing further or changes to existing government curtailment programs or the imposition of new programs; the risk that OPEC, Russia and other nations fail to agree on and/or adhere to production quotas from time to time that are sufficient to balance supply and demand fundamentals for crude oil; general economic and political conditions in Canada, the U.S. and globally, and in particular, the effect that those conditions have on commodity prices and our access to capital; industry conditions, including fluctuations in the price of crude oil, natural gas liquids and natural gas, price differentials for crude oil and natural gas produced in Canada as compared to other markets, and transportation restrictions, including pipeline and railway capacity constraints; fluctuations in foreign exchange or interest rates; unanticipated operating events or environmental events that can reduce production or cause production to be shut-in or delayed (including extreme cold during winter months, wild fires and flooding); the possibility that fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to hydrocarbons and technological advances in fuel economy and renewable energy generation systems could permanently reduce the demand for oil and natural gas and/or permanently impair the Company’s ability to obtain financing on acceptable terms or at all, and the possibility that some or all of these risks are heightened as a result of the response of governments and consumers to the ongoing COVID-19 pandemic. Additional information on these and other factors that could affect Obsidian Energy, or its operations or financial results, are included in the Company’s Annual Information Form (See “Risk Factors” and “Forward-Looking Statements” therein) which may be accessed through the SEDAR website (www.sedar.com), EDGAR website (www.sec.gov) or Obsidian Energy’s website. Readers are cautioned that this list of risk factors should not be construed as exhaustive.
Unless otherwise specified, the forward-looking statements and FOFI contained in this document speak only as of the date of this document. Except as expressly required by applicable securities laws, we do not undertake any obligation to publicly update or revise any forward. The forward-looking statements and FOFI contained in this document are expressly qualified by this cautionary statement.
Obsidian Energy shares are listed on both the Toronto Stock Exchange in Canada and the OTCQX Market in the United States under the symbol “OBE” and “OBELF” respectively.
All figures are in Canadian dollars unless otherwise stated.
9
CONTACT
OBSIDIAN ENERGY
Suite 200, 207 - 9th Avenue SW, Calgary, Alberta T2P 1K3
Phone: 403-777-2500
Toll Free: 1-866-693-2707
Website: www.obsidianenergy.com;
Investor Relations:
Toll Free: 1-888-770-2633
E-mail: investor.relations@obsidianenergy.com
10
Exhibit 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the three and nine months ended September 30, 2021
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 and nine months ended September 30, 2021 and the Company’s audited consolidated financial statements and MD&A for the year ended December 31, 2020. The date of this MD&A is November 5, 2021. All dollar amounts contained in this MD&A are expressed in millions of Canadian dollars unless noted otherwise.
Certain financial measures such as funds flow from operations, funds flow from operations per share-basic, funds flow from operations per share-diluted, free cash flow, netback, net operating costs, gross revenues and net debt included in this MD&A do not have a standardized meaning prescribed by International Financial Reporting Standards (“IFRS”) and therefore are considered non-GAAP measures; accordingly, they may not be comparable to similar measures provided by other issuers. 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 Measures”, “Oil and Gas Information”, and “Forward-Looking Statements” included at the end of this MD&A.
Within this MD&A the Company has updated the presentation of our financial figures to disclose dollar figures rounded to the nearest hundred thousand. This may result in immaterial differences in the comparative figures.
Quarterly Financial Summary
(millions, except per share and production amounts) (unaudited)
| Sep. 30 | June 30 | Mar. 31 | Dec. 31 | Sep. 30 | June 30 | Mar. 31 | Dec. 31 | |||||||||||||||||||||||||
| Three months ended |
2021 | 2021 | 2021 | 2020 | 2020 | 2020 | 2020 | 2019 | ||||||||||||||||||||||||
| Production revenues |
$ | 124.5 | $ | 111.0 | $ | 92.2 | $ | 72.8 | $ | 75.4 | $ | 48.2 | $ | 79.0 | $ | 111.6 | ||||||||||||||||
| Cash flow from operations |
65.5 | 42.2 | 28.1 | 11.1 | 34.8 | 2.1 | 31.4 | 49.5 | ||||||||||||||||||||||||
| Basic per share |
0.88 | 0.57 | 0.38 | 0.15 | 0.47 | 0.03 | 0.43 | 0.68 | ||||||||||||||||||||||||
| Diluted per share |
0.85 | 0.55 | 0.37 | 0.15 | 0.47 | 0.03 | 0.43 | 0.68 | ||||||||||||||||||||||||
| Funds flow from operations (1) |
59.3 | 42.3 | 36.3 | 26.4 | 30.4 | 24.7 | 36.3 | 54.2 | ||||||||||||||||||||||||
| Basic per share |
0.79 | 0.57 | 0.49 | 0.36 | 0.41 | 0.34 | 0.50 | 0.74 | ||||||||||||||||||||||||
| Diluted per share |
0.77 | 0.55 | 0.48 | 0.36 | 0.41 | 0.34 | 0.50 | 0.74 | ||||||||||||||||||||||||
| Net income (loss) |
46.6 | 322.5 | 23.2 | 0.2 | (3.2 | ) | (21.1 | ) | (747.6 | ) | (543.2 | ) | ||||||||||||||||||||
| Basic per share |
0.62 | 4.33 | 0.32 | 0.01 | (0.04 | ) | (0.29 | ) | (10.24 | ) | (7.44 | ) | ||||||||||||||||||||
| Diluted per share |
$ | 0.60 | $ | 4.23 | $ | 0.31 | $ | 0.01 | $ | (0.04 | ) | $ | (0.29 | ) | $ | (10.24 | ) | $ | (7.44 | ) | ||||||||||||
| Production |
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| Light oil (bbls/d) |
10,314 | 10,836 | 10,014 | 10,055 | 10,952 | 12,800 | 12,512 | 12,246 | ||||||||||||||||||||||||
| Heavy oil (bbls/d) |
2,688 | 2,660 | 2,788 | 2,895 | 2,823 | 1,966 | 3,644 | 3,718 | ||||||||||||||||||||||||
| NGLs (bbls/d) |
2,213 | 2,162 | 2,056 | 2,087 | 2,244 | 2,278 | 2,239 | 2,095 | ||||||||||||||||||||||||
| Natural gas (mmcf/d) |
54 | 54 | 50 | 52 | 54 | 53 | 52 | 52 | ||||||||||||||||||||||||
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| Total (boe/d) |
24,164 | 24,651 | 23,225 | 23,644 | 25,031 | 25,872 | 27,092 | 26,639 | ||||||||||||||||||||||||
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| (1) | Please refer to our prior quarterly filings for reconciliations of cash flow from operations to funds flow from operations. |
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 1 |
Cash flow from Operations and Funds Flow from Operations
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions, except per share amounts) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Cash flow from operating activities |
$ | 65.5 | $ | 34.8 | $ | 135.8 | $ | 68.3 | ||||||||
| Change in non-cash working capital |
(9.1 | ) | (11.1 | ) | (1.1 | ) | (1.0 | ) | ||||||||
| Decommissioning expenditures |
1.6 | 0.6 | 5.4 | 8.8 | ||||||||||||
| Onerous office lease settlements |
2.3 | 2.4 | 7.0 | 7.4 | ||||||||||||
| Deferred financing costs |
(1.7 | ) | — | (4.4 | ) | — | ||||||||||
| Financing fees paid |
— | — | 4.4 | — | ||||||||||||
| Realized foreign exchange loss – debt maturities |
— | — | 0.3 | — | ||||||||||||
| Restructuring charges (1) |
0.1 | — | (1.8 | ) | 0.3 | |||||||||||
| Transaction costs |
— | 2.9 | — | 2.9 | ||||||||||||
| Other expenses (1) |
0.6 | 0.8 | (7.7 | ) | 4.7 | |||||||||||
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| Funds flow from operations |
$ | 59.3 | $ | 30.4 | $ | 137.9 | $ | 91.4 | ||||||||
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| Per share – funds flow from operations |
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| Basic per share |
$ | 0.79 | $ | 0.41 | $ | 1.86 | $ | 1.25 | ||||||||
| Diluted per share |
$ | 0.77 | $ | 0.41 | $ | 1.81 | $ | 1.25 | ||||||||
| (1) | Excludes the non-cash portion of restructuring and other expenses. |
Both cash flow from operations and funds flow from operations were higher in Q3 2021 and for the first nine months of 2021 than the comparable periods mainly due to higher revenues as a result of higher commodity prices. This was partially offset by lower production levels as base production declines were not replaced by development activity as commencing in March 2020, the Company restricted capital spending in response to the COVID-19 pandemic and resultant volatile commodity price market. The Company re-started development activities in late 2020 with the first wells brought on production in March 2021. Additionally, in 2021, the Company recorded significant share-based compensation charges which reduced funds flow from operations and cash flow from operations, which was predominately due to the significant increase in the Company’s share price in Q2 2021.
Business Strategy
We believe our plan to primarily focus on our industry leading Cardium position offers a predictable, liquids weighted, production profile that is capable of generating sustainable value for all stakeholders. Favourable weather and ground conditions allowed us to start our second half development program early, and in light of higher commodity prices and strong production results, we modestly increased our 2021 capital budget and increased our production guidance. With strong results thus far from our 2021 development program, we expect to generate higher fourth quarter and exit 2021 production rates than that achieved in 2020, while still meaningfully reducing debt levels. With a continued constructive pricing environment, our program further positions us for additional production growth that generates even higher free cash flow in 2022.
During our second half 2021 development program we have been utilizing a two-rig continuous drilling program and plan to drill 27 wells (25.7 net), predominantly in our Willesden Green and Pembina Cardium assets, resulting in a total program of 36 wells (34.7 net) for full year 2021 plus 1 well (1.0 net) that was rig released in December 2020. We expect to bring 26 wells (25.0 net) on production in 2021, with the remaining 10 wells (9.7 net) expected to be on production early in Q1 2022. In addition, our successful optimization program continues with approximately $11 million allocated for 2021 to capture further highly attractive capital efficiencies. The Company has significant capability to scale our development drilling in response to changes in commodity prices.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 2 |
In Q3 2021, we continued our participation in the Alberta Site Restoration Program (“ASRP”) and Area-Based Closure (“ABC”) program, focusing on inactive fields in Northern Alberta. Our decommissioning activity in 2021 and 2022 will benefit from over $35 million (gross) of ASRP grants, of which approximately $11 million (net) have been utilized since inception through Q3 2021.
Peace River Oil Partnership (“PROP) acquisition
Subsequent to September 30, 2021, the Company announced that we have entered into a purchase and sale agreement to acquire the remaining 45 percent partnership interest in PROP from our joint venture partner, through a wholly-owned subsidiary. Total consideration paid will be $43.5 million prior to closing adjustments with an effective date of July 1, 2021. The acquisition will be funded by a combination of cash and, if necessary, Obsidian Energy common shares issued to our joint venture partner. Closing adjustments are expected to reduce the total consideration paid at closing by approximately $7.2 - $7.5 million to $36.0 - $36.3 million, assuming the acquisition closes in mid-November 2021.
The cash consideration for the acquisition will be funded by a $16.3 million limited-recourse loan secured by the 45 percent interest in PROP, which will be acquired pursuant to the acquisition and proceeds from a new equity offering. The Company has filed and been receipted for an amended and restated preliminary short form prospectus with the securities commissions in each of the provinces of Canada, other than Québec, in connection with a “best efforts” marketed equity offering of subscription receipts for minimum gross proceeds of $12.5 million and maximum gross proceeds of $22.5 million.
In connection with the Company’s acquisition of the 45 percent interest in PROP, we have agreed to reduce our aggregate syndicated credit facility commitment amount by $25 million to $415 million at closing of the transaction. The $25 million reduction will be applied against the non-revolving term loan. Also, upon closing of the acquisition, the Company will repay approximately $3.3 million of the outstanding senior notes.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 3 |
Business Environment
The following table outlines quarterly averages for benchmark prices and Obsidian Energy’s realized prices for the previous eight quarters.
| Q3 2021 | Q2 2021 | Q1 2021 | Q4 2020 | Q3 2020 | Q2 2020 | Q1 2020 | Q4 2019 | |||||||||||||||||||||||||
| Benchmark prices |
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| WTI oil ($US/bbl) |
$ | 70.56 | $ | 66.07 | $ | 57.84 | $ | 42.66 | $ | 40.93 | $ | 27.85 | $ | 46.17 | $ | 56.96 | ||||||||||||||||
| Edm mixed sweet par price (CAD$/bbl) |
83.77 | 77.30 | 66.61 | 50.29 | 49.83 | 29.55 | 51.62 | 67.99 | ||||||||||||||||||||||||
| Western Canada Select (CAD$/bbl) |
71.80 | 67.01 | 57.45 | 43.46 | 42.41 | 22.42 | 34.11 | 54.29 | ||||||||||||||||||||||||
| NYMEX Henry Hub ($US/mmbtu) |
4.01 | 2.83 | 3.56 | 2.53 | 2.00 | 1.72 | 1.95 | 2.50 | ||||||||||||||||||||||||
| AECO Index (CAD$/mcf) |
3.60 | 3.09 | 3.15 | 2.77 | 2.24 | 1.99 | 2.22 | 2.48 | ||||||||||||||||||||||||
| Foreign exchange rate (CAD$/$US) |
1.260 | 1.228 | 1.266 | 1.303 | 1.332 | 1.386 | 1.345 | 1.320 | ||||||||||||||||||||||||
| Benchmark differentials |
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| WTI - Edm Light Sweet ($US/bbl) |
(4.08 | ) | (3.11 | ) | (5.24 | ) | (4.07 | ) | (3.51 | ) | (6.14 | ) | (7.58 | ) | (5.37 | ) | ||||||||||||||||
| WTI - WCS Heavy ($US/bbl) |
(13.58 | ) | (11.49 | ) | (12.47 | ) | (9.31 | ) | (9.08 | ) | (11.47 | ) | (20.53 | ) | (15.83 | ) | ||||||||||||||||
| Average sales price (1) |
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| Light oil (CAD$/bbl) |
84.27 | 76.97 | 67.34 | 50.76 | 50.84 | 29.20 | 50.59 | 70.57 | ||||||||||||||||||||||||
| Heavy oil (CAD$/bbl) |
60.87 | 48.58 | 40.48 | 30.00 | 29.54 | 5.98 | 20.07 | 41.80 | ||||||||||||||||||||||||
| NGLs (CAD$/bbl) |
52.79 | 39.31 | 38.20 | 24.61 | 22.11 | 11.65 | 22.52 | 31.42 | ||||||||||||||||||||||||
| Total liquids (CAD$/bbl) |
75.55 | 66.95 | 58.27 | 43.14 | 43.06 | 24.18 | 41.13 | 60.10 | ||||||||||||||||||||||||
| Natural gas (CAD$/mcf) |
$ | 3.89 | $ | 3.21 | $ | 3.21 | $ | 2.81 | $ | 2.40 | $ | 2.14 | $ | 2.20 | $ | 2.55 | ||||||||||||||||
| (1) | Excludes the impact of realized hedging gains or losses. |
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 4 |
Oil
WTI averaged US$70.56 per barrel during Q3 2021. WTI prices started the quarter at approximately US$75.00 per barrel but decreased throughout July and August as concerns over rising COVID-19 cases, specifically due to the Delta variant, and uncertainty over OPEC’s curtailment plan led to demand uncertainty. In September, OPEC provided more clarity regarding their plan to maintain previously announced production increases and inventory levels showed positive draws which resulted in WTI increasing to approximately US$75.00 per barrel.
In Q3 2021, the MSW differential averaged US$4.08 per barrel and the WCS differential averaged US$13.58 per barrel. Differentials for Q3 2021 were marginally wider than Q2 2021, however, they tightened throughout the quarter as various operational issues led to less supply out of Western Canada.
The Company currently has the following financial oil contracts in place on a weighted average basis:
| Term |
Notional volume | Pricing | ||||||
| October 2021 |
7,750 bbl/d | $ | 92.59/bbl | |||||
| November 2021 |
6,500 bbl/d | $ | 100.39/bbl | |||||
| December 2021 |
500 bbl/d | $ | 100.00/bbl | |||||
Additionally, the Company currently has the following physical contracts in place:
| Notional volume |
Term | Pricing | ||||||||||
| Heavy Oil Differential – USD (1) |
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| 550 bbl/d | |
Oct – Dec 2021 |
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US$ | 26.00/bbl | |||||||
| (1) | Hedged on a USD basis and inclusive of WCS differential, quality and transportation charges. |
Natural Gas
NYMEX Henry Hub gas prices started the quarter at US$3.79 per mmbtu, reducing to a low of US$3.56 per mmbtu in early July and then gradually increased throughout the period reaching a high of US$5.73 per mmbtu in late September due to extremely warm weather in the U.S. and Canada and increased demand for US exported LNG. For Q3 2021, the average price was US$4.01 per mmbtu.
In Alberta, AECO 5A prices followed a similar pattern, starting the quarter at $4.35 per mcf due to an early summer heat wave, then decreasing to a low of $1.25 per mcf in early August as pipeline border restrictions restricted egress out of Alberta. Natural gas prices then increased over the remainder of the quarter, reaching a high of $5.06 per mcf in late September. The AECO 5A price for Q3 2021 averaged $3.60 per mcf.
The Company currently has the following financial natural gas contracts in place on a weighted average basis:
| Term |
Notional volume |
Pricing | ||||||
| October 2021 |
23,695 mcf/d | $ | 2.70/mcf | |||||
| November 2021 – March 2022 |
25,591 mcf/d | $ | 4.63/mcf | |||||
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 5 |
Average Sales Prices
| Three months ended September 30 |
Nine months ended September 30 |
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| 2021 | 2020 | % change |
2021 | 2020 | % change |
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| Light oil (per bbl) |
$ | 84.27 | $ | 50.84 | 66 | $ | 76.35 | $ | 43.14 | 77 | ||||||||||||||
| Heavy oil (per bbl) |
60.87 | 29.54 | >100 | 49.94 | 19.99 | >100 | ||||||||||||||||||
| NGL (per bbl) |
52.79 | 22.11 | >100 | 43.64 | 18.73 | >100 | ||||||||||||||||||
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| Total liquids (per bbl) |
75.55 | 43.06 | 75 | 67.05 | 36.14 | 86 | ||||||||||||||||||
| Risk management gain (loss) (per bbl) |
(0.13 | ) | — | n/a | (1.50 | ) | 4.79 | n/a | ||||||||||||||||
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| Total liquids price, net (per bbl) |
75.42 | 43.06 | 75 | 65.55 | 40.93 | 60 | ||||||||||||||||||
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| Natural gas (per mcf) |
3.89 | 2.40 | 62 | 3.44 | 2.25 | 53 | ||||||||||||||||||
| Risk management gain (loss) (per mcf) |
(0.38 | ) | (0.19 | ) | 100 | (0.14 | ) | (0.09 | ) | 56 | ||||||||||||||
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| Natural gas net (per mcf) |
3.51 | 2.21 | 59 | 3.30 | 2.16 | 53 | ||||||||||||||||||
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| Weighted average (per boe) |
56.21 | 32.74 | 72 | 50.11 | 28.43 | 76 | ||||||||||||||||||
| Risk management gain (loss) (per boe) |
(0.93 | ) | (0.42 | ) | >100 | (1.27 | ) | 2.98 | n/a | |||||||||||||||
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| Weighted average net (per boe) |
$ | 55.28 | $ | 32.32 | 71 | $ | 48.84 | $ | 31.41 | 55 | ||||||||||||||
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RESULTS OF OPERATIONS
Production
| Three months ended September 30 |
Nine months ended September 30 |
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| Daily production |
2021 | 2020 | % change |
2021 | 2020 | % change |
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| Light oil (bbls/d) |
10,314 | 10,952 | (6 | ) | 10,389 | 12,084 | (14 | ) | ||||||||||||||||
| Heavy oil (bbls/d) |
2,688 | 2,823 | (5 | ) | 2,712 | 2,811 | (4 | ) | ||||||||||||||||
| NGL (bbls/d) |
2,213 | 2,244 | (1 | ) | 2,144 | 2,254 | (5 | ) | ||||||||||||||||
| Natural gas (mmcf/d) |
54 | 54 | — | 53 | 53 | — | ||||||||||||||||||
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|||||||||||||
| Total production (boe/d) |
24,164 | 25,031 | (3 | ) | 24,017 | 25,995 | (8 | ) | ||||||||||||||||
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During 2020, the Company postponed virtually all development activity from late March to early December, in response to the COVID-19 pandemic and the low commodity price environment, which led to lower production levels throughout the year and in the first nine months of 2021 due to base declines.
Our decision to defer development spending for the majority of 2020 reduced production levels across all areas in the second half of 2020 and in the first three quarters of 2021. Heavy oil production volumes in Peace River were also impacted by our decision to temporarily shut-in certain heavy oil production which remained partially in effect until early Q3 2021. The Company re-started development activity in late 2020 and brought 12 wells on production in the first nine months of 2021, which has partially mitigated base declines. Through further development activities, we expect to generate higher fourth quarter and exit 2021 production rates than achieved in 2020.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 6 |
Average production within the Company’s key development areas and within the Company’s Legacy asset area was as follows:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||||||||||
| Daily production (boe/d) (1) |
2021 | 2020 | % change |
2021 | 2020 | % change |
||||||||||||||||||
| Cardium |
19,807 | 20,661 | (4 | ) | 19,753 | 21,615 | (9 | ) | ||||||||||||||||
| Peace River |
2,974 | 3,196 | (7 | ) | 2,960 | 3,123 | (5 | ) | ||||||||||||||||
| Alberta Viking |
822 | 825 | — | 810 | 845 | (4 | ) | |||||||||||||||||
| Legacy |
561 | 349 | 61 | 494 | 412 | 20 | ||||||||||||||||||
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| Total |
24,164 | 25,031 | (3 | ) | 24,017 | 25,995 | (8 | ) | ||||||||||||||||
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| (1) | Refer to “Supplemental Production Disclosure” for details by product type. |
Netbacks
| Three months ended September 30 | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Liquids | Natural Gas | Combined | Combined | |||||||||||||
| (bbl) | (mcf) | (boe) | (boe) | |||||||||||||
| Sales price (1) |
$ | 75.55 | $ | 3.89 | $ | 56.21 | $ | 32.74 | ||||||||
| Risk management gain (loss) (2) |
(0.13 | ) | (0.38 | ) | (0.93 | ) | (0.42 | ) | ||||||||
| Royalties |
(8.79 | ) | (0.21 | ) | (5.99 | ) | (1.42 | ) | ||||||||
| Transportation |
(3.21 | ) | (0.18 | ) | (2.41 | ) | (2.13 | ) | ||||||||
| Net operating costs |
(18.01 | ) | (0.87 | ) | (13.28 | ) | (11.36 | ) | ||||||||
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| Netback |
$ | 45.41 | $ | 2.25 | $ | 33.60 | $ | 17.41 | ||||||||
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| (bbls/d) | (mmcf/d) | (boe/d) | (boe/d) | |||||||||||||
| Production |
15,215 | 54 | 24,164 | 25,031 | ||||||||||||
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| (1) | Includes the impact of commodities purchased and sold to/from third parties - $0.4 million (2020 – nil). |
| (2) | Realized risk management gains and losses on commodity contracts. |
| Nine months ended September 30 | ||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| Liquids | Natural Gas | Combined | Combined | |||||||||||||
| (bbl) | (mcf) | (boe) | (boe) | |||||||||||||
| Sales price (1) |
$ | 67.05 | $ | 3.44 | $ | 50.11 | $ | 28.43 | ||||||||
| Risk management gain (loss) (2) |
(1.50 | ) | (0.14 | ) | (1.27 | ) | 2.98 | |||||||||
| Royalties |
(6.54 | ) | (0.19 | ) | (4.56 | ) | (1.48 | ) | ||||||||
| Transportation |
(2.60 | ) | (0.18 | ) | (2.05 | ) | (2.01 | ) | ||||||||
| Net operating costs |
(18.17 | ) | (0.90 | ) | (13.50 | ) | (10.65 | ) | ||||||||
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| Netback |
$ | 38.24 | $ | 2.03 | $ | 28.73 | $ | 17.27 | ||||||||
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| (bbls/d) | (mmcf/d) | (boe/d) | (boe/d) | |||||||||||||
| Production |
15,245 | 53 | 24,017 | 25,995 | ||||||||||||
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| (1) | Includes the impact of commodities purchased and sold to/from third parties - $0.8 million (2020 – ($0.1) million). |
| (2) | Realized risk management gains and losses on commodity contracts. |
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 7 |
In 2021, netbacks were higher than the comparable periods due to higher commodity prices as product demand increased with the easing of COVID-19 restrictions and the roll-out of vaccines. This was partially offset by minor realized hedging losses and higher royalties due to stronger oil prices, as well as higher operating costs due to increased activity levels and higher power prices. Note that in Q2 2020 and for a portion of Q3 2020, the Company delayed discretionary operating cost spending in response to the low commodity price environment at that time.
Production Revenues
A reconciliation from production revenues to gross revenues is as follows:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Production revenues |
$ | 124.5 | $ | 75.4 | $ | 327.7 | $ | 202.6 | ||||||||
| Realized risk management gain (loss) (1) |
(2.0 | ) | (1.0 | ) | (8.3 | ) | 21.2 | |||||||||
| Sales of commodities purchased |
2.8 | 0.8 | 6.7 | 2.8 | ||||||||||||
| Less: Commodities purchased |
(2.4 | ) | (0.8 | ) | (5.9 | ) | (2.9 | ) | ||||||||
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| Gross revenues |
$ | 122.9 | $ | 74.4 | $ | 320.2 | $ | 223.7 | ||||||||
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| (1) | Relates to realized risk management gains and losses on commodity contracts |
Production revenues and gross revenues were higher in 2021 due to increases in commodity prices, which was partially offset by lower production volumes and realized risk management losses versus realized risk management gains in 2020 for the first nine months of the year.
Change in Gross Revenues
| (millions) |
||||
| Gross revenues – January 1 – September 30, 2020 |
$ | 223.7 | ||
| Decrease in liquids production |
(20.5 | ) | ||
| Increase in liquids prices |
129.8 | |||
| Decrease in natural gas production |
(0.4 | ) | ||
| Increase in natural gas prices |
17.2 | |||
| Decrease in realized oil risk management |
(28.8 | ) | ||
| Decrease in realized natural gas risk management |
(0.8 | ) | ||
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| Gross revenues – January 1 – September 30, 2021 (1) |
$ | 320.2 | ||
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| (1) | Excludes processing fees and other income. |
Royalties
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Royalties (millions) |
$ | 13.3 | $ | 3.3 | $ | 29.9 | $ | 10.6 | ||||||||
| Average royalty rate (1) |
11 | % | 4 | % | 9 | % | 5 | % | ||||||||
| $/boe |
$ | 5.99 | $ | 1.42 | $ | 4.56 | $ | 1.48 | ||||||||
| (1) | Excludes effects of risk management activities and other income. |
For 2021, royalties, including the average royalty rate and per boe metrics, increased from the comparable periods largely due to higher commodity prices.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 8 |
Expenses
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Net Operating |
$ | 29.5 | $ | 26.2 | $ | 88.5 | $ | 75.9 | ||||||||
| Transportation |
5.4 | 4.9 | 13.5 | 14.3 | ||||||||||||
| Financing |
8.7 | 7.3 | 27.4 | 28.4 | ||||||||||||
| Share-based compensation |
$ | 3.0 | $ | 0.7 | $ | 15.4 | $ | 1.7 | ||||||||
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (per boe) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Net Operating |
$ | 13.28 | $ | 11.36 | $ | 13.50 | $ | 10.65 | ||||||||
| Transportation |
2.41 | 2.13 | 2.05 | 2.01 | ||||||||||||
| Financing |
3.84 | 3.18 | 4.16 | 3.99 | ||||||||||||
| Share-based compensation |
$ | 1.41 | $ | 0.30 | $ | 2.36 | $ | 0.24 | ||||||||
Operating
A reconciliation of operating costs to net operating costs is as follows:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Operating costs |
$ | 32.3 | $ | 28.0 | $ | 97.1 | $ | 83.9 | ||||||||
| Less processing fees |
(1.6 | ) | (1.3 | ) | (4.9 | ) | (4.6 | ) | ||||||||
| Less road use recoveries |
(1.2 | ) | (0.5 | ) | (3.7 | ) | (3.4 | ) | ||||||||
| Net Operating costs |
$ | 29.5 | $ | 26.2 | $ | 88.5 | $ | 75.9 | ||||||||
In 2021, the Company returned to normal activity levels compared to 2020 where the Company restricted discretionary spending beginning in March 2020 and into Q3 2020 as a result of the low commodity price environment. During 2021, the Company was impacted by high power prices particularly in the first half of 2021, mostly due to extreme weather (cold in Q1 and heat in Q2) in several parts of North America which increased demand and, when combined with higher natural gas prices (power input cost), led to an increase in operating costs. The increase in power costs was more than offset by the increase in our natural gas revenue.
For the first nine months of 2021 the Canadian Emergency Wage Subsidy (“CEWS”) program reduced operating costs by $0.3 million.
Transportation
The Company continues to utilize multiple sales points in the Peace River area to increase realized prices. The increase in realized prices is partially offset by additional transportation costs. In 2020, the Company had certain take-or-pay contracts terminate which led to a reduction in transportation costs in the first nine months of 2021. Additionally, in the comparable period of Q3 2020, temporarily shut in production at various properties in the Peace River area (due to low commodity prices) resulted in lower transportation costs in 2020. The majority of the shut in production was brought back on-line late in Q3 2020.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 9 |
Financing
Financing expense consists of the following:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Interest on bank debt and senior notes |
$ | 6.8 | $ | 5.5 | $ | 19.5 | $ | 19.0 | ||||||||
| Advisor fees |
0.4 | 1.6 | 1.4 | 8.1 | ||||||||||||
| Deferred financing costs |
1.7 | — | 4.4 | — | ||||||||||||
| Unwinding of discount on lease liabilities |
0.2 | 0.2 | 0.5 | 1.3 | ||||||||||||
| Loss (gain) on debt modification |
(0.4 | ) | — | 1.6 | — | |||||||||||
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| Financing |
$ | 8.7 | $ | 7.3 | $ | 27.4 | $ | 28.4 | ||||||||
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Obsidian Energy’s debt structure includes short-term borrowings under our syndicated credit facility and term financing through our senior notes. In Q3 2021, financing charges increased mainly due to higher interest rates under the Company’s current banking agreements which was partially offset by lower drawn balances under our syndicated credit facility. For the first nine months of 2021, lower advisor costs primarily contributed to lower financing costs which was partially offset by the before mentioned higher interest rates.
The interest rates on the Company’s syndicated credit facility are subject to fluctuations in short-term money market rates as advances on the syndicated credit facility are generally made under short-term instruments. As at September 30, 2021, 85 percent (December 31, 2020 – 87 percent) of the Company’s outstanding debt instruments were exposed to changes in short-term interest rates.
The Company has a reserve-based syndicated credit facility which is subject to a semi-annual borrowing base redetermination typically in May and November of each year. The aggregate amount available under the syndicated credit facility is $440 million which consists of a $225 million revolving syndicated credit facility and a $215 million non-revolving term loan. The revolving period under the syndicated credit facility is set at May 31, 2022, with the maturity date of both the syndicated credit facility and non-revolving term loan of November 30, 2022. Additionally, the Company has a revolving period reconfirmation date on January 17, 2022, whereby, on or prior to such date, the lenders may accelerate the end date of the revolving period to February 1, 2022. In this case, the end date of the term period would remain unchanged at November 30, 2022. Furthermore, the Company’s revolving credit facility will have a one-time adjustment to reduce our undrawn availability to $35 million at December 31, 2021. Any borrowing availability at this time in excess of that amount will be used to reduce amounts outstanding on the non-revolving term loan and senior notes.
In connection with our announced acquisition of the 45 percent interest in PROP, we have agreed with our lenders to reduce the syndicated credit facility commitment amount by $25 million to $415 million at closing of the acquisition. The $25 million reduction will be applied against the non-revolving term loan. We will also repay $3.3 million of senior notes upon close of the acquisition.
At September 30, 2021, the carrying value of the Company’s US dollar denominated senior notes was $58.9 million (December 31, 2020 – $60.3 million). In Q1 2021, the Company repaid senior notes in the amount of US$1.1 million (CAD $1.4 million) which resulted in a decrease in the carrying value. Additionally, a stronger Canadian dollar against the US dollar at the comparable balance sheet dates contributed to a lower carrying value. Summary information on the Company’s senior notes outstanding as at September 30, 2021 is as follows:
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 10 |
| Amount (millions) | Maturity date | Average interest rate |
Weighted average remaining term (years) |
|||||||||||
| 2008 Notes |
US$ | 4.0 | November 30, 2022 | 8.52 | % | 1.2 | ||||||||
| 2010 Q1 Notes |
US$ | 9.5 | November 30, 2022 | 7.97 | % | 1.2 | ||||||||
| 2010 Q4 Notes |
US$ | 20.8 | November 30, 2022 | 7.06 | % | 1.2 | ||||||||
| 2011 Notes |
US$ | 12.0 | November 30, 2022 | 6.91 | % | 1.2 | ||||||||
Share-Based Compensation
Share-based compensation expense relates to the Company’s Stock Option Plan (the “Option Plan”), restricted shares units (“RSUs”) granted under the Restricted and Performance Share Unit Plan (“RPSU plan”), restricted awards granted under the Non-Treasury Incentive Award Plan (“NTIP”), Deferred Share Unit Plan (“DSU plan”) and performance share units (“PSUs”) granted under the RPSU plan.
Share-based compensation expense consisted of the following:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| RSU grants |
$ | 0.2 | $ | 0.7 | $ | 0.9 | $ | 1.5 | ||||||||
| PSU grants |
0.8 | — | 3.6 | — | ||||||||||||
| DSU plan |
0.8 | — | 8.7 | 0.2 | ||||||||||||
| Options |
0.4 | — | 0.8 | — | ||||||||||||
| NTIP |
0.8 | — | 1.4 | — | ||||||||||||
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| Share-based compensation |
$ | 3.0 | $ | 0.7 | $ | 15.4 | $ | 1.7 | ||||||||
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|||||||||
In 2021, the increase in share-based compensation is largely attributed to the significant increase in the Company’s share price which closed at $4.51 per share at September 30, 2021 compared to $0.87 per share at December 31, 2020 and $4.24 per share at June 30, 2021. The majority of the increase occurred in Q2 2021. During Q3 2021, approximately $1.5 million of DSUs vested and were consequently exercised and will no longer be included in future share-based compensation changes.
The share price at September 30, 2021 of $4.51 (2020 – $0.49) was used in the fair value calculation of the RPSU, DSU and NTIP plan obligations.
General and Administrative Expenses (“G&A”)
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions, except per boe amounts) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Gross |
$ | 7.5 | $ | 5.3 | $ | 20.5 | $ | 17.1 | ||||||||
| Per boe |
3.36 | 2.29 | 3.13 | 2.41 | ||||||||||||
| Net |
4.1 | 3.2 | 11.4 | 10.4 | ||||||||||||
| Per boe |
$ | 1.82 | $ | 1.40 | $ | 1.73 | $ | 1.47 | ||||||||
Beginning in Q2 2020, the Company implemented a number of temporary measures to reduce costs, specifically lower salaries and staff benefits in response to the low commodity price environment. Most of these temporary reductions were eliminated prior to Q2 2021 which led to the increase in G&A in 2021 compared to 2020.
Our decision to defer development spending for the majority of 2020 reduced production levels and partially contributed to higher per boe costs in 2021 compared to 2020.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 11 |
Restructuring and other expenses
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions, except per boe amounts) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Restructuring |
$ | 0.1 | $ | 0.1 | $ | (1.8 | ) | $ | 0.4 | |||||||
| Per boe |
0.07 | 0.05 | (0.27 | ) | 0.07 | |||||||||||
| Other |
0.6 | 0.8 | (7.7 | ) | 5.8 | |||||||||||
| Per boe |
$ | 0.27 | $ | 0.36 | $ | (1.17 | ) | $ | 0.81 | |||||||
In 2021, restructuring expenses include a settlement benefit of a prior cancelled office lease that resulted in a $2.0 million recovery of previously accrued costs recorded in Q1 2021.
In 2018, the Company fully utilized available insurance coverage relating to ongoing claims against former Penn West employees arising from the Company’s 2014 restatement of certain financial results when we were known as Penn West. A claim brought by the United States Securities and Exchange Commission (“SEC”) against Penn West was previously settled. The Company had been indemnifying two former employees pursuant to indemnity agreements in connection with the claims brought by the SEC arising out of the same restatement. In 2020, the SEC reached a settlement with the two former employees.
The Company continued to accrue for, but not pay, defense costs incurred on behalf of the two former employees and in Q1 2021 agreed to a settlement to pay $6.4 million of the defense costs equally over a 30-month period beginning in April 2021. As a result of the settlement, the Company recorded a recovery of previously accrued costs in Q1 2021 within Other in the Consolidated Statements of Income (Loss).
Depletion, Depreciation, Impairment and Accretion
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions, except per boe amounts) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Depletion and depreciation (“D&D”) |
$ | 32.4 | $ | 27.6 | $ | 83.8 | $ | 103.9 | ||||||||
| D&D expense per boe |
14.60 | 12.00 | 12.78 | 14.58 | ||||||||||||
| PP&E Impairment (reversal) |
(22.3 | ) | — | (333.7 | ) | 762.3 | ||||||||||
| PP&E Impairment (reversal) per boe |
(10.02 | ) | — | (50.89 | ) | 107.02 | ||||||||||
| Accretion |
2.0 | 1.9 | 6.0 | 6.5 | ||||||||||||
| Accretion expense per boe |
$ | 0.89 | $ | 0.81 | $ | 0.92 | $ | 0.90 | ||||||||
The Company’s D&D expense has increased in Q3 2021 due to a non-cash impairment reversal recorded in Q2 2021 due to the higher commodity price environment and capital additions within our Cardium Cash Generating Unit (“CGU”).
The decrease in D&D expense from the comparable period for the first nine months of 2021 is primarily due to non-cash impairment charges recorded in Q1 2020. These impairment charges were recorded mainly due to lower forecasted commodity prices and higher discount rates due to continued commodity price and market value volatility within the oil and natural gas industry.
During Q3 2021, as a result of the Company entering into an agreement to purchase the 45 percent interest of our partner in PROP, the Company concluded that an indicator of impairment reversal was present within our Peace River CGU. The Company followed the fair value less costs of disposal method using the estimated purchase price of the acquisition which resulted in a $26.5 million impairment reversal. The reversal was partially offset by a $4.2 million impairment charge on our Legacy CGU.
In Q2 2021, as a result of recent improvements in forecasted commodity prices and continued positive drilling results, the Company recorded a $311.5 million impairment reversal in our Cardium CGU.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 12 |
In 2020, the Company completed impairment tests across all of our CGU’s as a result of the low commodity price environment, primarily due to the impact of the COVID-19 pandemic and concerns regarding potential supply and demand implications. This led to the Company recording $762.9 million of non-cash impairments in Q1 2020.
Taxes
As at September 30, 2021, the Company was in a net unrecognized deferred tax asset position of approximately $357.9 million (December 31, 2020—$448.6 million). Since the Company has not recognized the benefit of deductible timing differences in excess of taxable timing differences, deferred tax expense (recovery) for the quarter is nil.
Foreign Exchange
Obsidian Energy records unrealized foreign exchange gains or losses to translate U.S. denominated senior notes and the related accrued interest to Canadian dollars using the exchange rates in effect on the balance sheet date. Realized foreign exchange gains or losses are recorded upon repayment of the senior notes.
The split between realized and unrealized foreign exchange gain or loss is as follows:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Realized foreign exchange loss |
$ | — | $ | — | $ | 0.3 | $ | — | ||||||||
| Unrealized foreign exchange (gain)/loss |
1.6 | (1.3 | ) | (0.3 | ) | 1.5 | ||||||||||
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| Foreign exchange (gain)/loss |
$ | 1.6 | $ | (1.3 | ) | $ | — | $ | 1.5 | |||||||
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In Q1 2021, the Company repaid senior notes in the amount of US$1.1 million which resulted in the realized foreign exchange loss.
Net Income/(Loss)
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions, except per share amounts) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Net income/(loss) |
$ | 46.6 | $ | (3.2 | ) | $ | 392.3 | $ | (771.9 | ) | ||||||
| Basic per share |
0.62 | (0.04 | ) | 5.28 | (10.55 | ) | ||||||||||
| Diluted per share |
$ | 0.60 | $ | (0.04 | ) | $ | 5.14 | $ | (10.55 | ) | ||||||
In 2021, net income was associated with the Company’s strong netback which was supported by higher oil prices. Additionally, during Q3 2021, the Company recorded a $26.5 million impairment reversal in our Peace River CGU.
For the first nine months of 2021, the Company recorded a $311.5 million impairment reversal in Q2 2021 in our Cardium CGU due to higher forecasted commodity prices and strong drilling results. In Q1 2021, the Company recorded a recovery within Other in the Consolidated Statements of Income (Loss) as a result of a settlement on a previously accrued provision.
In 2020, the net loss was mainly due to non-cash, PP&E impairment charges as a result of lower forecasted commodity prices due to the impact of the COVID-19 pandemic and potential supply and demand implications.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 13 |
Capital Expenditures
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Drilling and completions |
$ | 30.8 | $ | 2.3 | $ | 64.4 | $ | 32.9 | ||||||||
| Well equipping and facilities |
14.4 | 2.2 | 30.6 | 12.2 | ||||||||||||
| Land and geological/geophysical |
(0.3 | ) | — | 0.6 | 0.3 | |||||||||||
| Corporate |
0.2 | 0.1 | 0.5 | 0.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Capital expenditures |
45.1 | 4.6 | 96.1 | 45.6 | ||||||||||||
| Property dispositions, net |
— | — | — | (0.1 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total capital expenditures |
$ | 45.1 | $ | 4.6 | $ | 96.1 | $ | 45.5 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company began drilling our second half 2021 program in our Willesden Green and Pembina plays in the Cardium in June 2021 which includes 25 wells. A total of 11 gross (10.2 net) wells were rig-released during Q3 2021 with three gross (3.0 net) brought on production.
The remainder of our second half 2021 drilling program includes 16 gross (15.5 net) additional wells to be drilled and 14 gross (13.0 net) operated wells expected to be brought on production in Q4 2021.
Drilling
| Nine months ended September 30 |
||||||||||||||||
| 2021 | 2020 | |||||||||||||||
| (number of wells) |
Gross | Net | Gross | Net | ||||||||||||
| Oil |
23 | 19 | 12 | 10 | ||||||||||||
| Gas |
1 | 1 | — | — | ||||||||||||
| Injectors, stratigraphic and service |
3 | 1 | 1 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
27 | 21 | 13 | 10 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Success rate (1) |
100 | % | 100 | % | ||||||||||||
|
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|
|
|
|||||||||||||
| (1) | Success rate is calculated excluding stratigraphic and service wells. |
The Company rig released 20 wells relating to our 2021 development program between December 2020 and September 2021. In addition to this, the Company had a minor non-operated working interest on four oil wells and three injector wells that were drilled by a partner during the period.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 14 |
Environmental and Climate Change
The oil and natural gas industry has a number of environmental risks and hazards and is subject to regulation by all levels of government. Environmental legislation includes, but is not limited to, operational controls, site restoration requirements and restrictions on emissions of various substances produced in association with oil and natural gas operations. Compliance with such legislation could require additional expenditures and a failure to comply may result in fines and penalties which could, in the aggregate and under certain assumptions, become material.
Obsidian Energy is dedicated to managing the environmental impact from our operations through our environmental programs which include resource conservation, water management and site abandonment/reclamation/remediation. Obsidian Energy has voluntarily entered into the Government of Alberta’s Area Based Closure program (the “ABC program”) which has allowed the Company to accelerate abandonment activities, specifically on inactive properties, in a more cost-effective manner. The Company is committed to remaining in the ABC program for at least 2021 and 2022. The Alberta Government announced the suspension of spending requirements for the ABC program for 2020 and the $11 million incurred by the Company in 2020 will be applied to our 2021 program target. Additionally, operations are continuously monitored to minimize both environmental and climate change impacts and allocate sufficient capital to reclamation and other activities to mitigate the impact on the areas in which the Company operates.
The Company has received ASRP grants and allocations to date of over $35 million on a gross basis, a portion of which was received in allocation eligibility as an ABC program participant. Total grant support will be determined by final project costs. These awards have allowed the Company to expand our abandonment activities for wells, pipelines, facilities, and related site reclamation and thus reduce our decommissioning liability. We began utilizing the ASRP grants in Q4 2020 and continued this work in 2021. We will continue to utilize these grants for the remainder of 2021 and throughout 2022.
Liquidity and Capital Resources
Net Debt
Net debt is the total of long-term debt and working capital deficiency as follows:
| As at | ||||||||
| (millions) |
September 30, 2021 | December 31, 2020 | ||||||
| Long-term debt |
||||||||
| Syndicated credit facility |
$ | 340.0 | $ | 395.0 | ||||
| Senior secured notes |
58.9 | 60.3 | ||||||
| Deferred interest |
1.6 | — | ||||||
| Deferred financing costs |
(3.5 | ) | (3.5 | ) | ||||
|
|
|
|
|
|||||
| Total |
397.0 | 451.8 | ||||||
| Working capital deficiency |
||||||||
| Cash |
(4.0 | ) | (8.1 | ) | ||||
| Accounts receivable |
(56.5 | ) | (40.8 | ) | ||||
| Prepaid expenses and other |
(12.0 | ) | (9.2 | ) | ||||
| Accounts payable and accrued liabilities |
103.6 | 74.1 | ||||||
|
|
|
|
|
|||||
| Total |
31.1 | 16.0 | ||||||
|
|
|
|
|
|||||
| Net debt |
$ | 428.1 | $ | 467.8 | ||||
|
|
|
|
|
|||||
Net debt decreased compared to December 31, 2020, as a result of free cash flow generation due to higher commodity prices and strong production performance which led to higher netbacks and lower drawings on the syndicated credit facility, which has been reduced by $55 million since December 31, 2020.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 15 |
The Company’s credit facility was classified as a long-term liability at September 30, 2021 as the term-out date is November 30, 2022, which is beyond 12 months from the reporting date.
Liquidity
The Company has a reserve-based syndicated credit facility with a borrowing limit of $440.0 million with $340.0 million drawn at September 30, 2021. For further details on the Company’s debt instruments and our recent bank amendment, please refer to the “Financing” section of this MD&A.
The Company actively manages our debt portfolio and considers opportunities to reduce or diversify our debt capital structure. Management contemplates both operating and financial risks and takes action as appropriate to limit the Company’s exposure to certain risks. Management maintains close relationships with the Company’s lenders and agents to monitor credit market developments. These actions and plans aim to increase the likelihood of maintaining the Company’s financial flexibility and appropriate capital program, supporting the Company’s ongoing operations and ability to execute longer-term business strategies.
On September 30, 2021, the Company was in compliance with all of our financial covenants which consisted of the following:
| Limit | September 30, 2021 | |||||||
| Senior debt to capitalization |
Less than 75 | % | 36.0 | % | ||||
| Total debt to capitalization |
Less than 75 | % | 36.0 | % | ||||
Financial Instruments
Obsidian Energy had the following financial instruments outstanding as at September 30, 2021. Fair values are determined using external counterparty information, which is compared to observable market data. The Company limits our credit risk by executing counterparty risk procedures which include transacting only with institutions within our syndicated credit facility or companies with high credit ratings, and by obtaining financial security in certain circumstances.
| Notional volume |
Remaining term |
Pricing | Fair value (millions) |
|||||||||||||
| Oil |
||||||||||||||||
| WTI Swaps |
6,750 bbl/d | October 2021 | $ | 91.54/bbl | $ | (0.7 | ) | |||||||||
| AECO Swaps |
|
|||||||||||||||
| AECO Swaps |
23,695 mcf/d | October 2021 | $ | 2.70/mcf | (1.1 | ) | ||||||||||
| AECO Swaps |
21,325 mcf/d | November/21 – March/22 | $ | 4.46/mcf | (2.4 | ) | ||||||||||
|
|
|
|||||||||||||||
| Total |
$ | (4.2 | ) | |||||||||||||
|
|
|
|||||||||||||||
Refer to the Business Environment section above for a full list of hedges currently outstanding including trades that were entered into subsequent to September 30, 2021.
Based on commodity prices and contracts in place at September 30, 2021, a $1.00 change in the price per barrel of liquids of WTI would change pre-tax unrealized risk management by $0.2 million and a $0.10 change in the price per mcf of natural gas would change pre-tax unrealized risk management by $0.4 million.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 16 |
The components of risk management on the Consolidated Statements of Income (Loss) are as follows:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Realized |
||||||||||||||||
| Settlement of commodity contracts |
$ | (2.0 | ) | $ | (1.0 | ) | $ | (8.3 | ) | $ | 21.2 | |||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total realized risk management gain (loss) |
$ | (2.0 | ) | $ | (1.0 | ) | $ | (8.3 | ) | $ | 21.2 | |||||
| Unrealized |
||||||||||||||||
| Commodity contracts |
$ | (0.9 | ) | $ | 0.2 | $ | (4.4 | ) | $ | 0.4 | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total unrealized risk management gain (loss) |
(0.9 | ) | 0.2 | (4.4 | ) | 0.4 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Risk management gain (loss) |
$ | (2.9 | ) | $ | (0.8 | ) | $ | (12.7 | ) | $ | 21.6 | |||||
|
|
|
|
|
|
|
|
|
|||||||||
Refer to the Business Environment section above for a full list of physical hedges currently outstanding including trades that were entered into subsequent to September 30, 2021.
Sensitivity Analysis
Estimated sensitivities to selected key assumptions on funds flow from operations for the 12 months subsequent to the date of this MD&A, including risk management contracts entered into to date, are based on forecasted results (before giving effect to the proposed acquisition of the remaining 45% interest in PROP).
| Impact on funds flow | ||||||||||||
| Change of: |
Change | $ millions | $/share | |||||||||
| Price per barrel of liquids |
WTI US$1.00 | 5 | 0.07 | |||||||||
| Liquids production |
1,000 bbls/day | 25 | 0.34 | |||||||||
| Price per mcf of natural gas |
AECO $0.10 | 1 | 0.02 | |||||||||
| Natural gas production |
10 mmcf/day | 14 | 0.18 | |||||||||
| Effective interest rate |
1 | % | 3 | 0.04 | ||||||||
| Exchange rate ($US per $CAD) |
$0.01 | 3 | 0.05 | |||||||||
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 17 |
Contractual Obligations and Commitments
Obsidian Energy is committed to certain payments over the next five calendar years and thereafter as follows:
| 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||||||
| Long-term debt (1) |
$ | — | $ | 389.9 | $ | — | $ | — | $ | — | $ | — | $ | 389.9 | ||||||||||||||
| Transportation |
1.5 | 6.0 | 5.0 | 2.6 | 2.1 | 6.0 | 23.2 | |||||||||||||||||||||
| Interest obligations |
7.4 | 27.2 | — | — | — | — | 34.6 | |||||||||||||||||||||
| Office lease |
2.5 | 10.0 | 10.0 | 10.0 | 0.8 | — | 33.3 | |||||||||||||||||||||
| Lease liability |
1.1 | 4.1 | 2.9 | 0.3 | 0.1 | 5.2 | 13.7 | |||||||||||||||||||||
| Decommissioning liability (2) |
2.6 | 13.6 | 3.5 | 3.3 | 3.1 | 39.3 | 65.4 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
$ | 15.1 | $ | 450.8 | $ | 21.4 | $ | 16.2 | $ | 6.1 | $ | 50.5 | $ | 560.1 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| (1) | The 2022 figure includes $340.0 million related to the syndicated credit facility and non-revolving term loan that is due for renewal in 2022 and $58.9 million of senior notes set to mature in 2022; refer to the Financing section above for further details. Historically, the Company has successfully renewed its syndicated credit facility. |
| (2) | These amounts represent the inflated, discounted future reclamation and abandonment costs that are expected to be incurred over the life of the Company’s properties. |
The revolving period of our syndicated credit facility continues to May 31, 2022, with a term out period to November 30, 2022, provided that if the lenders do not reconfirm the revolving period on January 17, 2022 the revolving period will accelerate to February 1, 2022 and the end date of the term period will continue to be November 30, 2022. In addition, the Company has an aggregate of US$46.3 million in senior notes maturing November 30, 2022. If the Company is unsuccessful in renewing or replacing the syndicated credit facility or obtaining alternate funding for some or all of the maturing amounts of the senior notes, it is possible that we could be required to seek to obtain other sources of financing, including other forms of debt or equity arrangements if available. Please see the Financing section of this MD&A for further details regarding our syndicated credit facility and senior notes.
The Company is involved in various litigation and claims in the normal course of business and records provisions for claims as required.
Equity Instruments
| Common shares issued: |
||||
| As at September 30, 2021 and November 5, 2021 |
74,852,877 | |||
|
|
|
|||
| Options outstanding: |
||||
| As at September 30, 2021 and November 5, 2021 |
3,033,610 | |||
|
|
|
|||
| RSUs |
||||
| As at September 30, 2021 |
1,183,538 | |||
| Forfeited |
(8,167 | ) | ||
|
|
|
|||
| As at November 5, 2021 |
1,175,371 | |||
|
|
|
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 18 |
Supplemental Production Disclosure
Outlined below is production by product type for each area as follows for the periods indicated:
| Three months ended September 30 | Nine months ended September 30 | |||||||||||||||
| Daily production (boe/d) |
2021 | 2020 | 2021 | 2020 | ||||||||||||
| Cardium |
||||||||||||||||
| Light oil (bbls/d) |
9,988 | 10,695 | 10,098 | 11,793 | ||||||||||||
| Heavy oil (bbls/d) |
60 | 43 | 52 | 38 | ||||||||||||
| NGLs (bbls/d) |
2,127 | 2,175 | 2,067 | 2,184 | ||||||||||||
| Natural gas (mmcf/d) |
46 | 46 | 45 | 46 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total production (boe/d) |
19,807 | 20,661 | 19,753 | 21,615 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Peace River |
||||||||||||||||
| Light oil (bbls/d) |
— | — | — | — | ||||||||||||
| Heavy oil (bbls/d) |
2,449 | 2,701 | 2,481 | 2,647 | ||||||||||||
| NGLs (bbls/d) |
2 | — | 3 | 2 | ||||||||||||
| Natural gas (mmcf/d) |
3 | 3 | 3 | 3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total production (boe/d) |
2,974 | 3,196 | 2,960 | 3,123 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Viking |
||||||||||||||||
| Light oil (bbls/d) |
177 | 202 | 168 | 215 | ||||||||||||
| Heavy oil (bbls/d) |
122 | 62 | 118 | 47 | ||||||||||||
| NGLs (bbls/d) |
49 | 41 | 43 | 38 | ||||||||||||
| Natural gas (mmcf/d) |
3 | 4 | 3 | 3 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total production (boe/d) |
822 | 825 | 810 | 845 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Legacy |
||||||||||||||||
| Light oil (bbls/d) |
149 | 55 | 123 | 76 | ||||||||||||
| Heavy oil (bbls/d) |
57 | 17 | 61 | 79 | ||||||||||||
| NGLs (bbls/d) |
35 | 28 | 31 | 30 | ||||||||||||
| Natural gas (mmcf/d) |
2 | 1 | 2 | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total production (boe/d) |
561 | 349 | 494 | 412 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total |
||||||||||||||||
| Light oil (bbls/d) |
10,314 | 10,952 | 10,389 | 12,084 | ||||||||||||
| Heavy oil (bbls/d) |
2,688 | 2,823 | 2,712 | 2,811 | ||||||||||||
| NGLs (bbls/d) |
2,213 | 2,244 | 2,144 | 2,254 | ||||||||||||
| Natural gas (mmcf/d) |
54 | 54 | 53 | 53 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total production (boe/d) |
24,164 | 25,031 | 24,017 | 25,995 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 19 |
Changes in Internal Control Over Financial Reporting (“ICFR”)
Obsidian Energy’s senior management has evaluated whether there were any changes in the Company’s ICFR that occurred during the period beginning on July 1, 2021 and ending on September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s ICFR. No changes to the Company’s ICFR were made during the quarter.
Off-Balance-Sheet Financing
Obsidian Energy has off-balance-sheet financing arrangements consisting of operating leases. The operating lease payments are summarized in the Contractual Obligations and Commitments section.
Non-GAAP Measures
Certain financial measures including funds flow from operations, funds flow from operations per share-basic, funds flow from operations per share-diluted, free cash flow, netback, net operating costs, gross revenues and net debt, included in this MD&A do not have a standardized meaning prescribed by IFRS and therefore are considered non-GAAP measures; accordingly, they may not be comparable to similar measures provided by other issuers. Funds flow from operations is cash flow from operating activities before changes in non-cash working capital, decommissioning expenditures, onerous office lease settlements, the effects of financing related transactions from foreign exchange contracts and debt repayments, restructuring charges, transaction costs and certain other expenses and is representative of cash related to continuing operations. Funds flow from operations is used to assess the Company’s ability to fund our planned capital programs. See “Cash flow from Operations and Funds Flow from Operations” above for a reconciliation of funds flow from operations to cash flow from operating activities, being our nearest measure prescribed by IFRS. Free cash flow is funds flow from operations less both capital and decommissioning expenditures. Netback is the per unit of production amount of revenue less royalties, net operating costs, transportation expenses and realized risk management gains and losses, and is used in capital allocation decisions and to economically rank projects. See “Results of Operations – Netbacks” above for our calculation of netbacks. Net operating costs are calculated by deducting processing income and road use recoveries from operating costs and is used to assess the Company’s cost position. Processing fees are primarily generated by processing third party volumes at the Company’s facilities. In situations where the Company has excess capacity at a facility, it may agree with third parties to process their volumes as a means to reduce the cost of operating/owning the facility. Road use recoveries are a cost recovery for the Company as we operate and maintain roads that are also used by third parties. See “Expenses – Operating” above for a reconciliation of operating costs to net operating costs. Gross revenues are production revenues including realized risk management gains and losses on commodity contracts and adjusted for commodities purchased and sales of commodities purchased and is used to assess the cash realizations on commodity sales. See “Production Revenues” above for a reconciliation of gross revenues to production revenues, being our nearest measure prescribed by IFRS. Net debt is the total of long-term debt and working capital deficiency and is used by the Company to assess our liquidity. See “Liquidity and Capital Resources – Net Debt” above for a calculation of the Company’s net debt.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 20 |
Oil and Natural Gas Information
Barrels of oil equivalent (“boe”) may be misleading, particularly if used in isolation. A boe conversion ratio of six thousand cubic feet of natural gas to one barrel of oil is based on an energy equivalency conversion method primarily applicable at the burner tip and does not represent a value equivalency at the wellhead. Given that the value ratio based on the current price of oil as compared to natural gas is significantly different from the energy equivalency conversion ratio of 6:1, utilizing a conversion on a 6:1 basis is misleading as an indication of value.
Forward-Looking Statements
Certain statements contained in this document constitute forward-looking statements or information (collectively “forward-looking statements”) within the meaning of the “safe harbour” provisions of applicable securities legislation. In particular, this document contains forward-looking statements pertaining to, without limitation, the following: our belief that our plan to primarily focus on our industry leading Cardium position offers a predictable, liquids weighted, production profile that is capable of generating sustainable value for all stakeholders; that we expect to generate higher fourth quarter and exit 2021 production rates than achieved in 2020, while still meaningfully reducing debt levels; that with a constructive pricing environment, our program further positions us for additional production growth that generates even greater free cash flow in 2022; expectations regarding our 2021 and second half 2021 drilling program, locations, completion and on production dates, optimization program and significant capability to scale our development drilling in response to changes in commodity prices; that our decommissioning activity will benefit in 2021 and 2022 from our ASRP grants; all matters relating to our proposed acquisition of the remaining 45% interest in PROP, including the purchase price, amount of estimated closing adjustments, nature of the consideration, proposed closing date, funding sources, and related agreement to reduce the amount of our credit facility commitment amount and to repay a portion of the principal amount of our senior notes; all matters relating to our proposal to obtain a limited-recourse loan and to complete a prospectus offering of new equity to fund the proposed acquisition; the expected re-confirmation and term out dates, as applicable, in connection with our reserve-based syndicated credit facility, the lender option date to complete a borrowing base redetermination on the credit facility, the available revolving capacity at the end of the year depending on the amount drawn under the credit facility, and the maturity dates and interest rates on the senior notes; the use of borrowing availability to reduce amounts outstanding on the non-revolving term loan and senior notes; that the compliance with certain environmental legislation could require additional expenditures and a failure to comply may result in fines and penalties which could, in the aggregate and under certain assumptions, become material; that the Company continuously monitors operations to minimize environmental and climate change impacts and allocate sufficient capital to reclamation and other activities to mitigate the impact on the areas in which the Company operates; that we are dedicated to managing the environmental impact from our operations through our environmental programs which include resource conservation, water management and site abandonment / reclamation / remediation; that we will remain in the ABC program for 2021 and 2022; how the ASRP will allow the Company to expand the abandonment activities, the timing thereof and staying actively engaged in these types of programs; that amounts spent in 2020 under the ABC program can be applied to our 2021 target; the continued use of ASRP grants in 2021 and 2022; the information disclosed under “Sensitivity Analysis”; our future payment obligations as disclosed under “Contractual Obligations and Commitments”; that management contemplates both operating and financial risks and takes action as appropriate to limit the Company’s exposure to certain risks and that management maintains close relationships with the Company’s lenders and agents to monitor credit market developments, and these actions and plans aim to increase the likelihood of maintaining the Company’s financial flexibility and capital program, supporting the Company’s ongoing operations and ability to execute longer-term business strategies; and the Company’s need to require additional sources of financing in certain circumstances.
With respect to forward-looking statements contained in this document, the Company has made assumptions regarding, among other things: that the Company does not dispose of or acquire material producing properties or royalties or other interests therein other than as stated herein in respect of our proposed acquisition of the remaining 45% interest in PROP; that the Government of Alberta will not impose oil and bitumen production quotas under its curtailment rules again in the future; the impact of regional and/or global health related events, including the ongoing COVID-19 pandemic, on energy demand and commodity prices; that the Company’s operations and production will not be disrupted by circumstances attributable to the COVID-19 pandemic and the responses of governments and the public
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 21 |
to the pandemic; global energy policies going forward, including the continued ability and willingness of members of OPEC, Russia and other nations to agree on and adhere to production quotas from time to time; our ability to qualify for (or continue to qualify for) new or existing government programs created as a result of the COVID-19 pandemic (including the CEWS and ASRP) or otherwise, and obtain financial assistance therefrom, and the impact of those programs on our financial condition; our ability to execute our plans as described herein and in our other disclosure documents and the impact that the successful execution of such plans will have on our Company and our stakeholders; future capital expenditure and decommissioning expenditure levels; future operating costs and G&A costs; future oil, natural gas liquids and natural gas prices and differentials between light, medium and heavy oil prices and Canadian, WTI and world oil and natural gas prices; future hedging activities; future oil, natural gas liquids and natural gas production levels, including that we will not be required to shut-in production due to a deterioration of commodity prices; future exchange rates and interest rates; future debt levels; our ability to execute our capital programs as planned without significant adverse impacts from various factors beyond our control, including extreme weather events such as wild fires and flooding, infrastructure access and delays in obtaining regulatory approvals and third party consents; our ability to obtain equipment in a timely manner to carry out development activities and the costs thereof; our ability to market our oil and natural gas successfully to current and new customers; our ability to obtain financing on acceptable terms, including our ability (if necessary) to continue to extend the revolving period and term out period of our credit facility, our ability to maintain the existing borrowing base under our credit facility, our ability to renew or replace our syndicated bank facility and our ability to finance the repayment of our senior notes on maturity; our ability to add production and reserves through our development and exploitation activities; and our ability to complete the proposed acquisition of the remaining 45% interest in PROP, including our ability to secure the necessary financing to pay the purchase price and satisfy all of the conditions precedent to closing the acquisition including the related financing matters in respect thereof.
Although the Company believes that the expectations reflected in the forward-looking statements contained in this document, and the assumptions on which such forward-looking statements are made, are reasonable, there can be no assurance that such expectations will prove to be correct. Readers are cautioned not to place undue reliance on forward-looking statements included in this document, as there can be no assurance that the plans, intentions or expectations upon which the forward-looking statements are based will occur. By their nature, forward-looking statements involve numerous assumptions, known and unknown risks and uncertainties that contribute to the possibility that the forward-looking statements contained herein will not be correct, which may cause our actual performance and financial results in future periods to differ materially from any estimates or projections of future performance or results expressed or implied by such forward-looking statements. These risks and uncertainties include, among other things: the possibility that the Company will not be able to continue to successfully execute our business plans and strategies in part or in full, and the possibility that some or all of the benefits that the Company anticipates will accrue to our Company and our stakeholders as a result of the successful execution of such plans and strategies do not materialize; the possibility that the Company ceases to qualify for, or does not qualify for, one or more existing or new government assistance programs implemented in connection with the COVID-19 pandemic and other regional and/or global health related events or otherwise, that the impact of such programs falls below our expectations, that the benefits under one or more of such programs is decreased, or that one or more of such programs is discontinued; the impact on energy demand and commodity prices of regional and/or global health related events, including the ongoing COVID-19 pandemic, and the responses of governments and the public to the pandemic, including the risk that the amount of energy demand destruction and/or the length of the decreased demand exceeds our expectations; the risk that the significant decrease in the valuation of oil and natural gas companies and their securities and the decrease in confidence in the oil and natural gas industry generally that has been caused by, among other things, the COVID-19 pandemic and the worldwide transition towards less reliance on fossil fuels persists or worsens; the risk that the COVID-19 pandemic adversely affects the financial capacity of the Company’s contractual counterparties and potentially their ability to perform their contractual obligations; the possibility that the revolving period and/or term out period of our credit facility and the maturity date of our senior notes is not further extended (if necessary), that the borrowing base under our credit facility is reduced, that the Company is unable to renew our credit facilities on acceptable terms or at all and/or finance the repayment of our senior notes when they mature on acceptable terms or at all and/or obtain new debt and/or equity financing to replace one or both of our credit facilities and senior notes; the possibility that we breach one or more of the financial covenants pursuant to our agreements with our lenders and the holders of our senior notes; the possibility that we are forced to shut-in production, whether due to commodity prices decreasing or the Alberta government reactivating its curtailment program; the risk that OPEC, Russia
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 22 |
and other nations fail to agree on and/or adhere to production quotas from time to time that are sufficient to balance supply and demand fundamentals for oil; general economic and political conditions in Canada, the U.S. and globally, and in particular, the effect that those conditions have on commodity prices and our access to capital; industry conditions, including fluctuations in the price of oil, natural gas liquids and natural gas, price differentials for oil and natural gas produced in Canada as compared to other markets, and transportation restrictions, including pipeline and railway capacity constraints; fluctuations in foreign exchange or interest rates; unanticipated operating events or environmental events that can reduce production or cause production to be shut-in or delayed (including extreme cold during winter months, wild fires and flooding); the possibility that fuel conservation measures, alternative fuel requirements, increasing consumer demand for alternatives to hydrocarbons and technological advances in fuel economy and renewable energy generation systems could permanently reduce the demand for oil and natural gas and/or permanently impair the Company’s ability to obtain financing and/or insurance on acceptable terms or at all, and the possibility that some or all of these risks are heightened as a result of the response of governments, financial institutions and consumers to the ongoing COVID-19 pandemic and/or public opinion and/or special interest groups; the risk that we are unable to complete our proposed acquisition of the remaining 45% interest in PROP due to an inability to raise financing on acceptable terms or at all or satisfy one or more of the conditions precedent to closing such acquisition; and the other factors described under “Risk Factors” in our Annual Information Form and described in our public filings, available in Canada at www.sedar.com and in the United States at www.sec.gov. Readers are cautioned that this list of risk factors should not be construed as exhaustive.
The forward-looking statements contained in this document speak only as of the date of this document. Except as expressly required by applicable securities laws, the Company does not undertake any obligation to publicly update any forward-looking statements. The forward-looking statements contained in this document are expressly qualified by this cautionary statement.
Additional Information
Additional information relating to Obsidian Energy, including Obsidian Energy’s Annual Information Form, is available on the Company’s website at www.obsidianenergy.com, on SEDAR at www.sedar.com and on EDGAR at www.sec.gov.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
MANAGEMENT’S DISCUSSION AND ANALYSIS 23 |
Exhibit 99.3
Obsidian Energy Ltd.
Consolidated Balance Sheets
| As at | ||||||||||||
| (CAD millions, unaudited) |
Note | September 30, 2021 | December 31, 2020 | |||||||||
| Assets |
||||||||||||
| Current |
||||||||||||
| Cash |
$ | 4.0 | $ | 8.1 | ||||||||
| Accounts receivable |
56.5 | 40.8 | ||||||||||
| Risk management |
7 | — | 0.8 | |||||||||
| Prepaid expenses and other |
12.0 | 9.2 | ||||||||||
|
|
|
|
|
|||||||||
| 72.5 | 58.9 | |||||||||||
|
|
|
|
|
|||||||||
| Non-current |
||||||||||||
| Property, plant and equipment |
3 | 1,258.0 | 905.2 | |||||||||
|
|
|
|
|
|||||||||
| 1,258.0 | 905.2 | |||||||||||
|
|
|
|
|
|||||||||
| Total assets |
$ | 1,330.5 | $ | 964.1 | ||||||||
|
|
|
|
|
|||||||||
| Liabilities and Shareholders’ Equity |
||||||||||||
| Current |
||||||||||||
| Accounts payable and accrued liabilities |
$ | 103.6 | $ | 74.1 | ||||||||
| Current portion of long-term debt |
4 | — | 451.8 | |||||||||
| Current portion of lease liabilities |
5 | 4.2 | 4.8 | |||||||||
| Current portion of provisions |
6 | 21.7 | 16.3 | |||||||||
| Risk management |
7 | 4.2 | 0.6 | |||||||||
|
|
|
|
|
|||||||||
| 133.7 | 547.6 | |||||||||||
| Non-current |
||||||||||||
| Long-term debt |
4 | 397.0 | — | |||||||||
| Lease liabilities |
5 | 5.3 | 5.6 | |||||||||
| Provisions |
6 | 71.3 | 87.7 | |||||||||
| Other non-current liabilities |
6.2 | 0.1 | ||||||||||
|
|
|
|
|
|||||||||
| 613.5 | 641.0 | |||||||||||
|
|
|
|
|
|||||||||
| Shareholders’ equity |
||||||||||||
| Shareholders’ capital |
9 | 2,189.6 | 2,187.0 | |||||||||
| Other reserves |
9 | 102.6 | 103.6 | |||||||||
| Deficit |
(1,575.2 | ) | (1,967.5 | ) | ||||||||
|
|
|
|
|
|||||||||
| 717.0 | 323.1 | |||||||||||
|
|
|
|
|
|||||||||
| Total liabilities and shareholders’ equity |
$ | 1,330.5 | $ | 964.1 | ||||||||
|
|
|
|
|
|||||||||
Commitments and contingencies (Note 11)
Subsequent events (Notes 7 and 13)
See accompanying notes to the unaudited interim consolidated financial statements.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1 |
Obsidian Energy Ltd.
Consolidated Statements of Income (Loss)
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||||
| (CAD millions, except per share amounts, unaudited) |
Note | 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Production revenues |
8 | $ | 124.5 | $ | 75.4 | $ | 327.7 | $ | 202.6 | |||||||||
| Processing fees |
1.6 | 1.3 | 4.9 | 4.6 | ||||||||||||||
| Royalties |
(13.3 | ) | (3.3 | ) | (29.9 | ) | (10.6 | ) | ||||||||||
| Sales of commodities purchased from third parties |
2.8 | 0.8 | 6.7 | 2.8 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| 115.6 | 74.2 | 309.4 | 199.4 | |||||||||||||||
| Other income |
1.2 | 1.2 | 3.7 | 9.9 | ||||||||||||||
| Government decommissioning assistance |
12 | 2.9 | — | 8.8 | — | |||||||||||||
| Risk management gain (loss) |
7 | (2.9 | ) | (0.8 | ) | (12.7 | ) | 21.6 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| 116.8 | 74.6 | 309.2 | 230.9 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Expenses |
||||||||||||||||||
| Operating |
32.3 | 28.0 | 97.1 | 83.9 | ||||||||||||||
| Transportation |
5.4 | 4.9 | 13.5 | 14.3 | ||||||||||||||
| Commodities purchased from third parties |
2.4 | 0.8 | 5.9 | 2.9 | ||||||||||||||
| General and administrative |
4.1 | 3.2 | 11.4 | 10.4 | ||||||||||||||
| Restructuring |
0.1 | 0.1 | (1.8 | ) | 0.4 | |||||||||||||
| Share-based compensation |
10 | 3.0 | 0.7 | 15.4 | 1.7 | |||||||||||||
| Depletion, depreciation, impairment and accretion |
3,6 | 12.1 | 29.5 | (243.9 | ) | 872.7 | ||||||||||||
| (Gain)/loss on provisions |
6 | (0.1 | ) | 1.0 | (0.4 | ) | (22.0 | ) | ||||||||||
| Foreign exchange loss (gain) |
4 | 1.6 | (1.3 | ) | — | 1.5 | ||||||||||||
| Financing |
4,5 | 8.7 | 7.3 | 27.4 | 28.4 | |||||||||||||
| Transaction costs |
— | 2.8 | — | 2.8 | ||||||||||||||
| Other |
11 | 0.6 | 0.8 | (7.7 | ) | 5.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| 70.2 | 77.8 | (83.1 | ) | 1,002.8 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Income (loss) before taxes |
46.6 | (3.2 | ) | 392.3 | (771.9 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Deferred tax expense (recovery) |
— | — | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net and comprehensive income (loss) |
$ | 46.6 | $ | (3.2 | ) | $ | 392.3 | $ | (771.9 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income (loss) per share |
||||||||||||||||||
| Basic |
$ | 0.62 | $ | (0.04 | ) | $ | 5.28 | $ | (10.55 | ) | ||||||||
| Diluted |
$ | 0.60 | $ | (0.04 | ) | $ | 5.14 | $ | (10.55 | ) | ||||||||
| Weighted average shares outstanding (millions) |
||||||||||||||||||
| Basic |
9 | 74.9 | 73.5 | 74.3 | 73.2 | |||||||||||||
| Diluted |
9 | 77.3 | 73.5 | 76.4 | 73.2 | |||||||||||||
See accompanying notes to the unaudited interim consolidated financial statements.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 2 |
Obsidian Energy Ltd.
Consolidated Statements of Cash Flows
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||||||
| (CAD millions, unaudited) |
Note | 2021 | 2020 | 2021 | 2020 | |||||||||||||||
| Operating activities |
||||||||||||||||||||
| Net income (loss) |
$ | 46.6 | $ | (3.2 | ) | $ | 392.3 | $ | (771.9 | ) | ||||||||||
| Government decommissioning assistance |
12 | (2.9 | ) | — | (8.8 | ) | — | |||||||||||||
| Other income |
— | — | — | (0.3 | ) | |||||||||||||||
| Depletion, depreciation, impairment and accretion |
3,6 | 12.1 | 29.5 | (243.9 | ) | 872.7 | ||||||||||||||
| Provisions |
6 | (0.1 | ) | 1.0 | (0.4 | ) | (22.0 | ) | ||||||||||||
| Financing |
4,5 | 1.5 | 0.2 | 6.5 | 1.3 | |||||||||||||||
| Share-based compensation |
10 | 0.6 | 0.7 | 1.7 | 1.5 | |||||||||||||||
| Unrealized risk management loss (gain) |
7 | 0.9 | (0.2 | ) | 4.4 | (0.4 | ) | |||||||||||||
| Unrealized foreign exchange loss (gain) |
4 | 1.6 | (1.3 | ) | (0.3 | ) | 1.5 | |||||||||||||
| Other |
— | — | — | 1.1 | ||||||||||||||||
| Decommissioning expenditures |
6 | (1.6 | ) | (0.6 | ) | (5.4 | ) | (8.8 | ) | |||||||||||
| Onerous office lease settlements |
6 | (2.3 | ) | (2.4 | ) | (7.0 | ) | (7.4 | ) | |||||||||||
| Financing fees paid |
— | — | (4.4 | ) | — | |||||||||||||||
| Change in non-cash working capital |
9.1 | 11.1 | 1.1 | 1.0 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| 65.5 | 34.8 | 135.8 | 68.3 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Investing activities |
||||||||||||||||||||
| Capital expenditures |
3 | (45.1 | ) | (4.6 | ) | (96.1 | ) | (45.6 | ) | |||||||||||
| Property dispositions (acquisitions), net |
3 | — | — | — | 0.1 | |||||||||||||||
| Change in non-cash working capital |
12.4 | 0.6 | 15.8 | (13.2 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| (32.7 | ) | (4.0 | ) | (80.3 | ) | (58.7 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Financing activities |
||||||||||||||||||||
| Decrease in syndicated credit facility |
4 | (30.0 | ) | (25.0 | ) | (55.0 | ) | (4.0 | ) | |||||||||||
| Repayments of senior notes |
4 | — | — | (1.4 | ) | — | ||||||||||||||
| Realized foreign exchange loss on repayments |
4 | — | — | 0.3 | — | |||||||||||||||
| Lease receivable receipts |
— | — | — | 2.2 | ||||||||||||||||
| Lease liabilities settlements |
5 | (1.1 | ) | (1.6 | ) | (3.4 | ) | (5.0 | ) | |||||||||||
| Exercised compensation plans |
— | — | (0.1 | ) | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| (31.1 | ) | (26.6 | ) | (59.6 | ) | (6.8 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Change in cash and cash equivalents |
1.7 | 4.2 | (4.1 | ) | 2.8 | |||||||||||||||
| Cash and cash equivalents, beginning of period |
2.3 | 1.6 | 8.1 | 3.0 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Cash and cash equivalents, end of period |
$ | 4.0 | $ | 5.8 | $ | 4.0 | $ | 5.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
See accompanying notes to the unaudited interim consolidated financial statements.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 3 |
Obsidian Energy Ltd.
Statements of Changes in Shareholders’ Equity
| (CAD millions, unaudited) |
Note | Shareholders’ Capital |
Other Reserves |
Deficit | Total | |||||||||||||||
| Balance at January 1, 2021 |
$ | 2,187.0 | $ | 103.6 | $ | (1,967.5 | ) | $ | 323.1 | |||||||||||
| Net and comprehensive income |
— | — | 392.3 | 392.3 | ||||||||||||||||
| Share-based compensation |
10 | — | 1.7 | — | 1.7 | |||||||||||||||
| Issues on exercise of equity compensation plans |
2.6 | (2.7 | ) | — | (0.1 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at September 30, 2021 |
$ | 2,189.6 | $ | 102.6 | $ | (1,575.2 | ) | $ | 717.0 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| (CAD millions, unaudited) |
Note | Shareholders’ Capital |
Other Reserves |
Deficit | Total | |||||||||||||||
| Balance at January 1, 2020 |
$ | 2,186.7 | $ | 101.8 | $ | (1,195.8 | ) | $ | 1,092.7 | |||||||||||
| Net and comprehensive loss |
— | — | (771.9 | ) | (771.9 | ) | ||||||||||||||
| Share-based compensation |
10 | — | 1.5 | — | 1.5 | |||||||||||||||
| Issues on exercise of equity compensation plans |
0.3 | (0.3 | ) | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at September 30, 2020 |
$ | 2,187.0 | $ | 103.0 | $ | (1,967.7 | ) | $ | 322.3 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
See accompanying notes to the unaudited interim consolidated financial statements.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 4 |
Notes to the Unaudited Interim Consolidated Financial Statements
(All tabular amounts are in CAD millions except numbers of common shares, per share amounts,
percentages and various figures in Note 7)
1. Structure of Obsidian Energy
Obsidian Energy Ltd. (“Obsidian Energy”, the “Company”, “we”, “us” or “our”) is an exploration and production company and is governed by the laws of the Province of Alberta, Canada. The Company operates in one segment, to explore for, develop and hold interests in oil and natural gas properties and related production infrastructure in the Western Canada Sedimentary Basin directly and through investments in securities of subsidiaries holding such interests. Obsidian Energy’s portfolio of assets is managed at an enterprise level, rather than by separate operating segments or business units. The Company assesses our financial performance at the enterprise level and resource allocation decisions are made on a project basis across our portfolio of assets, without regard to the geographic location of projects. Obsidian Energy owns the petroleum and natural gas assets or 100 percent of the equity, directly or indirectly, of the entities that carry on the remainder of the oil and natural gas business of Obsidian Energy, except for an unincorporated joint arrangement (the “Peace River Oil Partnership”) in which Obsidian Energy’s wholly owned subsidiaries hold a 55 percent interest.
2. Basis of presentation and statement of compliance
a) Basis of Presentation
The unaudited condensed interim consolidated financial statements (“interim consolidated financial statements”) include the accounts of Obsidian Energy, our wholly owned subsidiaries and our proportionate interest in partnerships. Results from acquired properties are included in the Company’s reported results subsequent to the closing date and results from properties sold are included until the closing date.
All intercompany balances, transactions, income and expenses are eliminated on consolidation.
Certain comparative figures have been reclassified to correspond with current period presentation. Additionally, within these interim consolidated financial statements the Company has updated the presentation of our financial figures to disclose dollar figures rounded to the nearest hundred thousand. This may result in immaterial differences in the comparative figures.
b) Statement of Compliance
These interim consolidated financial statements are prepared in compliance with IAS 34 “Interim Financial Reporting” and accordingly do not contain all of the disclosures included in Obsidian Energy’s annual audited consolidated financial statements.
These interim consolidated financial statements were prepared using the same accounting policies as in the annual consolidated financial statements as at and for the year ended December 31, 2020.
All tabular amounts are in millions of Canadian dollars, except numbers of common shares, per share amounts, percentages and other figures as noted.
These interim consolidated financial statements were approved for issuance by the Board of Directors on November 5, 2021.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 5 |
3. Property, plant and equipment (“PP&E”)
Oil and Gas assets/ Facilities, Corporate assets
| Cost |
Nine months ended September 30, 2021 |
Year ended December 31, 2020 |
||||||
| Balance, beginning of period |
$ | 10,838.3 | $ | 10,387.2 | ||||
| Capital expenditures |
96.1 | 57.2 | ||||||
| Dispositions |
— | (0.1 | ) | |||||
| Transfer from/(to) assets held for sale |
— | 423.0 | ||||||
| Change in decommissioning liability |
4.8 | (29.0 | ) | |||||
|
|
|
|
|
|||||
| Balance, end of period |
$ | 10,939.2 | $ | 10,838.3 | ||||
|
|
|
|
|
|||||
| Accumulated depletion and depreciation |
Nine months ended September 30, 2021 |
Year ended December 31, 2020 |
||||||
| Balance, beginning of period |
$ | 9,942.6 | $ | 8,708.3 | ||||
| Depletion and depreciation |
81.2 | 122.1 | ||||||
| Impairments |
4.3 | 766.2 | ||||||
| Impairment reversals |
(338.0 | ) | — | |||||
| Transfers from/(to) asset held for sale |
— | 346.0 | ||||||
|
|
|
|
|
|||||
| Balance, end of period |
$ | 9,690.1 | $ | 9,942.6 | ||||
|
|
|
|
|
|||||
| As at | ||||||||
| Net book value |
September 30, 2021 | December 31, 2020 | ||||||
| Total |
$ | 1,249.1 | $ | 895.7 | ||||
|
|
|
|
|
|||||
Right-of-use assets
The following table includes a break-down of the categories for right-of-use assets.
| Cost |
Office | Transportation | Vehicle | Surface | Total | |||||||||||||||
| Balance, January 1, 2020 |
$ | 12.6 | $ | 16.7 | $ | 4.1 | $ | 2.1 | $ | 35.5 | ||||||||||
| Additions (Terminations) |
(12.6 | ) | (1.8 | ) | 1.6 | — | (12.8 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, December 31, 2020 |
$ | — | $ | 14.9 | $ | 5.7 | $ | 2.1 | $ | 22.7 | ||||||||||
| Additions |
— | 1.4 | 0.6 | — | 2.0 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, September 30, 2021 |
$ | — | $ | 16.3 | $ | 6.3 | $ | 2.1 | $ | 24.7 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Accumulated amortization |
Office | Transportation | Vehicle | Surface | Total | |||||||||||||||
| Balance, January 1, 2020 |
$ | 2.4 | $ | 6.0 | $ | 1.3 | $ | 0.1 | $ | 9.8 | ||||||||||
| Amortization |
0.5 | 4.5 | 1.3 | — | 6.3 | |||||||||||||||
| Termination |
(2.9 | ) | — | — | — | (2.9 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, December 31, 2020 |
$ | — | $ | 10.5 | $ | 2.6 | $ | 0.1 | $ | 13.2 | ||||||||||
| Amortization |
— | 1.6 | 1.0 | — | 2.6 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, September 30, 2021 |
$ | — | $ | 12.1 | $ | 3.6 | $ | 0.1 | $ | 15.8 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| As at | ||||||||
| Net book value |
September 30, 2021 | December 31, 2020 | ||||||
| Total |
$ | 8.9 | $ | 9.5 | ||||
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 6 |
Total PP&E
Total PP&E including Oil and Gas assets, Facilities, Corporate assets and Right-of-use assets is as follows:
| As at | ||||||||
| PP&E |
September 30, 2021 | December 31, 2020 | ||||||
| Oil and Gas assets, Facilities, Corporate assets |
$ | 1,249.1 | $ | 895.7 | ||||
| Right-of-use assets |
8.9 | 9.5 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 1,258.0 | $ | 905.2 | ||||
|
|
|
|
|
|||||
At September 30, 2021, the Company completed an assessment to determine if indicators of impairment or an impairment reversal were present. As a result of the Company entering into an agreement to purchase the 45 percent interest of our partner in the Peace River Oil Partnership subsequent to September 30, 2021, the Company concluded that an indicator of impairment reversal was present within our Peace River CGU. The Company followed the fair value less costs of disposal method using the purchase price of the acquisition (a Level 2 fair value measure) which resulted in a recoverable amount of $50.8 million and a $26.5 million non-cash impairment reversal. See Note 13 for additional information regarding the proposed acquisition. Additionally, as a result of the Company revising estimates related to our decommissioning liability, the Company recorded a $4.2 million impairment within our Legacy CGU. No indicator of impairment or impairment reversal was noted for our Cardium or Viking CGU’s, thus no test was performed.
At June 30, 2021, the Company recorded a $311.5 million non-cash impairment reversal within our Cardium CGU mainly due to the improved commodity price environment and strong drilling results in the area.
In 2020, the Company recorded $766.2 million of non-cash net impairments across multiple CGU’s, primarily as a result of the low commodity price environment due to the impact of the COVID-19 pandemic.
4. Long-term debt
| As at | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| Syndicated credit facility |
$ | 340.0 | $ | 395.0 | ||||
| Senior secured notes – 2008 Notes 8.52%, US$4.0 million, maturing November 30, 2022 |
5.0 | 5.2 | ||||||
| Senior secured notes – 2010 Q1 Notes 7.97%, US$9.5 million, maturing November 30, 2022 |
12.2 | 12.4 | ||||||
| Senior secured notes – 2010 Q4 Notes 7.00%, US$13.0 million, maturing November 30, 2022 |
16.5 | 16.9 | ||||||
| 7.10%, US$5.7 million, maturing November 30, 2022 |
7.2 | 7.4 | ||||||
| 7.35%, US$2.1 million, maturing November 30, 2022 |
2.7 | 2.7 | ||||||
| Senior secured notes – 2011 Q4 Notes 6.91%, US$12.0 million, maturing November 30, 2022 |
15.3 | 15.7 | ||||||
|
|
|
|
|
|||||
| Total credit facility and senior secured notes |
398.9 | 455.3 | ||||||
|
|
|
|
|
|||||
| Deferred interest |
1.6 | — | ||||||
| Deferred financing costs |
(3.5 | ) | (3.5 | ) | ||||
|
|
|
|
|
|||||
| Total long-term debt |
$ | 397.0 | $ | 451.8 | ||||
|
|
|
|
|
|||||
| Current portion |
$ | — | $ | 451.8 | ||||
| Long-term portion |
$ | 397.0 | $ | — | ||||
|
|
|
|
|
|||||
As a result of entering into amending agreements with our banking syndicate and senior secured noteholders during the first quarter of 2021 and the extension of the term-out periods to November 30, 2022, the Company’s syndicated credit facility and senior secured notes are classified as non-current on September 30, 2021. Additionally, as part of the amending agreements, the Company made a US$1.1 million (CAD$1.4 million) repayment on our senior secured notes during the first quarter of 2021.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 7 |
Additional information on Obsidian Energy’s senior secured notes was as follows:
| As at | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| Weighted average remaining life (years) |
1.2 | 0.9 | ||||||
| Weighted average interest rate |
7.3 | % | 5.2 | % | ||||
The Company has a reserve-based syndicated credit facility which is subject to a semi-annual borrowing base redetermination typically in May and November of each year. The aggregate amount available under the syndicated credit facility is $440 million which consists of a $225 million revolving syndicated credit facility and a $215 million non-revolving term loan. The revolving period under the syndicated credit facility is set at May 31, 2022, with the maturity date of both the syndicated credit facility and non-revolving term loan of November 30, 2022. Additionally, the Company has a revolving period reconfirmation date on January 17, 2022, whereby, on or prior to such date, the lenders may accelerate the end date of the revolving period to February 1, 2022. In this case, the end date of the term period would remain unchanged at November 30, 2022. Furthermore, the Company’s revolving credit facility will have a one-time adjustment to reduce our undrawn availability to $35 million at December 31, 2021. Any borrowing availability at this time in excess of that amount will be used to reduce amounts outstanding on the non-revolving term loan and senior notes. The borrowing base for the syndicated credit facility is based on the syndicate’s interpretation of the Company’s reserves, commodity prices and decommissioning obligations. The recent commodity price volatility and the economic impact of COVID-19 pandemic may result in increased risk regarding borrowing base redeterminations, maintaining available credit limits and extending debt instruments upon maturity.
Drawings on the Company’s syndicated credit facility are subject to fluctuations in short-term money market rates as they are generally held as short-term borrowings. As at September 30, 2021, 85 percent (December 31, 2020 – 87 percent) of Obsidian Energy’s long-term debt instruments were exposed to changes in short-term interest rates.
At September 30, 2021, letters of credit totaling $5.0 million were outstanding (December 31, 2020 – $5.0 million) that reduce the amount otherwise available to be drawn on the syndicated credit facility.
Financing expense consists of the following:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Interest on bank debt and senior notes |
$ | 6.8 | $ | 5.5 | $ | 19.5 | $ | 19.0 | ||||||||
| Advisor fees |
0.4 | 1.6 | 1.4 | 8.1 | ||||||||||||
| Deferred financing costs |
1.7 | — | 4.4 | — | ||||||||||||
| Unwinding discount on lease liabilities |
0.2 | 0.2 | 0.5 | 1.3 | ||||||||||||
| Loss (gain) on debt modification |
(0.4 | ) | — | 1.6 | — | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Financing |
$ | 8.7 | $ | 7.3 | $ | 27.4 | $ | 28.4 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The senior note amending agreements entered into during the first quarter of 2021 resulted in a debt modification under IFRS 9 (“Financial Instruments”) and the recognition of a non-cash loss of $2.3 million due to the extended term and increase in interest rates.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 8 |
Obsidian Energy records unrealized foreign exchange gains or losses on our senior notes as amounts are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date. Realized foreign exchange gains or losses are recorded upon actual repayment of senior notes. The split between realized and unrealized foreign exchange is as follows:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Realized foreign exchange loss |
$ | — | $ | — | $ | 0.3 | $ | — | ||||||||
| Unrealized foreign exchange (gain)/loss |
1.6 | (1.3 | ) | (0.3 | ) | 1.5 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Foreign exchange (gain)/loss |
$ | 1.6 | $ | (1.3 | ) | $ | — | $ | 1.5 | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company is subject to Senior debt and Total debt to Capitalization financial covenants with a maximum ratio of 75 percent, as more specifically defined in the applicable lending agreements. At September 30, 2021, the Company was in compliance with our financial covenants under such lending agreements.
5. Lease liabilities
Total lease liabilities included in the Consolidated Balance Sheets are as follows:
| Nine months ended September 30, 2021 |
Year ended December 31, 2020 |
|||||||
| Balance, beginning of period |
$ | 10.4 | $ | 113.8 | ||||
| Additions (terminations) |
2.0 | (98.6 | ) | |||||
| Unwinding of discount on lease liabilities |
0.5 | 1.5 | ||||||
| Lease payments |
(3.4 | ) | (6.3 | ) | ||||
|
|
|
|
|
|||||
| Balance, end of period |
$ | 9.5 | $ | 10.4 | ||||
|
|
|
|
|
|||||
| Current portion |
$ | 4.2 | $ | 4.8 | ||||
| Long-term portion |
$ | 5.3 | $ | 5.6 | ||||
The following table sets out a maturity analysis of lease payments, disclosing the undiscounted balance after September 30, 2021:
| 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | ||||||||||||||||||||||
| Transportation |
$ | 0.7 | $ | 2.6 | $ | 1.8 | $ | — | $ | — | $ | — | $ | 5.1 | ||||||||||||||
| Vehicle |
0.4 | 1.4 | 1.0 | 0.2 | — | — | 3.0 | |||||||||||||||||||||
| Surface |
— | 0.1 | 0.1 | 0.1 | 0.1 | 5.2 | 5.6 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
$ | 1.1 | $ | 4.1 | $ | 2.9 | $ | 0.3 | $ | 0.1 | $ | 5.2 | $ | 13.7 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Amounts recognized in Consolidated Statements of Income (Loss) and Consolidated Statements of Cash Flows
The Company recorded $nil income from sub-leases related to our right-of-use assets. Expenses related to short-term leases and leases of low-value assets were insignificant during the period.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 9 |
6. Provisions
| As at | ||||||||
| September 30, 2021 | December 31, 2020 | |||||||
| Decommissioning liability |
$ | 65.4 | $ | 70.5 | ||||
| Office lease provision |
27.6 | 33.5 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 93.0 | $ | 104.0 | ||||
|
|
|
|
|
|||||
| Current portion |
$ | 21.7 | $ | 16.3 | ||||
| Long-term portion |
$ | 71.3 | $ | 87.7 | ||||
|
|
|
|
|
|||||
Decommissioning liability
At September 30, 2021, the decommissioning liability was determined by applying an inflation factor of 2.0 percent (December 31, 2020 - 2.0 percent) and the inflated amount was discounted using a credit-adjusted rate of 9.0 percent (December 31, 2020 – 9.0 percent) over the expected useful life of the underlying assets, currently extending over 50 years into the future. At September 30, 2021, the total decommissioning liability on an undiscounted, uninflated basis was $580.0 million (December 31, 2020 - $596.6 million).
Changes to the decommissioning liability were as follows:
| Nine months ended September 30, 2021 |
Year ended December 31, 2020 |
|||||||
| Balance, beginning of period |
$ | 70.5 | $ | 100.1 | ||||
| Net liabilities added (disposed) (1) |
0.5 | (0.4 | ) | |||||
| Increase (decrease) due to changes in estimates |
4.3 | (28.6 | ) | |||||
| Liabilities settled |
(5.4 | ) | (11.1 | ) | ||||
| Government decommissioning assistance |
(8.8 | ) | (2.2 | ) | ||||
| Transfers from (to) liabilities for assets held for sale |
— | 7.0 | ||||||
| Accretion charges |
4.3 | 5.7 | ||||||
|
|
|
|
|
|||||
| Balance, end of period |
$ | 65.4 | $ | 70.5 | ||||
|
|
|
|
|
|||||
| Current portion |
$ | 12.8 | $ | 7.3 | ||||
| Long-term portion |
$ | 52.6 | $ | 63.2 | ||||
| (1) | Includes additions from drilling activity, facility capital spending and disposals related to net property dispositions as applicable. |
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 10 |
Office lease provision
The office lease provision represents the net present value of non-lease components on future office lease payments. The office lease provision was determined by applying an asset specific credit-adjusted discount rate of 6.5 percent (December 31, 2020 – 6.5 percent) over the remaining life of the lease contracts, extending into 2025.
Changes to the office lease provision were as follows:
| Nine months ended September 30, 2021 |
Year ended December 31, 2020 |
|||||||
| Balance, beginning of period |
$ | 33.5 | $ | 12.7 | ||||
| Net additions (dispositions) |
— | 27.0 | ||||||
| Increase (decrease) due to changes in estimates |
(0.4 | ) | 1.0 | |||||
| Cash settlements |
(7.0 | ) | (9.7 | ) | ||||
| Accretion charges |
1.5 | 2.5 | ||||||
|
|
|
|
|
|||||
| Balance, end of period |
$ | 27.6 | $ | 33.5 | ||||
|
|
|
|
|
|||||
| Current portion |
$ | 8.9 | $ | 9.0 | ||||
| Long-term portion |
$ | 18.7 | $ | 24.5 | ||||
7. Risk management
Financial instruments consist of cash and cash equivalents, accounts receivable, fair values of derivative financial instruments, accounts payable and accrued liabilities and long-term debt. At September 30, 2021, except for the senior notes described in Note 4 with a carrying value of $58.9 million (December 31, 2020 – $60.3 million) and a fair value of $55.5 million (December 31, 2020—$49.3 million) and the syndicated credit facility, the fair values of these financial instruments approximate their carrying amounts due to the short-term maturity of the instruments. The carrying value of the syndicated credit facility approximates its carrying value as the loans bears interest at market rates.
The fair values of all outstanding financial commodity related contracts are reflected on the Consolidated Balance Sheets with the changes during the period recorded in income as unrealized gains or losses.
At September 30, 2021 and December 31, 2020, the only asset or liability measured at fair value on a recurring basis was the risk management asset and liability, which was valued based on “Level 2 inputs” being quoted prices in markets that are not active or based on prices that are observable for the asset or liability.
The following table reconciles the changes in the fair value of financial instruments outstanding:
| Risk management asset (liability) | Nine months ended September 30, 2021 |
Year ended December 31, 2020 |
||||||
| Balance, beginning of period |
$ | 0.2 | $ | (0.6 | ) | |||
| Unrealized gain (loss) on financial instruments: |
||||||||
| Commodity collars and swaps |
(4.4 | ) | 0.8 | |||||
|
|
|
|
|
|||||
| Total fair value, end of period |
$ | (4.2 | ) | $ | 0.2 | |||
|
|
|
|
|
|||||
| Current portion |
$ | (4.2 | ) | $ | 0.2 | |||
| Long-term portion |
$ | — | $ | — | ||||
Obsidian Energy had the following financial instruments outstanding as at September 30, 2021. Fair values are determined using external counterparty information, which is compared to observable market data. The Company limits our credit risk by executing counterparty risk procedures which include transacting only with institutions within our syndicated credit facility or companies with high credit ratings and by obtaining financial security in certain circumstances.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 11 |
| Notional volume |
Remaining term |
Pricing | Fair value (millions) |
|||||||||||||
| Oil |
||||||||||||||||
| WTI Swaps |
6,750 bbl/d | October 2021 | $ | 91.54/bbl | $ | (0.7 | ) | |||||||||
| AECO Swaps |
|
|||||||||||||||
| AECO Swaps |
23,695 mcf/d | October 2021 | $ | 2.70/mcf | (1.1 | ) | ||||||||||
| AECO Swaps |
21,325 mcf/d | November/21 – March/22 | $ | 4.46/mcf | (2.4 | ) | ||||||||||
|
|
|
|||||||||||||||
| Total |
$ | (4.2 | ) | |||||||||||||
|
|
|
|||||||||||||||
Based on commodity prices and contracts in place at September 30, 2021, a $1.00 change in the price per barrel of WTI oil would change pre-tax unrealized risk management by $0.2 million and a $0.10 change in the price per mcf of natural gas would change pre-tax unrealized risk management by $0.4 million.
Subsequent to September 30, 2021 the Company entered into the following additional financial hedges on a weighted average basis:
| Notional volume |
Term | Pricing | ||||||||||
| Oil |
||||||||||||
| WTI Swaps |
1,000 bbl/d | October 2021 | $ | 99.71/bbl | ||||||||
| WTI Swaps |
6,500 bbl/d | November 2021 | $ | 100.39/bbl | ||||||||
| WTI Swaps |
500 bbl/d | December 2021 | $ | 100.00/bbl | ||||||||
| AECO Swaps |
||||||||||||
| AECO Swaps |
4,265 mcf/d | November 2021 – March 2022 | $ | 5.49/mcf | ||||||||
The components of risk management on the Consolidated Statements of Income (Loss) are as follows:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Realized |
||||||||||||||||
| Settlement of commodity contracts |
$ | (2.0 | ) | $ | (1.0 | ) | $ | (8.3 | ) | $ | 21.2 | |||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total realized risk management gain (loss) |
$ | (2.0 | ) | $ | (1.0 | ) | $ | (8.3 | ) | $ | 21.2 | |||||
| Unrealized |
||||||||||||||||
| Commodity contracts |
$ | (0.9 | ) | $ | 0.2 | $ | (4.4 | ) | $ | 0.4 | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total unrealized risk management gain (loss) |
(0.9 | ) | 0.2 | (4.4 | ) | 0.4 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Risk management gain (loss) |
$ | (2.9 | ) | $ | (0.8 | ) | $ | (12.7 | ) | $ | 21.6 | |||||
|
|
|
|
|
|
|
|
|
|||||||||
Additionally, the Company had the following physical contracts outstanding at September 30, 2021.
| Notional volume |
Term | Pricing | ||||||||||
| Heavy Oil Differential - USD (1) |
550 bbl/d | |
October – December 2021 |
|
US$ | 26.00/bbl | ||||||
| (1) | Hedged on a US$ basis and inclusive of WCS differential, quality and transportation charges. |
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 12 |
Market risks
Obsidian Energy is exposed to normal market risks inherent in the oil and natural gas business, including, but not limited to, commodity price risk, foreign currency rate risk, credit risk, interest rate risk and liquidity risk. The Company seeks to mitigate these risks through various business processes and management controls and from time to time by using financial instruments.
COVID-19 Pandemic Risk
In March 2020, the World Health Organization declared COVID-19 a global pandemic. Since that time, the oil and natural gas industry has experienced significant volatility with commodity prices, and in particular oil prices, as a result of a decline in economic activity and lower demand for commodities in both Canada and around the world. In 2021, oil prices have recovered from the lows that occurred in the second quarter of 2020 as restrictions eased and vaccines continue to be administered. The timing for achieving full demand recovery remains uncertain as countries are at various stages of rolling-out vaccines while virus outbreaks continue to occur, mainly due to new variants, which has resulted in activity restrictions in certain countries. This market volatility has not only impacted oil and natural gas sales but has increased the complexity of certain judgements and estimates when preparing our third quarter financial information, particularly within the measurement uncertainty of the inputs used in the Company’s assessment of the recoverability of asset carrying values, assessing counterparty credit risk as well as the credit risk-adjusted discount rate used within our decommissioning liability and office lease provision.
There have been no material changes to these risks from those discussed in the Company’s annual audited consolidated financial statements.
8. Revenue and Other Income
The Company’s significant revenue streams consist of the following:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Oil |
$ | 94.6 | $ | 58.9 | $ | 252.7 | $ | 158.3 | ||||||||
| NGLs |
10.7 | 4.6 | 25.5 | 11.6 | ||||||||||||
| Natural gas |
19.2 | 11.9 | 49.5 | 32.7 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Production revenues |
124.5 | 75.4 | 327.7 | 202.6 | ||||||||||||
| Processing fees |
1.6 | 1.3 | 4.9 | 4.6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Oil and natural gas sales |
126.1 | 76.7 | 332.6 | 207.2 | ||||||||||||
| Other income |
1.2 | 1.2 | 3.7 | 9.9 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Oil and natural gas sales and other income |
$ | 127.3 | $ | 77.9 | $ | 336.3 | $ | 217.1 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Other income includes $1.2 million in road use recoveries for the third quarter of 2021 (2020 - $0.5 million) and $3.7 million for the nine-month period ended September 30, 2021 (2020 - $3.4 million). In 2020, the remainder of other income primarily relates to curtailment sales, whereby the Company sold unused production limit capacity under the Alberta Government Curtailment production limits.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 13 |
9. Shareholders’ equity
i) Issued
| Shareholders’ capital |
Common Shares | Amount | ||||||
| Balance, December 31, 2019 |
73,011,488 | $ | 2,186.7 | |||||
| Issued pursuant to equity compensation plans (1) |
504,737 | 0.3 | ||||||
|
|
|
|
|
|||||
| Balance, December 31, 2020 |
73,516,225 | $ | 2,187.0 | |||||
| Issued pursuant to equity compensation plans (1) |
1,336,652 | 2.6 | ||||||
|
|
|
|
|
|||||
| Balance, September 30, 2021 |
74,852,877 | $ | 2,189.6 | |||||
|
|
|
|
|
|||||
| (1) | Upon vesting or exercise of equity awards, the net benefit is recorded as a reduction of other reserves and an increase to shareholders’ capital. |
ii) Earnings per share - Basic and Diluted
The weighted average number of shares used to calculate per share amounts was as follows:
| Average shares outstanding (millions) |
Three months ended September 30 |
Nine months ended September 30 |
||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Basic |
74.9 | 73.5 | 74.3 | 73.2 | ||||||||||||
| Dilutive impact of stock options/ RSUs |
2.4 | — | 2.1 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Diluted (1) |
77.3 | 73.5 | 76.4 | 73.2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| (1) | 2020 excludes the impact of 3.3 million weighted average shares related to options outstanding under the Stock Option Plan (“Option Plan”) and Restricted Share Units (“RSUs”) outstanding under the Restricted and Performance Share Unit plan (“RPSU plan”) that were considered anti-dilutive and/or not in the money. |
10. Share-based compensation
Restricted and Performance Share Unit plan
Restricted Share Unit grants under the RPSU plan
Obsidian Energy awards RSU grants under the RPSU plan whereby employees receive consideration that fluctuates based on the Company’s share price on the TSX. Consideration can be in the form of cash or shares purchased on the open market or issued from treasury.
| RSUs (number of shares equivalent) |
Nine months ended September 30, 2021 |
Year ended December 31, 2020 |
||||||
| Outstanding, beginning of period |
2,355,408 | 1,100,278 | ||||||
| Granted |
190,500 | 1,818,840 | ||||||
| Vested |
(1,336,652 | ) | (510,738 | ) | ||||
| Forfeited |
(25,718 | ) | (52,972 | ) | ||||
|
|
|
|
|
|||||
| Outstanding, end of period |
1,183,538 | 2,355,408 | ||||||
|
|
|
|
|
|||||
The fair value and weighted average assumptions of the RSUs granted during the nine month periods were as follows:
| Nine months ended September 30 | ||||||||
| 2021 | 2020 | |||||||
| Average fair value of units granted (per unit) |
$ | 1.99 | $ | 0.55 | ||||
| Expected life of units (years) |
1.0 | 3.0 | ||||||
| Expected forfeiture rate |
nil | 0.6 | % | |||||
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 14 |
Performance Share Unit (“PSU”) grants under the RPSU plan
The RPSU plan allows Obsidian Energy to grant PSUs to employees of the Company. Members of the Board of Directors are not eligible for the RPSU plan. The PSU obligation is classified as a liability due to the cash settlement feature and could be settled in cash or shares purchased on the open market or issued from treasury.
| PSUs (number of shares equivalent) |
Nine months ended September 30, 2021 |
Year ended December 31, 2020 |
||||||
| Outstanding, beginning of period |
453,845 | 92,424 | ||||||
| Granted |
684,620 | 376,310 | ||||||
| Vested |
— | (10,716 | ) | |||||
| Forfeited |
— | (4,173 | ) | |||||
|
|
|
|
|
|||||
| Outstanding, end of period |
1,138,465 | 453,845 | ||||||
|
|
|
|
|
|||||
The liability associated with the PSUs under the RPSU plan was $3.7 million at September 30, 2021 (December 31, 2020—$0.1 million) including $0.3 million recorded as a current liability and $3.4 million as a non-current liability.
Stock Option Plan
Obsidian Energy has an Option Plan that allows the Company to issue options to acquire common shares to officers, employees, directors and other service providers.
| Nine months ended September 30, 2021 |
Year ended December 31, 2020 |
|||||||||||||||
| Options |
Number of Options |
Weighted Average Exercise Price |
Number of Options |
Weighted Average Exercise Price |
||||||||||||
| Outstanding, beginning of period |
961,954 | $ | 0.94 | 89,178 | $ | 10.41 | ||||||||||
| Granted |
2,116,120 | 1.99 | 917,490 | 0.56 | ||||||||||||
| Forfeited |
(44,464 | ) | 8.74 | (44,714 | ) | 12.06 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Outstanding, end of period |
3,033,610 | $ | 1.56 | 961,954 | $ | 0.94 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Exercisable, end of period |
379,376 | $ | 0.56 | 44,464 | $ | 8.74 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The fair value and weighted average assumptions of the options granted during the nine-month periods were as follows:
| Nine months ended September 30 | ||||||||
| 2021 | 2020 | |||||||
| Average fair value of options granted (per option) |
$ | 1.11 | $ | 0.29 | ||||
| Expected volatility |
86.9 | % | 83.6 | % | ||||
| Expected life of options (years) |
3.4 | 2.2 | ||||||
| Expected forfeiture rate |
0.5 | % | 1.0 | % | ||||
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 15 |
Non-Treasury Incentive Award Plan (“NTIP”)
Beginning in the second quarter of 2021, Obsidian Energy implemented the NTIP that allows the Company to issue restricted awards whereby employees receive consideration that fluctuates based on the Company’s share price on the TSX. The Company currently anticipates that the consideration will be in the form of cash, however, we do have the option to provide the consideration in the form of shares purchased on the open market.
| NTIP Restricted Awards |
Nine months ended September 30, 2021 |
Year ended December 31, 2020 |
||||||
| Outstanding, beginning of period |
— | — | ||||||
| Granted |
1,089,560 | — | ||||||
| Forfeited |
(18,970 | ) | — | |||||
|
|
|
|
|
|||||
| Outstanding, end of period |
1,070,590 | — | ||||||
|
|
|
|
|
|||||
The liability associated with the NTIP was $1.4 million at September 30, 2021 (December 31, 2020 – nil), including $0.7 million recorded as a current liability and $0.7 million as a non-current liability.
Deferred Share Unit (“DSU”) plan
The DSU plan allows the Company to grant DSUs in lieu of cash fees to non-employee directors providing a right to receive, upon retirement, a cash payment based on the volume-weighted-average trading price of the common shares on the TSX. At September 30, 2021, 2,018,304 DSUs (December 31, 2020 – 2,087,580) were outstanding and $9.1 million was recorded as a current liability (December 31, 2020 – $1.9 million).
Share-based compensation
Share-based compensation consisted of the following:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| RSU grants |
$ | 0.2 | $ | 0.7 | $ | 0.9 | $ | 1.5 | ||||||||
| PSU grants |
0.8 | — | 3.6 | — | ||||||||||||
| DSU plan |
0.8 | — | 8.7 | 0.2 | ||||||||||||
| Options |
0.4 | — | 0.8 | — | ||||||||||||
| NTIP |
0.8 | — | 1.4 | — | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Share-based compensation |
$ | 3.0 | $ | 0.7 | $ | 15.4 | $ | 1.7 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The share price used in the fair value calculation of the RPSU, DSU and NTIP plan obligations at September 30, 2021 was $4.51 per share (2020 – $0.49).
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 16 |
Employee retirement savings plan
Obsidian Energy has an employee retirement savings plan (the “savings plan”) for the benefit of all employees. Under the savings plan, employees may elect to contribute up to 10 percent of their salary and Obsidian Energy matches these contributions at a rate of $1.00 for each $1.00 of employee contribution. Both the employee’s and Obsidian Energy’s contributions are used to acquire Obsidian Energy common shares or are placed in low-risk investments. Shares are purchased in the open market at prevailing market prices.
Effective May 1, 2020, due to the low commodity price environment, the Company temporarily suspended the employer match portion of the savings plan. This was partially re-instated on May 1, 2021 with Obsidian Energy matching contributions at a rate of $0.50 for each $1.00 of employee contribution and subsequently fully re-instated on August 1, 2021 with Obsidian Energy matching the remaining additional $0.50 for each $1.00 of employee contribution up to 10 percent of an employee’s salary. However, in order for an employee to receive the full contribution from August 1, 2021 onwards, they must allocate at least 25 percent (50 percent for officers) of their contribution into Obsidian Energy shares.
11. Commitments and contingencies
The Company is involved in various litigation and claims in the normal course of business and records provisions for claims as required.
In 2018, the Company fully utilized available insurance coverage relating to ongoing claims against former Penn West employees arising from the Company’s 2014 restatement of certain financial results when we were known as Penn West. A claim brought by the United States Securities and Exchange Commission (“SEC”) against Penn West was previously settled. The Company had been indemnifying two former employees pursuant to indemnity agreements in connection with the claims brought by the SEC arising out of the same restatement. In 2020, the SEC reached a settlement with the two former employees.
The Company continued to accrue for, but not pay, defense costs incurred on behalf of the two former employees and recently agreed to a settlement to pay $6.4 million of the defense costs equally over a 30-month period beginning in April 2021. As a result of the settlement, the Company recorded a recovery of costs in the first quarter of 2021 previously accrued which was recorded within Other in the Consolidated Statements of Income (Loss).
12. Government grants
The Company has received payments as part of the Canadian Emergency Wage Subsidy program (“CEWS”). CEWS allows eligible companies to receive a subsidy of employee wages, subject to a maximum. For the first nine months of 2021, this resulted in a benefit to the Company of approximately $0.5 million (2020 – $2.8 million) which resulted in a $0.3 million reduction to operating costs, a $0.1 million reduction to general and administrative costs and a $0.1 million reduction to capital expenditures.
The Company received a grant allocation under the Alberta Site Rehabilitation Program beginning in 2020. These awards will allow the Company to expand our abandonment activities for wells, pipelines, facilities, and related site reclamation and thus reduce our decommissioning liability. The Company utilized $8.8 million of net grants during the first nine months of 2021 (2020 – nil).
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 17 |
13. Peace River Oil Partnership (“PROP) acquisition
Subsequent to September 30, 2021, the Company announced that we have entered into a purchase and sale agreement to acquire the remaining 45 percent partnership interest in PROP from our joint venture partner, through a wholly-owned subsidiary. Total consideration paid will be $43.5 million prior to closing adjustments with an effective date of July 1, 2021. The acquisition will be funded by a combination of cash and, if necessary, Obsidian Energy common shares issued to our joint venture partner. Closing adjustments are expected to reduce the total consideration paid at closing by approximately $7.2 - $7.5 million to $36.0 - $36.3 million, assuming the acquisition closes in mid-November 2021.
The cash consideration for the acquisition will be funded by a $16.3 million limited-recourse loan secured by the 45 percent interest in PROP, which will be acquired pursuant to the acquisition and proceeds from a new equity offering. The Company has filed and been receipted for an amended and restated preliminary short form prospectus with the securities commissions in each of the provinces of Canada, other than Québec, in connection with a “best efforts” marketed equity offering of subscription receipts for minimum gross proceeds of $12.5 million and maximum gross proceeds of $22.5 million.
In connection with the Company’s acquisition of the 45 percent interest in PROP, we have agreed to reduce our aggregate syndicated credit facility commitment amount by $25 million to $415 million at closing of the transaction. The $25 million reduction will be applied against the non-revolving term loan. Also, upon closing of the acquisition, the Company will repay approximately $3.3 million of the outstanding senior notes.
| OBSIDIAN ENERGY THIRD QUARTER 2021 |
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 18 |
Exhibit 99.4
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, Stephen Loukas, Interim President and Chief Executive Officer of Obsidian Energy Ltd., certify the following:
| 1. | Review: I have reviewed the interim financial report and interim MD&A (together the “interim filings”) of Obsidian Energy Ltd. (the “issuer”) for the interim period ended September 30, 2021. |
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. |
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. |
| 4. | Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer. |
| 5. | Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings |
| (a) | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
| (i) | material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and |
| (ii) | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
| (b) | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
| 5.1 | Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). |
| 5.2 | N/A. |
| 5.3 | N/A. |
| 6. | Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2021 and ended on September 30, 2021 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. |
Date: November 8, 2021
| (signed) “Stephen Loukas” |
|
|
| Stephen Loukas |
| Interim President & Chief Executive Officer |
Exhibit 99.5
FORM 52-109F2
CERTIFICATION OF INTERIM FILINGS
FULL CERTIFICATE
I, Peter Scott, Senior Vice President and Chief Financial Officer of Obsidian Energy Ltd., certify the following:
| 1. | Review: I have reviewed the interim financial report and interim MD&A (together, the “interim filings”) of Obsidian Energy Ltd. (the “issuer”) for the interim period ended September 30, 2021. |
| 2. | No misrepresentations: Based on my knowledge, having exercised reasonable diligence, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings. |
| 3. | Fair presentation: Based on my knowledge, having exercised reasonable diligence, the interim financial report together with the other financial information included in the interim filings fairly present in all material respects the financial condition, financial performance and cash flows of the issuer, as of the date of and for the periods presented in the interim filings. |
| 4. | Responsibility: The issuer’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (DC&P) and internal control over financial reporting (ICFR), as those terms are defined in National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim Filings, for the issuer. |
| 5. | Design: Subject to the limitations, if any, described in paragraphs 5.2 and 5.3, the issuer’s other certifying officer(s) and I have, as at the end of the period covered by the interim filings |
| (a) | designed DC&P, or caused it to be designed under our supervision, to provide reasonable assurance that |
| (i) | material information relating to the issuer is made known to us by others, particularly during the period in which the interim filings are being prepared; and |
| (ii) | information required to be disclosed by the issuer in its annual filings, interim filings or other reports filed or submitted by it under securities legislation is recorded, processed, summarized and reported within the time periods specified in securities legislation; and |
| (b) | designed ICFR, or caused it to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with the issuer’s GAAP. |
| 5.1 | Control framework: The control framework the issuer’s other certifying officer(s) and I used to design the issuer’s ICFR is the framework set forth in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). |
| 5.2 | N/A. |
| 5.3 | N/A. |
| 6. | Reporting changes in ICFR: The issuer has disclosed in its interim MD&A any change in the issuer’s ICFR that occurred during the period beginning on July 1, 2021 and ended on September 30, 2021 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. |
Date: November 8, 2021
| (signed) “Peter Scott” |
|
|
| Peter Scott |
| Senior Vice President and Chief Financial Officer |