Obsidian Energy Ltd 6-K, filed Nov 2, 2020
Obsidian Energy Ltd. (OBE)
About this 6-K
Obsidian Energy Ltd filed this 6-K on November 2, 2020.
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 2020
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 2, 2020.
| 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 2, 2020 | |
| 99.2 | Management’s Discussion and Analysis for the three and nine months ended September 30, 2020 | |
| 99.3 | Financial Statements for the three and nine months ended September 30, 2020 | |
| 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 Strong Third Quarter 2020 Results Driven by Successful First Half
Development Program and Continued Improvements to our Cost Structure
CALGARY, Nov. 2, 2020 /CNW/ - OBSIDIAN ENERGY LTD. (TSX – OBE, OTCQX – OBELF) (“Obsidian Energy”, the “Company”, “we”, “us” or “our”) announces strong third quarter 2020 financial and operational results. Funds from Operations (“FFO”) improved in the quarter as the success of our development program earlier in the year and our lower cost structure more than offset the impact of lower commodity prices, year over year.
“Our strong third quarter performance is a direct result of the improvements we are driving across our business” said Stephen Loukas, Interim President and Chief Executive Officer of Obsidian Energy. “Our strategically-focused capital program in the first half of 2020 has strengthened our underlying production base, driving impressive performance and resulting in third quarter production volumes down only slightly year over year, even with a 33% lower capital investment to date in 2020. Combined with the significant improvements across our cost structure, we successfully generated free cash flow in the third quarter, allowing us to lower debt levels despite the challenging macro environment. Our improved efficiency and strong operational base position us well as we look into 2021 and at the opportunities we see ahead”.
All figures are in Canadian dollars unless otherwise stated. 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, 2020 can be found on our website at www.obsidianenergy.com. The documents will also be filed on SEDAR and EDGAR in due course.
FINANCIAL HIGHLIGHTS
| • | FFO in the third quarter of 2020 increased to $30 million ($0.41 per share) up from $25 million ($0.34 per share) for the second quarter of 2020 and $29 million ($0.40 per share) for the third quarter of 2019. FFO increased in the third quarter of 2020 as a result of higher commodity prices (compared to Q2 2020) as restrictions around the COVID-19 pandemic eased, which improved demand. In addition, the Company continues to benefit from lower Operating Expenses (“Opex”) and General and Administrative (“G&A”) expenses (compared to Q3 2019) as a result of our cost reduction initiatives. |
| • | Year to date, we have generated free cash flow of approximately $37 million, as FFO of $92 million have exceeded capital and decommissioning expenditures in the same period of $55 million. |
| • | As a result of our strong third quarter performance, net debt decreased in the quarter by $17 million to $479 million, including $395 million drawn on our syndicated credit facility and $63 million of senior notes at September 30, 2020, primarily due to free cash flow being applied to our syndicated credit facility. |
| • | In the third quarter the Company continued to receive payments from the Federal Government’s Canadian Emergency Wage Subsidy program (“CEWS”). These payments reduced our Opex by $0.08 per boe and reduced G&A expenses by $0.05 per boe in the third quarter of 2020. |
| • | Net loss was $4 million ($0.05 per share) in third quarter compared to $22 million ($0.30 per share) during the second quarter of 2020 and $28 million ($0.38 per share) in the third quarter of 2019. The improvement from the second quarter was largely due to higher realized crude oil prices. The improvement from the previous year was driven by our improved cost structure and higher light oil volumes. |
| • | On September 21, 2020, we formally launched our bid to acquire Bonterra Energy Corp in a value enhancing transaction that will create the “Cardium Champion”. |
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| • | Subsequent to quarter end, we successfully extended our syndicated credit facility to January 29, 2021. |
OPERATIONAL HIGHLIGHTS
| • | Average production in the third quarter remained relatively stable as the success of our development program earlier in 2020, largely offset the impact of our lower capital investment driven by lower commodity prices. Production averaged 25,031 boe/d in the third quarter, down 3% from the second quarter of 2020 and 2% from the third quarter of 2019. |
| • | Opex was $11.36 per boe in the third quarter of 2020 compared to $8.51 per boe in the previous quarter of 2020, and $14.65 per boe in the third quarter of 2019. While year-over-year operating expenses were down 22%, reflecting the improvements we have made in 2020, operating expenses increased from the second quarter of 2020 as we completed scheduled turnarounds and resumed routine repairs on downhole pumps and other related activities. |
| • | G&A expenses were $1.40 per boe in the third quarter of 2020, compared to $1.36 per boe in the previous quarter and $2.25 per boe in the third quarter of 2019. G&A costs were down 38% from the same quarter last year and remained largely in line with the second quarter as we continue to benefit from efficiency improvements made starting in 2019 and continuing to date in 2020. Additionally, in response to a continued weak commodity price environment, we continue to seek opportunities to remove costs from the business where possible. |
| • | Our first half 2020 development program continues to exceed expectations with some of the strongest new well production rates seen to date in our multi-year Cardium program. |
| • | Development capital and decommissioning expenditures were $6 million in the third quarter of 2020 as the Company restricted development spending in response to lower crude oil prices driven by the COVID-19 pandemic. For the first nine months of 2020, capital and decommissioning expenditures totaled $55 million. |
| • | During the third quarter of 2020, in partnership with our service providers, the Company received grants under the Alberta Site Rehabilitation Program (“ASRP”) totaling $17 million and an additional $4 million in allocation eligibility as an Area Based Closure participant. These awards will allow the Company to expand our decommissioning activities for inactive Legacy sites starting in the fourth quarter of this year and further reduce our decommissioning liability. |
2020 DEVELOPMENT PROGRAM AND OPERATIONS UPDATE
Over the past several months, our staff continued to work diligently under the volatile commodity price environment which has resulted in continued strong production and netback results. Results by area for the third quarter of 2020 are as follows:
Production Volumes by Product and Producing Region – Three Months Ended September 30, 2020
| Area |
Production (boe/d) |
Light Oil (bbl/d) |
Heavy Oil (bbl/d) |
NGLs (bbl/d) |
Gas (mmcf/d) |
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| Cardium |
20,661 | 10,695 | 43 | 2,175 | 47 | |||||||||||||||
| Alberta Viking |
825 | 202 | 62 | 41 | 3 | |||||||||||||||
| Peace River |
3,196 | — | 2,700 | — | 3 | |||||||||||||||
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| Key Development Areas |
24,682 | 10,897 | 2,805 | 2,216 | 53 | |||||||||||||||
| Legacy Areas |
349 | 55 | 18 | 28 | 1 | |||||||||||||||
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| Key Development & Legacy Areas |
25,031 | 10,952 | 2,823 | 2,244 | 54 | |||||||||||||||
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Operating Expense and Netbacks by Producing Region – Three Months Ended September 30, 2020
| Area |
Operating Expense ($/boe) |
Netback(1) ($/boe) |
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| Cardium |
10.76 | 20.16 | ||||||
| Alberta Viking |
18.93 | 2.20 | ||||||
| Peace River |
9.73 | 12.36 | ||||||
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| Key Development Areas |
10.90 | 18.56 | ||||||
| Legacy Areas |
43.63 | (33.39 | ) | |||||
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| Key Development & Legacy Areas |
11.36 | 17.83 | ||||||
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| (1) | Netback excludes risk management gains. |
FINANCIAL AND OPERATING HIGHLIGHTS
| Three months ended September 30 |
Nine months ended September 30 |
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| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| FINANCIAL(millions, except per share amounts) |
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| Cash flow from Operations |
$ | 34 | $ | 32 | $ | 69 | $ | 28 | ||||||||
| Basic and Diluted ($/share) |
0.46 | 0.44 | 0.94 | 0.38 | ||||||||||||
| Funds Flow from Operations 1 |
30 | 29 | 92 | 106 | ||||||||||||
| Basic and Diluted ($/share) |
0.41 | 0.40 | 1.26 | 1.46 | ||||||||||||
| Net loss |
(4 | ) | (28 | ) | (772 | ) | (244 | ) | ||||||||
| Basic and Diluted ($/share) |
(0.05 | ) | (0.38 | ) | (10.55 | ) | (3.35 | ) | ||||||||
| Capital expenditures |
5 | 27 | 46 | 69 | ||||||||||||
| Decommissioning expenditures |
1 | 5 | 9 | 8 | ||||||||||||
| Net debt 1 |
$ | 479 | $ | 497 | $ | 479 | $ | 497 | ||||||||
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| OPERATIONS |
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| Daily Production |
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| Light oil (bbl/d) |
10,952 | 10,802 | 12,084 | 11,871 | ||||||||||||
| Heavy oil (bbl/d) |
2,823 | 3,991 | 2,811 | 4,048 | ||||||||||||
| NGL (bbl/d) |
2,244 | 2,192 | 2,254 | 2,172 | ||||||||||||
| Natural gas (mmcf/d) |
54 | 51 | 53 | 53 | ||||||||||||
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| Total production 2 (boe/d) |
25,031 | 25,505 | 25,995 | 26,989 | ||||||||||||
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| Average sales price 3 |
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| Light oil ($/bbl) |
$ | 50.84 | $ | 68.14 | $ | 43.14 | $ | 68.44 | ||||||||
| Heavy oil ($/bbl) |
29.54 | 40.44 | 19.99 | 37.89 | ||||||||||||
| NGL ($/bbl) |
22.11 | 15.75 | 18.73 | 17.31 | ||||||||||||
| Natural gas ($/mcf) |
$ | 2.40 | $ | 1.05 | $ | 2.25 | $ | 1.55 | ||||||||
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| NETBACK ($/boe) |
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| Sales price |
$ | 32.74 | $ | 38.64 | $ | 28.43 | $ | 40.24 | ||||||||
| Risk management gain (loss) |
(0.42 | ) | 0.60 | 2.98 | (1.10 | ) | ||||||||||
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| Net sales price |
32.32 | 39.24 | 31.41 | 39.14 | ||||||||||||
| Royalties |
(1.42 | ) | (3.12 | ) | (1.48 | ) | (2.89 | ) | ||||||||
| Operating expenses 4 |
(11.36 | ) | (14.65 | ) | (10.65 | ) | (13.64 | ) | ||||||||
| Transportation |
(2.13 | ) | (2.72 | ) | (2.01 | ) | (2.83 | ) | ||||||||
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| Netback 1 2($/boe) |
$ | 17.41 | $ | 18.75 | $ | 17.27 | $ | 19.78 | ||||||||
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| (1) | The terms FFO and their applicable per share amounts, “Net debt”, and “Netback” 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). |
| (4) | Includes the benefit of processing fees totaling $2 million for the three months ended September 30, 2020 (2019 - $2 million), and $5 million for the nine months ended September 30, 2020 (2019 - $6 million). |
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OUTLOOK
In response to the current commodity price environment, we prudently decided to pause our development drilling program and lower our 2020 capital expenditures. We anticipate our fourth quarter 2020 capital and decommissioning expenditures to total approximately $9 million. These activities are focused on highly capital efficient optimization activities and include $2 million added for minor infrastructure projects. The grants and allocations we have received under the ASRP of $21 million will allow us to further reduce our inactive abandonment liabilities in our Legacy assets and this work has now begun in the fourth quarter. Once completed, these projects will have the added benefit of further reducing operating expenditures as costs associated with inactive well sites are reduced or eliminated.
As we look ahead to 2021, and given the current broad-based volatility, we are closely monitoring commodity prices and remain ready to take advantage of our significant regional and operational flexibility when economic conditions merit the investment. With the recent strength in AECO pricing, we are evaluating our meaningful portfolio of natural gas-weighted opportunities in combination with our deep inventory of high return, light oil locations.
2020 PRODUCTION AND COST GUIDANCE
| Metric |
H2 2020 Guidance Range |
Full Year 2020 Guidance Range |
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| Production (boe/d) 1 2 |
24,000 – 24,500 | 25,000 – 25,500 | ||||||
| Capital Expenditures ($millions) |
12 | 53 | ||||||
| Decommissioning Expenditures ($millions) |
3 | 11 | ||||||
| Operating Expense ($/boe) |
12.00 – 12.50 | 11.10 – 11.50 | ||||||
| General & Administrative ($/boe) |
1.50 – 1.65 | 1.50 – 1.60 | ||||||
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| (1) | Adjusted for January 2020 Carrot Creek Disposition of 115 boe/d (85% light oil) |
| (2) | Mid-points of guidance: |
Second half of 2020: 10,840 bbl/d light oil, 2,995 bbl/d heavy oil, 2,000 bbl/d NGLs and 50.5 mmcf/d natural gas
Full year 2020: 11,680 bbl/d light oil, 2,885 bbl/d heavy oil, 2,135 bbl/d NGLs and 51.3 mmcf/d natural gas
BONTERRA ENERGY CORP. (“BONTERRA”) TAKEOVER BID
As part of our strategy to proactively pursue Cardium-focused consolidation, on September 21, 2020, we formally launched a takeover bid to acquire all the issued and outstanding common shares of Bonterra (“Bonterra Shares”) for the consideration of two Obsidian Energy common shares (“Obsidian Energy Shares”) for each Bonterra Share (the “Offer”). Obsidian Energy and Bonterra have highly complementary operations and the compelling combination of the companies will create the Cardium Champion. The combination would also result in material synergies driving increased cash flow, reduced debt levels, further lowering our breakeven $US WTI/barrel costs and ultimately allowing us to return money to shareholders. The combination is a compelling opportunity to create a stronger, more efficient company with a far superior future than what Obsidian Energy or Bonterra could achieve on a standalone basis. Benefits from the transaction include:
| • | The combined entity’s increased size will make us a top 20 Western Canadian oil producer, with improved financial metrics, increased capital markets relevance and enhanced positioning for future Cardium consolidation; |
| • | The combined entity will have a strong operating platform with a low decline production base, low cost structure and high netbacks; |
| • | With improved efficiencies, we expect that the combined entity will have over $1001 million cost saving synergies over three years resulting in increased FFO; and |
| • | Higher free cash flow will achieve accelerated debt repayment (estimated to fall to 2 times EBITDA by year-end 2022), lower credit risk, improved access to capital and ultimately, the reinstatement of cash dividend payments and/or a share buy-back program. |
The offer is open until January 4, 2021, at 5:00 pm (Mountain Standard Time).
| (1) | Assumes US$50/bbl WTI and $1.95/MMBtu AECO 2021 – 2023. |
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EXTENSION TO SYNDICATED CREDIT FACILITY
On October 29, 2020, the Company entered into an amending agreement with our lenders which extended the revolving period of the syndicated credit facility to January 29, 2021. The end date of the term period remains at November 30, 2021. Additionally, the lenders have eliminated the October 31, 2020 and November 30, 2020 borrowing base redetermination dates and now have the option to complete a borrowing base determination on January 29, 2021.
HEDGING UPDATE
The Company has the following physical oil and financial natural gas hedges in place:
| 2020 | 2021 | |||||||||||||||||||||||
| October | November | December | January | February | March | |||||||||||||||||||
| WTI C$/bbl |
$ | 56.64 | $ | 56.64 | $ | 56.64 | $ | 55.54 | $ | 55.54 | $ | 55.54 | ||||||||||||
| Total bbl/day |
536 | 542 | 513 | 525 | 581 | 525 | ||||||||||||||||||
| 2020 | 2021 | |||||||||||||||||||
| November | December | January | February | March | ||||||||||||||||
| C$/mcf |
$ | 2.94 | $ | 2.94 | $ | 2.94 | $ | 2.94 | $ | 2.94 | ||||||||||
| Total mcf/day |
23,700 | 23,700 | 23,700 | 23,700 | 23,700 | |||||||||||||||
SPECIAL MEETING OF SHAREHOLDERS TO VOTE ON THE BONTERRA TAKEOVER OFFER
In connection with the Offer, the Company has scheduled a Obsidian Energy shareholder meeting to vote to approve the potential issuance of Obsidian Energy Shares for the applicable Bonterra Shares (the “Meeting”) on, Friday, November 23, 2020 at 9:00 am (Mountain Standard Time). The Meeting will take place at the Company’s head office located at 200 – 207 9th Avenue S.W., Calgary, Alberta. Please see the Company’s management information circular for further details.
Due to restrictions on gatherings implemented by the Government of Alberta in response to the COVID-19 (Coronavirus) outbreak, guidelines issued with respect to social distancing and out of concern for the wellbeing of all participants, we strongly recommend that registered shareholders not attend the meeting in-person. Any person attending the Meeting in person will be required to follow the Company’s health and safety measures, which will include physical distancing, use of personal protective equipment (including facemasks) and completion of a health-assessment. The precautionary measures being taken by the Company are intended to reduce the potential risks associated with the COVID-19 pandemic, and they may be further updated as necessary to take into account evolving recommendations and directives of public health authorities.
UPDATED CORPORATE PRESENTATION
For further information on these and other matters, Obsidian Energy has posted an updated corporate presentation which can be found on its website, www.obsidianenergy.com.
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.
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NON-GAAP MEASURES
Certain financial measures including FFO, FFO per share-basic, FFO per share-diluted, free cash flow, Netback Net debt and EBITDA, included in this press 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, operating expenses, transportation expenses and realized risk management gains and losses, and is used in capital allocation decisions and to economically rank projects. Net debt is the total of long-term debt and working capital deficiency and is used by the Company to assess its liquidity. EBITDA is net income (loss) plus finance expenses (income), provisions for (recovery of) income taxes, and depletion, depreciation, impairment and accretion.
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) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Cash flow from operating activities |
$ | 34 | $ | 32 | $ | 69 | $ | 28 | ||||||||
| Change in non-cash working capital |
(12 | ) | (13 | ) | (1 | ) | 46 | |||||||||
| Decommissioning expenditures |
1 | 5 | 9 | 8 | ||||||||||||
| Onerous office lease settlements |
2 | — | 7 | 2 | ||||||||||||
| Realized foreign exchange loss – debt maturities |
— | — | — | 3 | ||||||||||||
| Restructuring charges |
— | — | — | 3 | ||||||||||||
| Transaction costs |
3 | — | 3 | — | ||||||||||||
| Other expenses (1) |
2 | 5 | 5 | 16 | ||||||||||||
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| Funds flow from operations |
$ | 30 | $ | 29 | $ | 92 | $ | 106 | ||||||||
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| Per share |
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| Basic per share |
$ | 0.41 | $ | 0.40 | $ | 1.26 | $ | 1.46 | ||||||||
| Diluted per share |
$ | 0.41 | $ | 0.40 | $ | 1.26 | $ | 1.46 | ||||||||
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| (1) | Includes legal fees related to claims against former Penn West Petroleum Ltd. employees related to the Company’s 2014 restatement of certain financial results. |
ABBREVIATIONS
| Oil |
Natural Gas | |||||
| bbl | barrel or barrels | GJ | Gigajoule | |||
| bbl/d | barrels per day | GJ/day | gigajoule per day | |||
| Boe | Barrel of oil equivalent | mmcf | million cubic feet | |||
| boe/d | barrels of oil equivalent per day | Mmcf/d | million cubic feet per day | |||
| mcf | thousand cubic feet | |||||
| NGL | Natural gas liquids | |||||
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FORWARD-LOOKING STATEMENTS
Certain statements contained in this document constitute forward-looking statements or information (collectively “forward-looking statements”). 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 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 the unaudited interim consolidated financial statements and MD&A will be filed in due course on SEDAR and EDGAR; that the ASRP awards will allow the Company to expand our decommissioning activities for inactive Legacy sites starting in the fourth quarter of this year and further reduce our decommissioning liability; our expected expenditures for the fourth quarter of 2020 and the focus and benefits of those expenditures; that we will closely monitoring commodity prices and remain ready to take advantage of our significant regional and operational flexibility when economic conditions merit the investment; that we will evaluate our material gas-weighted opportunities; our second half and full year guidance including production, capital and decommissioning expenditures, Opex and G&A expenses; the date, time and place of our Meeting; the timing for acceptance of the Offer; the satisfaction of the conditions to the Offer; the anticipated strategic, operational and financial benefits and synergies that may result from the proposed combination between Obsidian Energy and Bonterra, including as to expected cost synergies, accretion, and expectations for each of the entities on a stand-alone basis; the resulting benefits of the Offer to Obsidian Energy and Bonterra shareholders; our hedges; the expected re-confirmation and term out dates, as applicable, and the lender option date to complete a borrowing base redetermination on the credit facility.
With respect to forward-looking statements contained in this document, the Company has made assumptions regarding, among other things: the benefits to be derived by the Company and its stakeholders from the proposed acquisition of Bonterra; we will have the ability to continue as a going concern going forward and realize our assets and discharge our liabilities in the normal course of business; 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 contained herein (including our guidance set out under “Outlook”) do not assume the completion of the proposed transaction); 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 additional production due to the continuation of low commodity prices or the further deterioration of commodity prices and our expectations regarding when commodity prices will improve such that any remaining shut-in properties can be returned to production; 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.
7
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 we are not able to continue as a going concern and realize our assets and discharge our liabilities in the normal course of business; 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 is unable to complete one or more of the potential transactions being pursued pursuant to our ongoing strategic alternatives review process (including the proposed acquisition of Bonterra), on favorable terms or at all, or that the Company and its stakeholders do not realize the anticipated benefits of any such transaction that is completed (including the benefits of the proposed acquisition of Bonterra described herein); 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 additional production or continue existing production shut-ins longer than anticipated, 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; 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, we do 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.
8
OBSIDIAN ENERGY: Suite 200, 207 - 9th Avenue SW, Calgary, Alberta T2P 1K3, Phone: 403-777-2500, Fax: 403-777-2699, Toll Free: 1-866-693-2707, Website: www.obsidianenergy.com; Investor Relations: Toll Free: 1-888-770-2633, E-mail: investor_relations@obsidianenergy.com
9
Exhibit 99.2
MANAGEMENT’S DISCUSSION AND ANALYSIS
For the three and nine months ended September 30, 2020
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, 2020 and the Company’s audited consolidated financial statements and MD&A for the year ended December 31, 2019. The date of this MD&A is October 30, 2020. 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, 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 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.
All per share figures included in this MD&A reflect the 7:1 common share consolidation that was effective June 5, 2019.
Quarterly Financial Summary
(millions, except per share and production amounts) (unaudited)
| Three months ended |
Sep. 30 2020 |
June 30 2020 |
Mar. 31 2020 |
Dec. 31 2019 |
Sep. 30 2019 |
June 30 2019 |
Mar. 31 2019 |
Dec. 31 2018 |
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| Oil and natural gas sales and other income |
$ | 77 | $ | 52 | $ | 84 | $ | 112 | $ | 94 | $ | 109 | $ | 103 | $ | 82 | ||||||||||||||||
| Cash flow from operations |
34 | 2 | 33 | 49 | 32 | (3 | ) | (1 | ) | 19 | ||||||||||||||||||||||
| Basic per share |
0.46 | 0.03 | 0.45 | 0.67 | 0.44 | (0.04 | ) | (0.01 | ) | 0.26 | ||||||||||||||||||||||
| Diluted per share |
0.46 | 0.03 | 0.45 | 0.67 | 0.44 | (0.04 | ) | (0.01 | ) | 0.26 | ||||||||||||||||||||||
| Funds flow from operations (1) |
30 | 25 | 37 | 54 | 29 | 41 | 36 | (2 | ) | |||||||||||||||||||||||
| Basic per share |
0.41 | 0.34 | 0.51 | 0.74 | 0.40 | 0.56 | 0.50 | (0.03 | ) | |||||||||||||||||||||||
| Diluted per share |
0.41 | 0.34 | 0.51 | 0.74 | 0.40 | 0.56 | 0.50 | (0.03 | ) | |||||||||||||||||||||||
| Net income (loss) |
(4 | ) | (22 | ) | (746 | ) | (544 | ) | (28 | ) | (162 | ) | (54 | ) | (113 | ) | ||||||||||||||||
| Basic per share |
(0.05 | ) | (0.30 | ) | (10.22 | ) | (7.45 | ) | (0.38 | ) | (2.22 | ) | (0.74 | ) | (1.56 | ) | ||||||||||||||||
| Diluted per share |
$ | (0.05 | ) | $ | (0.30 | ) | $ | (10.22 | ) | $ | (7.45 | ) | $ | (0.38 | ) | $ | (2.22 | ) | $ | (0.74 | ) | $ | (1.56 | ) | ||||||||
| Production |
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| Light oil (bbls/d) |
10,952 | 12,800 | 12,512 | 12,246 | 10,802 | 12,453 | 12,376 | 11,429 | ||||||||||||||||||||||||
| Heavy oil (bbls/d) |
2,823 | 1,966 | 3,644 | 3,718 | 3,991 | 4,059 | 4,096 | 4,784 | ||||||||||||||||||||||||
| NGLs (bbls/d) |
2,244 | 2,278 | 2,239 | 2,095 | 2,192 | 2,201 | 2,122 | 2,788 | ||||||||||||||||||||||||
| Natural gas (mmcf/d) |
54 | 53 | 52 | 52 | 51 | 55 | 54 | 65 | ||||||||||||||||||||||||
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| Total (boe/d) |
25,031 | 25,872 | 27,092 | 26,639 | 25,505 | 27,835 | 27,651 | 29,905 | ||||||||||||||||||||||||
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| (1) | Please refer to the prior quarterly filings for reconciliations of cash flow from operations to funds flow from operations. |
| OBSIDIAN ENERGY THIRD QUARTER 2020 | 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 |
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| (millions, except per share amounts) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Cash flow from operating activities |
$ | 34 | $ | 32 | $ | 69 | $ | 28 | ||||||||
| Change in non-cash working capital |
(12 | ) | (13 | ) | (1 | ) | 46 | |||||||||
| Decommissioning expenditures |
1 | 5 | 9 | 8 | ||||||||||||
| Onerous office lease settlements |
2 | — | 7 | 2 | ||||||||||||
| Realized foreign exchange loss – debt maturities |
— | — | 3 | |||||||||||||
| Restructuring charges |
— | — | — | 3 | ||||||||||||
| Transaction costs |
3 | — | 3 | — | ||||||||||||
| Other expenses (1) |
2 | 5 | 5 | 16 | ||||||||||||
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| Funds flow from operations |
$ | 30 | $ | 29 | $ | 92 | $ | 106 | ||||||||
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| Per share |
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| Basic per share |
$ | 0.41 | $ | 0.40 | $ | 1.26 | $ | 1.46 | ||||||||
| Diluted per share |
$ | 0.41 | $ | 0.40 | $ | 1.26 | $ | 1.46 | ||||||||
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| (1) | Includes mainly legal fees related to claims against former Penn West Petroleum Ltd. (“Penn West”) employees related to the Company’s 2014 restatement of certain financial results. |
In the third quarter of 2020, funds flow from operations and cash flow from operations were slightly higher than the comparable period as lower revenues due to lower crude oil prices were offset by the Company’s lower cost structure as we implemented a number of cost saving initiatives within operating costs and general and administrative (“G&A”) expenses.
For the first nine months of 2020, funds flow from operations was lower than 2019, primarily due to lower crude oil prices (particularly in the second quarter of 2020), as a result of the impact of the COVID-19 pandemic and potential supply and demand implications, which were partially offset by a lower cost structure.
Cash flow from operations increased in the first nine months of 2020 from the comparable period primarily due to the impact of working capital changes.
Business Strategy
Since March 2020, the oil and gas industry has experienced significant volatility with commodity prices, specifically crude oil prices. This is primarily due to macro-economic factors related to the COVID-19 pandemic and the resultant supply and demand issues. At the time crude oil prices began to fall in March, we had completed the majority of our drilling program for the first half of 2020, which totaled $49 million including drilling 10 horizontal wells, optimization spending and decommissioning expenditures. In response to the current low crude oil price environment, the Company anticipates minimal capital spending for the remainder of the year and is currently estimating total expenditures of $64 million for 2020, including capital and decommissioning expenditures. Similar to the third quarter of 2020, capital activities in the fourth quarter of 2020 will be focused on highly capital efficient, optimization activities. No drilling activity is anticipated for the remainder of 2020; however, we do have the operational flexibility to begin drilling activities quickly should crude oil prices warrant the investment.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 2 |
The Company actively reviewed our portfolio beginning in March, considering the commodity price outlook at the time and shut-in production deemed uneconomic. This reduced average production in the second quarter of 2020 by approximately 2,100 boe per day. This reduction was primarily composed of heavy oil and associated gas production in the Peace River and Viking areas and certain light-oil properties in the Cardium area. As crude oil prices began to improve in May and June, the Company restarted the majority of the shut-in production and currently there is approximately 300 boe per day of production that remains offline, mostly consisting of heavy oil properties. The Company will continue to economically evaluate and, if required, adjust our production base if commodity price volatility occurs.
In 2020, the Company has continued to focus on cost savings initiatives as well as implementing temporary cost saving measures due to COVID-19 induced oil price reductions. Cost savings on forecasted 2020 operating costs totaled $24 million through these initiatives and shut-in production. We have also achieved $6 million of G&A cost savings for the first nine months of 2020 compared to the same period of 2019.
The Company continues to monitor all applicable government relief programs. Thus far, we have benefited from the Canadian Emergency Wage Subsidy (“CEWS”). The CEWS allows eligible companies to receive a subsidy of employee wages, subject to a cap. The program has been extended into 2021 and we will continue to evaluate our eligibility to participate in the amended CEWS program as further details become available. Additionally, under the Alberta Site Rehabilitation program (“ASRP”) the Company has successfully been awarded grants totaling $17 million and an additional $4 million in allocation eligibility as an Area Based Closure program (“ABC” program) participant. These awards will allow the Company to expand our abandonment activities for wells, pipelines, facilities and related site reclamation starting in the fourth quarter of 2020 and thus reduce our decommissioning liability. We will continue to be actively engaged with the Government of Alberta on further ASRP developments, and other provincial and federal programs, as they are announced.
As Obsidian Energy moves forward, we believe our plan to focus on our industry leading Cardium position in addition to our goal of becoming a consolidating entity within the Cardium, offers a predictable, liquids weighted, production profile that is capable of generating sustainable value for all stakeholders. To that end, on September 21, 2020 the Company formally launched an offer to purchase all issued and outstanding common shares (“Bonterra Share”) of Bonterra Energy Corp. (“Bonterra”) for consideration of two common shares of Obsidian Energy for each Bonterra Share. The Company believes that the combination of the two companies will create the Cardium Champion allowing for the realization of material synergies that have the combined effect of generating increased cash flow, reducing debt levels, further lowering our breakeven $US WTI/barrel costs and ultimately allowing us to return money back to shareholders. Specific benefits we anticipate from this combination are far superior to what Obsidian Energy or Bonterra could achieve on a standalone basis and include:
| • | The combined entity’s increased size will make us a top 20 Western Canadian oil producer, with improved financial metrics, increased capital markets relevance and enhanced positioning for future Cardium consolidation, |
| • | The combined entity will have a strong operating platform with a low decline production base, low cost structure and high netbacks, |
| • | With improved efficiencies, we expect that the combined entity will have over $100 million cost saving synergies over three years resulting in increased funds flow from operations, and, |
| • | Higher free cash flow will achieve accelerated debt repayment (estimated to fall to 2:1X Debt to EBITDA by year-end 2022), lower credit risk, improved access to capital and ultimately, the reinstatement of cash dividend payments and/or a share buy-back program. |
The offer is open until 5:00pm (Mountain Standard Time) on January 4, 2021, unless extended, accelerated or withdrawn. Please refer to our Take-Over Bid circular dated September 21, 2020 for further details. The Company will provide updates on the offer as required.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 3 |
Business Environment
The following table outlines quarterly averages for benchmark prices and Obsidian Energy’s realized prices for the previous eight quarters.
| Q3 2020 | Q2 2020 | Q1 2020 | Q4 2019 | Q3 2019 | Q2 2019 | Q1 2019 | Q4 2018 | |||||||||||||||||||||||||
| Benchmark prices |
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| WTI crude oil ($US/bbl) |
$ | 40.93 | $ | 27.85 | $ | 46.17 | $ | 56.96 | $ | 56.45 | $ | 59.81 | $ | 54.90 | $ | 58.81 | ||||||||||||||||
| Edm mixed sweet par price (CAD$/bbl) |
49.83 | 29.55 | 51.62 | 67.99 | 68.40 | 73.81 | 66.52 | 42.97 | ||||||||||||||||||||||||
| Western Canada Select (CAD$/bbl) |
42.41 | 22.42 | 34.11 | 54.29 | 58.39 | 65.72 | 56.73 | 25.63 | ||||||||||||||||||||||||
| NYMEX Henry Hub ($US/mmbtu) |
2.00 | 1.72 | 1.95 | 2.50 | 2.32 | 2.47 | 2.85 | 3.68 | ||||||||||||||||||||||||
| AECO Index (CAD$/mcf) |
2.24 | 1.99 | 2.22 | 2.48 | 0.92 | 1.08 | 2.66 | 1.74 | ||||||||||||||||||||||||
| Foreign exchange rate (CAD$/$US) |
1.332 | 1.386 | 1.345 | 1.320 | 1.321 | 1.338 | 1.329 | 1.322 | ||||||||||||||||||||||||
| Benchmark differentials |
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| WTI - Edm Light Sweet ($US/bbl) |
(3.51 | ) | (6.14 | ) | (7.58 | ) | (5.37 | ) | (4.66 | ) | (4.63 | ) | (4.85 | ) | (26.30 | ) | ||||||||||||||||
| WTI - WCS Heavy ($US/bbl) |
(9.08 | ) | (11.47 | ) | (20.53 | ) | (15.83 | ) | (12.24 | ) | (10.68 | ) | (12.22 | ) | (39.42 | ) | ||||||||||||||||
| Average sales price (1) |
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| Light oil (CAD$/bbl) |
50.84 | 29.20 | 50.59 | 70.57 | 68.14 | 72.20 | 64.88 | 37.88 | ||||||||||||||||||||||||
| Heavy oil (CAD$/bbl) |
29.54 | 5.98 | 20.07 | 41.80 | 40.44 | 42.63 | 30.62 | 7.70 | ||||||||||||||||||||||||
| NGLs (CAD$/bbl) |
22.11 | 11.65 | 22.52 | 31.42 | 15.75 | 14.95 | 21.44 | 24.99 | ||||||||||||||||||||||||
| Total liquids (CAD$/bbl) |
43.06 | 24.18 | 41.13 | 60.10 | 54.87 | 59.05 | 52.37 | 28.39 | ||||||||||||||||||||||||
| Natural gas (CAD$/mcf) |
$ | 2.40 | $ | 2.14 | $ | 2.20 | $ | 2.55 | $ | 1.05 | $ | 1.18 | $ | 2.41 | $ | 2.46 | ||||||||||||||||
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| (1) | Excludes the impact of realized hedging gains or losses. |
Crude Oil
WTI prices averaged US$40.93 per barrel in the third quarter of 2020 compared to US$27.85 per barrel in the second quarter of 2020. The improvement in crude oil prices was mainly due to OPEC extending their production cuts and demand being partially restored as some COVID-19 restrictions were eased.
Differentials narrowed from the first half of 2020 and were relatively consistent over the third quarter of 2020 with Mixed Sweet Blend (“MSW”) differentials averaging US$3.51 per barrel and Western Canadian Select (“WCS”) differentials averaging US$9.08 per barrel. The narrower differentials were mainly due to refining capacity increasing, as demand partially improved, and lower supply due to shut-in production and an extended oil sands maintenance season in Western Canada.
The Company has the following physical crude oil contracts in place:
| Q4 2020 | Q1 2021 | |||||||
| WTI $CAD/bbl |
$ | 56.64 | $ | 55.54 | ||||
| bbl/day |
530 | 542 | ||||||
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| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 4 |
Natural Gas
NYMEX Henry Hub prices were volatile during the third quarter of 2020, starting at US$1.69 per mmbtu and increasing to a high of US$2.57 per mmbtu in August as production levels were forecast to be lower due to shut-in production and reduced drilling activity. In September, prices declined to a low of US$1.33 per mmbtu due to predictions of warmer than average Fall weather.
In Alberta, AECO 5A prices trended with NYMEX Henry Hub, starting the third quarter at $1.87 per mcf, increasing to a high of $2.82 per mcf in early September and then decreasing to a low of $1.32 per mcf by the end of the quarter. The third quarter AECO 5A price averaged $2.24 per mcf for the period.
The Company has the following natural gas hedges in place on a weighted average basis:
| Nov 2020 - Mar 2021 | ||||
| AECO $CAD/mcf |
2.94 | |||
| Total mcf/day |
23,700 | |||
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Average Sales Prices
| Three months ended September 30 |
Nine months ended September 30 |
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| 2020 | 2019 | % change |
2020 | 2019 | % change |
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| Light oil (per bbl) |
$ | 50.84 | $ | 68.14 | (25 | ) | $ | 43.14 | $ | 68.44 | (37 | ) | ||||||||||||
| Heavy oil (per bbl) |
29.54 | 40.44 | (27 | ) | 19.99 | 37.89 | (47 | ) | ||||||||||||||||
| NGL (per bbl) |
22.11 | 15.75 | 40 | 18.73 | 17.31 | 8 | ||||||||||||||||||
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| Total liquids (per bbl) |
43.06 | 54.87 | (22 | ) | 36.14 | 55.47 | (35 | ) | ||||||||||||||||
| Risk management gain (loss) (per bbl) |
— | 0.90 | (100 | ) | 4.79 | (1.64 | ) | n/a | ||||||||||||||||
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| Total liquids price, net (per bbl) |
43.06 | 55.77 | (23 | ) | 40.93 | 53.83 | (24 | ) | ||||||||||||||||
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| Natural gas (per mcf) |
2.40 | 1.05 | >100 | 2.25 | 1.55 | 45 | ||||||||||||||||||
| Risk management loss (per mcf) |
(0.19 | ) | — | n/a | (0.09 | ) | — | n/a | ||||||||||||||||
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| Natural gas net (per mcf) |
2.21 | 1.05 | >100 | 2.16 | 1.55 | 39 | ||||||||||||||||||
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| Weighted average (per boe) |
32.74 | 38.64 | (15 | ) | 28.43 | 40.24 | (29 | ) | ||||||||||||||||
| Risk management gain (loss) (per boe) |
(0.42 | ) | 0.60 | n/a | 2.98 | (1.10 | ) | n/a | ||||||||||||||||
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| Weighted average net (per boe) |
$ | 32.32 | $ | 39.24 | (18 | ) | $ | 31.41 | $ | 39.14 | (20 | ) | ||||||||||||
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| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 5 |
RESULTS OF OPERATIONS
Production
| Three months ended September 30 |
Nine months ended September 30 |
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| Daily production |
2020 | 2019 | % change | 2020 | 2019 | % change | ||||||||||||||||||
| Light oil (bbls/d) |
10,952 | 10,802 | 1 | 12,084 | 11,871 | 2 | ||||||||||||||||||
| Heavy oil (bbls/d) |
2,823 | 3,991 | (29 | ) | 2,811 | 4,048 | (31 | ) | ||||||||||||||||
| NGL (bbls/d) |
2,244 | 2,192 | 2 | 2,254 | 2,172 | 4 | ||||||||||||||||||
| Natural gas (mmcf/d) |
54 | 51 | 6 | 53 | 53 | — | ||||||||||||||||||
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|
|
|||||||||||||
| Total production (boe/d) |
25,031 | 25,505 | (2 | ) | 25,995 | 26,989 | (4 | ) | ||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|||||||||||||
During the third quarter of 2020, the Company completed no development activity in response to the COVID-19 pandemic and a low commodity price environment, which led to a minor decrease in production due to base declines.
For the first nine months of 2020, as a result of the lower crude oil pricing environment, the Company shut-in production deemed temporarily uneconomic which reduced average production by approximately 2,100 boe per day during the second quarter of 2020, mostly related to heavy oil properties in the Peace River area. This contributed to the decrease from the comparable period. Currently there is approximately 300 boe per day that remains offline. The Company will continue to evaluate and adjust our production base as required in this volatile commodity price environment.
Light oil production continued to increase from the comparable periods as the Company’s results from our 2020 Cardium development program continued to perform above expectations. As a result, our Cardium production has increased over last year’s levels. Heavy oil production declines have reduced our total Company production due to restricted capital spending, our decision to temporarily shut-in certain heavy oil production and our decision to defer the repair of certain failed wells that were uneconomic.
Average production within the Company’s asset areas was as follows:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||||||||||
| Daily production (boe/d) |
2020 | 2019 | % change | 2020 | 2019 | % change | ||||||||||||||||||
| Cardium |
20,661 | 19,426 | 6 | 21,615 | 20,622 | 5 | ||||||||||||||||||
| Peace River |
3,196 | 4,519 | (29 | ) | 3,123 | 4,528 | (31 | ) | ||||||||||||||||
| Alberta Viking |
825 | 1,051 | (22 | ) | 845 | 1,034 | (18 | ) | ||||||||||||||||
| Legacy |
349 | 509 | (31 | ) | 412 | 805 | (49 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total |
25,031 | 25,505 | (2 | ) | 25,995 | 26,989 | (4 | ) | ||||||||||||||||
|
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| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 6 |
Netbacks
| Three months ended September 30 | ||||||||||||||||
| 2020 | 2019 | |||||||||||||||
| Liquids (bbl) |
Natural Gas (mcf) |
Combined (boe) |
Combined (boe) |
|||||||||||||
| Operating netback: |
||||||||||||||||
| Sales price |
$ | 43.06 | $ | 2.40 | $ | 32.74 | $ | 38.64 | ||||||||
| Risk management gain (loss) (1) |
— | (0.19 | ) | (0.42 | ) | 0.60 | ||||||||||
| Royalties |
(1.81 | ) | (0.12 | ) | (1.42 | ) | (3.12 | ) | ||||||||
| Transportation |
(2.70 | ) | (0.19 | ) | (2.13 | ) | (2.72 | ) | ||||||||
| Operating costs (2) |
(14.74 | ) | (0.89 | ) | (11.36 | ) | (14.65 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Netback |
$ | 23.81 | $ | 1.01 | $ | 17.41 | $ | 18.75 | ||||||||
|
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|
|
|
|
|
|
|||||||||
| (bbls/d) | (mmcf/d) | (boe/d) | (boe/d) | |||||||||||||
| Production |
16,019 | 54 | 25,031 | 25,505 | ||||||||||||
|
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|
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|
|||||||||
| (1) | Realized risk management gains and losses on commodity contracts. |
| (2) | Includes the benefit of third-party processing fees totaling $2 million (2019 - $2 million). |
| Nine months ended September 30 | ||||||||||||||||
| 2020 | 2019 | |||||||||||||||
| Liquids (bbl) |
Natural Gas (mcf) |
Combined (boe) |
Combined (boe) |
|||||||||||||
| Operating netback: |
||||||||||||||||
| Sales price |
$ | 36.14 | $ | 2.25 | $ | 28.43 | $ | 40.24 | ||||||||
| Risk management gain (loss) (1) |
4.80 | (0.09 | ) | 2.98 | (1.10 | ) | ||||||||||
| Royalties |
(2.10 | ) | (0.05 | ) | (1.48 | ) | (2.89 | ) | ||||||||
| Transportation |
(2.40 | ) | (0.21 | ) | (2.01 | ) | (2.83 | ) | ||||||||
| Operating costs (2) |
(13.59 | ) | (0.83 | ) | (10.65 | ) | (13.64 | ) | ||||||||
|
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|
|
|
|
|
|||||||||
| Netback |
$ | 22.85 | $ | 1.07 | $ | 17.27 | $ | 19.78 | ||||||||
|
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|
|
|||||||||
| (bbls/d) | (mmcf/d) | (boe/d) | (boe/d) | |||||||||||||
| Production |
17,149 | 53 | 25,995 | 26,989 | ||||||||||||
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|
|||||||||
| (1) | Realized risk management gains and losses on commodity contracts. |
| (2) | Includes the benefit of third-party processing fees totaling $5 million (2019 - $6 million). |
For both the third quarter and the first nine months of 2020, netbacks were lower than the comparable periods as the impact of the COVID-19 pandemic and resultant supply and demand implications resulted in lower realized prices in 2020. This was partially offset by lower operating costs as a result of several successful cost saving initiatives, reduced royalty rates due to lower crude oil prices and higher realized risk management gains on crude oil hedges, specifically during the first half of 2020.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 7 |
Oil and Natural Gas Sales and Gross Revenues
A reconciliation from oil and natural gas sales and other income to gross revenues is as follows:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Oil and natural gas sales and other income |
$ | 77 | $ | 94 | $ | 213 | $ | 306 | ||||||||
| Realized risk management gain (loss) (1) |
— | 1 | 22 | (8 | ) | |||||||||||
| Less: Processing fees |
(2 | ) | (2 | ) | (5 | ) | (6 | ) | ||||||||
| Less: Financing income |
— | (1 | ) | — | (2 | ) | ||||||||||
| Less: Other income |
— | — | (6 | ) | — | |||||||||||
|
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|
|
|
|
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|
|
|||||||||
| Gross revenues |
$ | 75 | $ | 92 | $ | 224 | $ | 290 | ||||||||
|
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|
|||||||||
| (1) | Relates to realized risk management gains and losses on commodity contracts |
Oil and natural gas sales and other income and gross revenues were both lower than the comparable periods as a result of lower crude oil prices due to the COVID-19 pandemic, lower production volumes as a result of the Company temporarily shutting-in volumes deemed uneconomic during the second quarter of 2020 and the deferring of development capital spending. This was partially offset by crude oil hedging gains and higher natural gas prices in 2020 compared to 2019.
Change in Gross Revenues
| (millions) |
||||
| Gross revenues – January 1 – September 30, 2019 |
$ | 290 | ||
| Decrease in liquids production |
(7 | ) | ||
| Decrease in liquids prices (1) |
(69 | ) | ||
| Decrease in natural gas production |
— | |||
| Increase in natural gas prices (1) |
10 | |||
|
|
|
|||
| Gross revenues – January 1 – September 30, 2020 (2) |
$ | 224 | ||
|
|
|
|||
| (1) | Includes realized risk management gains and losses on commodity contracts. |
| (2) | Excludes processing fees and other income. |
Royalties
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Royalties (millions) |
$ | 4 | $ | 8 | $ | 11 | $ | 22 | ||||||||
| Average royalty rate (1) |
4 | % | 8 | % | 5 | % | 7 | % | ||||||||
| $/boe |
$ | 1.42 | $ | 3.12 | $ | 1.48 | $ | 2.89 | ||||||||
|
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|
|
|
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|
|||||||||
| (1) | Excludes effects of risk management activities and other income. |
For both the third quarter and for the first nine months of 2020, royalties decreased from the comparable period largely due to lower crude oil prices.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 8 |
Expenses
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Operating |
$ | 28 | $ | 36 | $ | 81 | $ | 106 | ||||||||
| Transportation |
5 | 6 | 14 | 21 | ||||||||||||
| Financing |
7 | 12 | 28 | 31 | ||||||||||||
| Share-based compensation |
$ | 1 | $ | 1 | $ | 2 | $ | 3 | ||||||||
|
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|
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|
|
|||||||||
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (per boe) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Operating (1) |
$ | 11.36 | $ | 14.65 | $ | 10.65 | $ | 13.64 | ||||||||
| Transportation |
2.13 | 2.72 | 2.01 | 2.83 | ||||||||||||
| Financing |
3.18 | 4.91 | 3.99 | 4.11 | ||||||||||||
| Share-based compensation |
$ | 0.30 | $ | 0.38 | $ | 0.24 | $ | 0.48 | ||||||||
|
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|
|
|
|
|
|
|
|||||||||
| (1) | Includes the benefit of third-party processing fees totaling $2 million (2019 - $2 million) for the third quarter of 2020 and $5 million (2019 - $6 million) for the first nine months of 2020. |
Operating
In 2020, the Company continued to progress on several cost saving initiatives and also quickly responded to the lower commodity price environment arising from the COVID-19 pandemic, which resulted in the Company temporally shutting-in production deemed uneconomic. This decision reduced operating costs beginning in the second quarter and partially in the third quarter of 2020, as most shut-in production was restored with oil prices improving. Additionally, the Company benefited from the CEWS program which reduced operating costs by $1.8 million and had a $0.25 per boe impact on operating expenses in the first nine months of 2020. The Company further lowered operating costs by temporarily reducing field staff salaries effective May 1.
The results for 2020 also include the full impact of the Company’s Legacy asset shut-in program, which was completed in 2019.
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 temporarily shut-in various heavy oil properties located in Peace River beginning in the second quarter and for part of the third quarter, which led to a reduction in transportation costs from the comparable periods.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 9 |
Financing
Financing expense consists of the following:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Interest on long-term-debt |
$ | 5 | $ | 8 | $ | 19 | $ | 22 | ||||||||
| Advisor fees |
2 | 2 | 8 | 3 | ||||||||||||
| Unwinding of discount on lease liabilities |
— | 2 | 1 | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Financing |
$ | 7 | $ | 12 | $ | 28 | $ | 31 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Obsidian Energy’s debt structure includes short-term borrowings under our syndicated credit facility and long-term financing through our senior notes. Financing charges decreased from the comparable periods mainly due to lower interest rates under the Company’s syndicated credit facility, partially offset by recent bank extension and various advisor fees.
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, 2020, 86 percent (December 31, 2019 – 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 with an underlying borrowing base and amount available to be drawn of $550 million and $450 million, respectively. The revolving period of the syndicated credit facility ends on January 29, 2021, with the end date of the term period on November 30, 2021. The syndicated credit facility is subject to a semi-annual borrowing base redetermination in May and November of each year. The last two amending agreements are described below.
| a) | In September 2020, the Company entered into an amending agreement with our lenders. Under the agreement, the syndicated credit facility continued to be available on a revolving basis until October 31, 2020, subject to further extensions, with the end date of the term period set at November 30, 2021. In connection with the extension, the lenders had the option to complete a borrowing base redetermination on October 31, 2020. |
| b) | Subsequent to September 30, 2020, the Company entered into an amending agreement with our lenders which extended the revolving period of the syndicated credit facility to January 29, 2021, subject to further extensions. The end date of the term period remains at November 30, 2021. In connection with the extension, the lenders have the option to complete a borrowing base redetermination on January 29, 2021. Additionally, the lenders have elected to not proceed with the borrowing base redeterminations on October 31, 2020 and on November 30, 2020. |
In 2020, the Company agreed with holders of our senior notes to move the maturity dates of the notes due on March 16, 2020, May 29, 2020, December 2, 2020, December 2, 2022 and December 2, 2025 to November 30, 2021.
In September 2019, the Company announced the initiation of a formal strategic alternative process to maximize shareholder value, and this process continues. Such strategic alternatives may include, but are not limited to, a corporate sale, merger or other business combination, a disposition of all or a portion of the Company’s assets, a recapitalization, a refinancing of our capital structure, or any combination of the foregoing. On September 21, 2020, the Company formally launched an offer to purchase all issued and outstanding common shares of Bonterra for consideration of two common shares of Obsidian Energy for each Bonterra share. The offer is open until 5:00pm (Mountain Standard Time) on January 4, 2021 unless extended, accelerated or withdrawn. The Company continues to pursue strategic alternatives however there can be no guarantees on the outcome. The outcome of the strategic review process as well as various factors such as government regulations and the commodity price environment lead to risk and uncertainty around revolving period reconfirmations and the terms of future renewals for the syndicated credit facility.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 10 |
At September 30, 2020, the carrying value of the Company’s US dollar denominated senior notes was $63 million (December 31, 2019 – $62 million). The increase in carrying value is the result of a weaker Canadian dollar against the US dollar at the comparable balance sheet dates. Summary information on the Company’s senior notes outstanding as at September 30, 2020 is as follows:
| Issue date |
Amount (millions) |
Initial Term |
Average interest rate |
Weighted average remaining | ||||||||||
| 2008 Notes |
May 29, 2008 | US$ | 4 | 8 – 12 years | 6.40 | % | 1.2 | |||||||
| 2010 Q1 Notes |
March 16, 2010 | US$ | 10 | 5 – 15 years | 5.85 | % | 1.2 | |||||||
| 2010 Q4 Notes |
December 2, 2010 | US$ | 21 | 5 – 15 years | 4.94 | % | 1.2 | |||||||
| 2011 Notes |
November 30, 2011 | US$ | 12 | 5 – 10 years | 4.79 | % | 1.2 | |||||||
Share-Based Compensation
Share-based compensation expense relates to the Company’s Stock Option Plan (the “Option Plan”), Restricted shares units (“RSU) granted under the Restricted Performance Share Unit Plan (“RPSU”), Deferred Share Unit Plan (“DSU”) and Performance share units (“PSU”) granted under the RPSU plan.
Share-based compensation expense consisted of the following:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| RSU |
$ | 1 | $ | 1 | $ | 2 | $ | 3 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Share-based compensation |
$ | 1 | $ | 1 | $ | 2 | $ | 3 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The share price used in the fair value calculation of the PSU and DSU plans obligations at September 30, 2020 was $0.49 per share (2019 – $1.10). Share-based compensation expense related to the DSU plan, PSU plan and Option plan were insignificant in both periods.
General and Administrative Expenses
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions, except per boe amounts) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Gross |
$ | 5 | $ | 9 | $ | 17 | $ | 29 | ||||||||
| Per boe |
2.29 | 3.72 | 2.41 | 3.85 | ||||||||||||
| Net |
3 | 5 | 10 | 16 | ||||||||||||
| Per boe |
$ | 1.40 | $ | 2.25 | $ | 1.47 | $ | 2.15 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
In 2019, the Company focused our development operations on the Cardium which led to staff reductions, information technology savings and associated lower head office costs. The full effect of these changes are being realized in 2020, which led to decreases in both gross and net costs from 2019.
In 2020, the Company benefited from the CEWS program which reduced net G&A expenses by approximately $0.1 million or $0.05 on a per boe basis in the third quarter and by $0.6 million or $0.08 on a per boe basis for the first nine months of 2020. Additionally, in response to the low commodity price environment due to the COVID-19 pandemic, effective May 1, the Company further reduced G&A expenses by temporarily reducing all head office staff salaries, suspending the Company’s matching component under the employee retirement savings plan and reducing Board of Directors retainer fees by 10 percent.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | 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) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Restructuring |
$ | — | $ | — | $ | — | $ | 3 | ||||||||
| Per boe |
— | — | — | 0.44 | ||||||||||||
| Other |
2 | 6 | 6 | 18 | ||||||||||||
| Per boe |
$ | 0.36 | $ | 2.88 | $ | 0.81 | $ | 2.57 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
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 has been indemnifying two former employees pursuant to indemnity agreements in connection with ongoing claims brought by the SEC arising out of the same restatement.
On July 18, 2019, the Company notified the two former employees that the Company did not believe that the former employees met the criteria for indemnification, that the amounts invoiced on account of indemnification to date were in any event unreasonable, and that the Company would not be making any further advancements on account of indemnification. At the same time, the Company commenced a proceeding in the Court of Queen’s Bench of Alberta against the two former employees, seeking a declaration that they had no further entitlement to indemnification, an order compelling them to repay all amounts advanced to date on account of indemnification, an order assessing the reasonableness of the amounts paid to date in respect of the indemnification, and other relief. In response, the two former employees brought a preliminary application to limit the evidence admissible in the proceeding. The preliminary application Judge ruled that the Company could not seek a declaration that the former employees are disentitled to advancements or indemnification because they failed to act honestly and in good faith with a view to the best interests of the Company, and had no reasonable grounds for believing that their conduct leading to the SEC Action was lawful, until after the former employees had had the opportunity to defend the allegations made against them in the SEC Action. The Company’s application was permitted to proceed on alternate grounds related to the reasonableness and appropriateness of the costs, charges and expenses claimed by the two former employees.
The Company has appealed the preliminary application Judge’s decision to the Court of Appeal of Alberta. The appeal is currently scheduled to be heard in December 2020.
On April 28, 2020, the U.S. District Court for the Southern District of New York approved settlements reached between the SEC and the two former employees. Under the settlements, in which the former employees neither admitted to nor denied the allegations made against them by the SEC, the two former employees agreed to make certain monetary payments. The Company currently is evaluating the impact of the SEC settlements on the former employees’ claims to advancement and indemnification.
While the Company has been challenging its advancement and indemnification obligations to the former employees in court, we have continued to accrue for the expenses incurred by the former employees which are recorded in Other expenses as shown in the table above.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 12 |
Transaction costs
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions, except per boe amounts) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Transaction costs |
$ | 3 | $ | — | $ | 3 | $ | — | ||||||||
| Per boe |
$ | 1.20 | $ | — | $ | 0.39 | $ | — | ||||||||
|
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|
|
|||||||||
In September 2020, the Company formally launched an offer to purchase all of the Bonterra Shares for consideration consisting of two common shares of Obsidian Energy for each Bonterra Share. This resulted in recording certain transaction related costs during the third quarter of 2020.
Depletion, Depreciation, Impairment and Accretion
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions, except per boe amounts) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Depletion and depreciation (“D&D”) |
$ | 28 | $ | 56 | $ | 104 | $ | 191 | ||||||||
| D&D expense per boe |
12.00 | 23.38 | 14.58 | 25.82 | ||||||||||||
| Property, Plant & Equipment (“PP&E”) Impairment |
— | — | 763 | 130 | ||||||||||||
| PP&E Impairment per boe |
— | — | 107.02 | 17.64 | ||||||||||||
| Accretion |
1 | 2 | 6 | 7 | ||||||||||||
| Accretion expense per boe |
$ | 0.81 | $ | 0.99 | $ | 0.90 | $ | 0.99 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company’s D&D expense has decreased from the comparable periods, primarily due to non-cash impairment charges recorded in both the first quarter of 2020 and the fourth quarter of 2019. These impairment charges were recorded mainly due to lower forecast commodity prices and higher discount rates due to continued commodity price and market value volatility within the oil and gas industry.
During the first quarter of 2020, the Company completed impairment tests across all of our cash generating units (“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 $763 million of non-cash impairments, which included $702 million within our Cardium CGU, $58 million within our Peace River CGU and $19 million within our corporate assets. Additionally, a $16 million impairment recovery was recorded within our Legacy CGU as a result of the Company increasing our discount rate used in our decommissioning liability due to current market conditions. Impairment losses related to PP&E may be reversed in future periods if commodity price forecasts materially improve.
Taxes
As at September 30, 2020, the Company was in a net unrecognized deferred tax asset position of approximately $447 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.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 13 |
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 gains or losses is as follows:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Realized foreign exchange loss |
$ | — | $ | — | $ | — | $ | 3 | ||||||||
| Unrealized foreign exchange loss (gain) |
(2 | ) | 1 | 1 | (5 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Foreign exchange loss (gain) |
$ | (2 | ) | $ | 1 | $ | 1 | $ | (2 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
Net Loss
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions except per share amounts) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Net income (loss) |
$ | (4 | ) | $ | (28 | ) | $ | (772 | ) | $ | (244 | ) | ||||
| Basic per share |
(0.05 | ) | (0.38 | ) | (10.55 | ) | (3.35 | ) | ||||||||
| Diluted per share |
$ | (0.05 | ) | $ | (0.38 | ) | $ | (10.55 | ) | $ | (3.35 | ) | ||||
|
|
|
|
|
|
|
|
|
|||||||||
During the third quarter of 2020, the net loss was lower than the comparative period mainly due to lower depletion charges and reduced operating costs. This was partially offset by lower revenues, primarily as a result of lower crude oil prices from the COVID-19 pandemic.
For the first nine months of 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.
Capital Expenditures
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
| (millions) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Drilling and completions |
$ | 3 | $ | 21 | $ | 34 | $ | 50 | ||||||||
| Well equipping and facilities |
2 | 6 | 12 | 18 | ||||||||||||
| Land acquisition and retention |
— | — | — | 1 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Capital expenditures |
5 | 27 | 46 | 69 | ||||||||||||
| Property dispositions, net |
— | — | — | (11 | ) | |||||||||||
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| Total capital expenditures |
$ | 5 | $ | 27 | $ | 46 | $ | 58 | ||||||||
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|
|
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As a result of the low commodity price environment due to the COVID-19 pandemic, the Company had minimal capital spending during the third quarter of 2020.
In early 2020, the Company continued with our development focus in the Cardium, specifically in the Willesden Green area. All 10 gross wells drilled in the first quarter were in this area and all of these wells were brought on production from March through May of 2020.
In response to the low commodity price environment, the Company anticipates modest capital spending of $9 million in the fourth quarter of 2020. Activities will focus on optimization and minor infrastructure projects in addition to decommissioning activities. The Company does have the operational flexibility to begin drilling activities quickly should crude oil prices warrant the investment.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 14 |
Drilling
| Nine months ended September 30 |
||||||||||||||||
| 2020 | 2019 | |||||||||||||||
| (number of wells) |
Gross | Net | Gross | Net | ||||||||||||
| Oil |
12 | 10 | 15 | 11 | ||||||||||||
| Injectors, stratigraphic and service |
1 | — | 3 | — | ||||||||||||
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|||||||||
| Total |
13 | 10 | 18 | 11 | ||||||||||||
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|
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|
|
|
|||||||||
| Success rate (1) |
100 | % | 100 | % | ||||||||||||
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|
|
|
|||||||||||||
| (1) | Success rate is calculated excluding stratigraphic and service wells. |
The Company drilled no wells during the third quarter of 2020.
Environmental and Climate Change
The oil and 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 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 2020 and 2021. Recently the Alberta Government announced the suspension of spending requirements for the ABC Program for 2020 and we expect the $9 million already 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 to date totaling $17 million and an additional $4 million in allocation eligibility as an ABC program participant. These awards will allow the Company to expand our abandonment activities for wells, pipelines, facilities, and related site reclamation starting in the fourth quarter of 2020 and thus reduce our decommissioning liability.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 15 |
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, 2020 | December 31, 2019 | ||||||
| Long-term debt |
||||||||
| Current portion of long-term debt |
$ | — | $ | 434 | ||||
| Long-term portion of long-term debt |
458 | 27 | ||||||
|
|
|
|
|
|||||
| Total |
458 | 461 | ||||||
| Working capital deficiency (1) |
||||||||
| Cash |
(6 | ) | (3 | ) | ||||
| Restricted cash |
(1 | ) | (2 | ) | ||||
| Accounts receivable |
(36 | ) | (66 | ) | ||||
| Prepaid expenses and other |
(16 | ) | (12 | ) | ||||
| Accounts payable and accrued liabilities |
80 | 117 | ||||||
|
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|
|
|||||
| Total |
21 | 34 | ||||||
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|
|||||
| Net debt |
$ | 479 | $ | 495 | ||||
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|
|||||
| (1) | Includes amounts classified as held for sale. |
Net debt decreased compared to December 31, 2019, as commodity price decreases due to the impact of COVID-19, which lowered revenues, were more than offset by realized hedging gains, the Company’s lower cost structure (specifically within operating costs and G&A expense) and lower capital expenditures. Long-term debt was relatively consistent between the periods.
The Company’s credit facility was classified as a long-term liability at September 30, 2020 as the term-out date is November 30, 2021, which is beyond 12 months from the reporting date.
Liquidity
The Company has a reserve-based syndicated credit facility with an underlying borrowing base of $550 million and a borrowing limit of $450 million. 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.
In the first quarter of 2020, the Company entered into amending agreements with holders of our senior notes and our bank syndicate to update our financial covenants as follows:
| • | for the period from January 1, 2020 onward both the Senior Debt and Total Debt to Adjusted EBITDA covenants have been eliminated; and |
| • | the maximum for both the Senior Debt and Total Debt to Capitalization ratios were permanently increased to 75 percent. |
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 16 |
On September 30, 2020, the Company was in compliance with all of our financial covenants which consisted of the following:
| Limit | September 30, 2020 | |||||||
| Senior debt to capitalization |
Less than 75 | % | 59 | % | ||||
| Total debt to capitalization |
Less than 75 | % | 59 | % | ||||
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|
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As at September 30, 2020, Obsidian Energy had sufficient liquidity under our syndicated credit facility to meet our current obligations. Based on strip commodity pricing as of October 22, 2020, the Company is currently forecasting that sufficient liquidity exists under our syndicated credit facility to fund operations, including planned capital expenditures. The Company continues to generate positive cash flow from operations and funds flow from operations at recent commodity prices as evidenced by our results in the third quarter and for the first nine months of 2020. Additionally, under the Company’s current forecast, sufficient liquidity exists in the event that additional strip commodity price reductions were to occur due to a combination of available borrowing capacity and the ability to implement additional proactive actions within the Company’s control. However, given the short-term nature of our credit facility extensions and due to significant commodity price volatility experienced since March 2020 mainly due to the impact of the COVID-19 pandemic on the demand for commodities and OPEC production levels, future significant decreases to commodity prices may occur which could impact future cash flows and cause uncertainty as to whether the Company has sufficient liquidity over the next 12 months. As a result, the Company may be required to obtain additional financing to increase liquidity, the availability of which is uncertain at this time. As such there is a material uncertainty that casts substantial doubt on the Company’s ability to continue as a going concern.
Financial Instruments
The Company had the following financial instruments outstanding as at September 30, 2020. Fair values are determined using external counterparty information, which is compared to observable market data. Obsidian Energy 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 |
Pricing | Fair value (millions) |
|||||||||||
| Financial AECO Swaps |
||||||||||||||
| AECO Swaps |
23,700 mcf/d | Nov 2020 - Mar 2021 | $ | 2.94/mcf | $ | — | ||||||||
|
|
|
|||||||||||||
| Total |
$ | — | ||||||||||||
|
|
|
|||||||||||||
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) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Realized gain (loss) |
||||||||||||||||
| Settlement of commodity contracts |
$ | — | $ | 1 | $ | 22 | $ | (8 | ) | |||||||
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| Total realized risk management |
$ | — | $ | 1 | $ | 22 | $ | (8 | ) | |||||||
| Unrealized gain (loss) |
||||||||||||||||
| Commodity contracts |
$ | — | $ | 3 | $ | — | $ | (5 | ) | |||||||
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|
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| Total unrealized risk management |
— | 3 | — | (5 | ) | |||||||||||
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| Risk management gain (loss) |
$ | — | $ | 4 | $ | 22 | $ | (13 | ) | |||||||
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| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 17 |
Additionally, the Company had the following physical contract outstanding at September 30, 2020.
| Notional volume |
Remaining term |
Pricing | ||||||||
| Physical Crude Oil Contracts |
||||||||||
| WTI |
530 bbl/d | Oct - Dec 2020 | $ | 56.64/bbl | ||||||
|
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|
|
|
|
||||||
Subsequent to September 30, 2020, the Company entered into an additional physical crude oil contract for 542 barrels per day from January – March 2021 at a price of $55.54 per barrel.
Outlook
For the second half of 2020, we still anticipate modest capital activity given the current commodity price environment. Capital spending will focus on highly capital efficient optimization projects and decommissioning activities. The Company increased our capital expenditure guidance by $2 million for the second half of 2020 as a result of adding minor infrastructure projects; otherwise, our guidance remains unchanged. Current second half and full year 2020 estimates on our key metrics are as follows:
| Metric |
Second Half 2020 Guidance Range |
Full Year 2020 Guidance Range |
||||||||
| Average Production (1) (2) |
boe per day | 24,000 – 24,500 | 25,000 – 25,500 | |||||||
| Capital Expenditures |
$ millions | 12 | 53 | |||||||
| Decommissioning Expenditures |
$ millions | 3 | 11 | |||||||
| Operating expense (3) |
$/boe | $ | 12.00 – $12.50 | $ | 11.10 – $11.50 | |||||
| G&A (3) |
$/boe | $ | 1.50 – $1.65 | $ | 1.50 – $1.60 | |||||
|
|
|
|
|
|
||||||
| (1) | Adjusted for asset sales of 115 boe per day. |
| (2) | Mid-point of guidance for second half of 2020 is 10,840 bbls per day light oil, 2,995 bbls per day heavy oil, 2,000 bbls per day NGLs and 50,500 mcf per day natural gas. Mid-point of full year guidance for 2020 is 11,680 bbls per day light oil, 2,885 bbls per day heavy oil, 2,135 bbls per day of NGLs and 51,300 mcf per day natural gas. |
| (3) | The Company is anticipating a minor impact related to the CEWS during the fourth quarter of 2020 based on recent commodity prices and the current criteria for the program, both of which are subject to change. |
This outlook section is included to provide shareholders with information about Obsidian Energy’s expectations as at October 30, 2020 for average production, capital expenditures, decommissioning expenditures, operating costs and G&A expenses for the second half and fiscal 2020 and readers are cautioned that the information may not be appropriate for any other purpose. This information constitutes forward-looking information. Readers should note the assumptions, risks and discussion under “Forward-Looking Statements” and are cautioned that numerous factors could potentially impact the Company and our ability to meet our guidance, including fluctuations in commodity prices, any decision we make to shut-in additional production or resume production from shut-in properties, the impact of the COVID-19 pandemic on supply and demand for commodities, particularly crude oil, changes to the Government of Alberta’s mandatory crude oil and bitumen curtailment program, or our ability to qualify for and receive payments under government assistance programs, and acquisition and disposition activity.
All press releases are available on Obsidian Energy’s website at www.obsidianenergy.com, on SEDAR at www.sedar.com, and on EDGAR at www.sec.gov.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 18 |
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 to date, are based on forecasted results as discussed in the Outlook above.
| Impact on funds flow | ||||||||||||
| Change of: |
Change | $ millions | $/share | |||||||||
| Price per barrel of liquids |
WTI US$1.00 | 6 | 0.07 | |||||||||
| Liquids production |
1,000 bbls/day | 9 | 0.12 | |||||||||
| Price per mcf of natural gas |
AECO $0.10 | 1 | 0.02 | |||||||||
| Natural gas production |
10 mmcf/day | 2 | 0.03 | |||||||||
| Effective interest rate |
1 | % | 4 | 0.05 | ||||||||
| Exchange rate ($US per $CAD) |
$ | 0.01 | 2 | 0.03 | ||||||||
|
|
|
|
|
|
|
|||||||
Contractual Obligations and Commitments
Obsidian Energy is committed to certain payments over the next five calendar years and thereafter as follows:
| 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | ||||||||||||||||||||||
| Long-term debt (1) |
$ | — | $ | 458 | $ | — | $ | — | $ | — | $ | — | $ | 458 | ||||||||||||||
| Transportation |
2 | 7 | 5 | 3 | 2 | 7 | 26 | |||||||||||||||||||||
| Power infrastructure |
2 | 6 | 2 | — | — | — | 10 | |||||||||||||||||||||
| Interest obligations |
5 | 19 | — | — | — | — | 24 | |||||||||||||||||||||
| Office lease |
2 | 10 | 10 | 10 | 10 | 1 | 43 | |||||||||||||||||||||
| Lease liability |
1 | 5 | 3 | 1 | — | 6 | 16 | |||||||||||||||||||||
| Decommissioning liability (2) |
3 | 7 | 7 | 1 | 1 | 41 | 60 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
$ | 15 | $ | 512 | $ | 27 | $ | 15 | $ | 13 | $ | 55 | $ | 637 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| (1) | The 2021 figure includes $395 million related to the syndicated credit facility that is due for renewal in November 2021. |
| (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 scheduled revolving period of our syndicated credit facility continues to January 29, 2021, with an additional term out period to November 30, 2021. In addition, the Company has an aggregate of US$47 million in senior notes maturing in 2021. 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.
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, 2020 |
73,506,743 | |||
| Issuances under RSU |
5,911 | |||
|
|
|
|||
| As at October 30, 2020 |
73,512,654 | |||
|
|
|
|||
| Options outstanding: |
||||
| As at September 30, 2020 and October 30, 2020 |
961,954 | |||
|
|
|
| OBSIDIAN ENERGY THIRD QUARTER 2020 | 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, 2020 and ending on September 30, 2020 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.
Obsidian Energy utilizes the original Internal Control - Integrated Framework (2013) issued by the Committee of the Sponsoring Organizations of the Treadway Commission (COSO) to design and evaluate our internal control over financial reporting.
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, 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 FFO less both capital and decommissioning expenditures. Netback is the per unit of production amount of revenue less royalties, operating expenses, 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 a calculation of the Company’s netbacks. Gross revenues are oil and natural gas sales and other income including realized risk management gains and losses on commodity contracts and excludes processing fees, financing income and other revenue and is used to assess the cash realizations on commodity sales. See “Oil and Natural Gas Sales and Gross Revenues” above for a reconciliation of gross revenues to oil and natural gas sales and other income, 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.
Oil and 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 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 price of crude oil as compared to natural gas from time to time may be different from the energy equivalency conversion ratio of 6:1, utilizing a conversion on a 6:1 basis may be misleading as an indication of value.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 20 |
Forward-Looking Statements
Certain statements contained in this document constitute forward-looking statements or information (collectively “forward-looking statements”). In particular, this document contains forward-looking statements pertaining to, without limitation, the following: that the Company anticipates minimal capital spending for the remainder of the year and what the current estimate is for 2020, including capital and decommissioning expenditures; that the Company will continue to economically evaluate and adjust our production base as required in this volatile commodity price environment; that the Company continues to monitor all applicable government relief programs to determine if we qualify to participate in them and will continue to evaluate our eligibility to participate in the amended CEWS program as further details become available; how the ASRP will allow the Company to expand the program, the timing thereof and staying actively engage in these types of programs; our plan to focus on our industry leading Cardium position in additional to our goal of becoming a consolidating entity within the Cardium, offer a predictable, liquids weighted, production profile that is capable of generating sustainable value for all stakeholders; the benefits and synergies attributable to the offer to purchase all the Bonterra Shares and that those attributes are fair superior to what either entity could achieve on a standalone basis; the expected re-confirmation and term out dates, as applicable, the lender option date to complete a borrowing base redetermination on the credit facility, and the maturity dates on the senior notes; the possible outcome of the strategic review process as well as various factors such as government regulations and the commodity price environment lead to risk and uncertainty around revolving period reconfirmations and the terms of future renewals of the syndicated credit facility; environment that the appeal with former Penn West employees will likely be heard in December 2020; that the impairment losses related to PP&E can be reversed in future periods if commodity price forecasts materially improve; what the capital focus will be for the fourth quarter of 2020 and the operational flexibility to begin drilling activities quickly should crude oil prices warrant the investment; 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 we are dedicated to managing the environmental impact from our operations through the environmental programs which include resource conservation, water management and site abandonment/ reclamation/ remediation; that we will remain in the ABC program for 2020 and 2021; that the ABC program remains suspended in 2020 and amounts spent in 2020 under the program can be applied to our 2021 target; that the Company continuously monitors operations to minimize environmental impact and allocate sufficient capital to reclamation and other activities to mitigate the impact on the areas in which the Company operates; the financial covenant amendments and time frames that are applicable in connection with the amending agreements; 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; our hedges; that we are forecasting that sufficient liquidity exists under our syndicated credit facility to fund operations and, based on these strip prices, does not expect to have a development capital program; that due to significant commodity price volatility currently due to the COVID-19 pandemic and potential lack of storage forcing production shut-ins, future significant decreases to commodity prices may occur which could impact future cash flows and cause uncertainty as to whether the Company has sufficient liquidity over the next 12 months, and as a result the Company may be required to obtain additional financing to increase liquidity, the availability of which is uncertain at this time; the second half and full year 2020 guidance including average production range, capital expenditures and decommissioning expenditures and operating and G&A expense ranges; and the sensitivity analysis and contractual obligations and commitments moving forward.
With respect to forward-looking statements contained in this document, the Company has made assumptions regarding, among other things: the benefits to be derived by the Company and its stakeholders from the proposed acquisition of Bonterra; we will have the ability to continue as a going concern going forward and realize our assets and discharge our liabilities in the normal course of business; 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 contained herein (including our guidance set out under “Outlook”) do not assume the completion of the proposed transaction); 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
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 21 |
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 additional production due to the continuation of low commodity prices or the further deterioration of commodity prices and our expectations regarding when commodity prices will improve such that any remaining shut-in properties can be returned to production; 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 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 we are not able to continue as a going concern and realize our assets and discharge our liabilities in the normal course of business; 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 is unable to complete one or more of the potential transactions being pursued pursuant to our ongoing strategic alternatives review process (including the proposed acquisition of Bonterra), on favorable terms or at all, or that the Company and its stakeholders do not realize the anticipated benefits of any such transaction that is completed (including the benefits of the proposed acquisition of Bonterra described herein); 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
| OBSIDIAN ENERGY THIRD QUARTER 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 22 |
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 additional production or continue existing production shut-ins longer than anticipated, 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; 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 2020 | MANAGEMENT’S DISCUSSION AND ANALYSIS | 23 |
Exhibit 99.3
Obsidian Energy Ltd.
Consolidated Balance Sheets
| (CAD millions, unaudited) |
Note | September 30, 2020 | December 31, 2019 | |||||||
| Assets |
||||||||||
| Current |
||||||||||
| Cash |
$ | 6 | $ | 1 | ||||||
| Restricted cash |
1 | 2 | ||||||||
| Accounts receivable |
36 | 62 | ||||||||
| Prepaid expenses and other |
16 | 12 | ||||||||
| Lease receivable |
3 | — | 9 | |||||||
| Assets held for sale |
4 | — | 83 | |||||||
|
|
|
|
|
|||||||
| 59 | 169 | |||||||||
|
|
|
|
|
|||||||
| Non-current |
||||||||||
| Lease receivable |
3 | — | 30 | |||||||
| Property, plant and equipment |
5 | 909 | 1,705 | |||||||
|
|
|
|
|
|||||||
| 909 | 1,735 | |||||||||
|
|
|
|
|
|||||||
| Total assets |
$ | 968 | $ | 1,904 | ||||||
|
|
|
|
|
|||||||
| Liabilities and Shareholders’ Equity |
||||||||||
| Current |
||||||||||
| Accounts payable and accrued liabilities |
$ | 80 | $ | 111 | ||||||
| Current portion of long-term debt |
6 | — | 434 | |||||||
| Current portion of lease liabilities |
7 | 5 | 29 | |||||||
| Current portion of provisions |
8 | 17 | 16 | |||||||
| Liabilities related to assets held for sale |
4 | — | 13 | |||||||
|
|
|
|
|
|||||||
| 102 | 603 | |||||||||
| Non-current |
||||||||||
| Long-term debt |
6 | 458 | 27 | |||||||
| Lease liabilities |
7 | 8 | 85 | |||||||
| Provisions |
8 | 78 | 97 | |||||||
|
|
|
|
|
|||||||
| 646 | 812 | |||||||||
|
|
|
|
|
|||||||
| Shareholders’ equity |
||||||||||
| Shareholders’ capital |
11 | 2,187 | 2,187 | |||||||
| Other reserves |
12 | 104 | 102 | |||||||
| Deficit |
(1,969 | ) | (1,197 | ) | ||||||
|
|
|
|
|
|||||||
| 322 | 1,092 | |||||||||
|
|
|
|
|
|||||||
| Total liabilities and shareholders’ equity |
$ | 968 | $ | 1,904 | ||||||
|
|
|
|
|
|||||||
Basis of presentation (Note 2)
Subsequent events (Note 6 and 9)
Commitments and contingencies (Note 13)
See accompanying notes to the unaudited interim consolidated financial statements.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | 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 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Oil and natural gas sales and other income |
10 | $ | 77 | $ | 94 | $ | 213 | $ | 306 | |||||||||
| Royalties |
(4 | ) | (8 | ) | (11 | ) | (22 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| 73 | 86 | 202 | 284 | |||||||||||||||
| Risk management gain (loss) |
9 | — | 4 | 22 | (13 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| 73 | 90 | 224 | 271 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Expenses |
||||||||||||||||||
| Operating |
14 | 28 | 36 | 81 | 106 | |||||||||||||
| Transportation |
5 | 6 | 14 | 21 | ||||||||||||||
| General and administrative |
14 | 3 | 5 | 10 | 16 | |||||||||||||
| Restructuring |
— | — | — | 3 | ||||||||||||||
| Share-based compensation |
12 | 1 | 1 | 2 | 3 | |||||||||||||
| Depletion, depreciation, impairment and accretion |
5,8 | 29 | 58 | 873 | 328 | |||||||||||||
| Provisions loss (gain) |
8 | 1 | (7 | ) | (22 | ) | (9 | ) | ||||||||||
| Foreign exchange loss (gain) |
6 | (2 | ) | 1 | 1 | (2 | ) | |||||||||||
| Financing |
6,7 | 7 | 12 | 28 | 31 | |||||||||||||
| Transaction costs |
15 | 3 | — | 3 | — | |||||||||||||
| Other |
2 | 6 | 6 | 18 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| 77 | 118 | 996 | 515 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Income (loss) before taxes |
(4 | ) | (28 | ) | (772 | ) | (244 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Deferred tax expense (recovery) |
— | — | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net and comprehensive income (loss) |
$ | (4 | ) | $ | (28 | ) | $ | (772 | ) | $ | (244 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Net income (loss) per share |
||||||||||||||||||
| Basic |
$ | (0.05 | ) | $ | (0.38 | ) | $ | (10.55 | ) | $ | (3.35 | ) | ||||||
| Diluted |
$ | (0.05 | ) | $ | (0.38 | ) | $ | (10.55 | ) | $ | (3.35 | ) | ||||||
| Weighted average shares outstanding (millions) |
||||||||||||||||||
| Basic |
11 | 73.5 | 73.0 | 73.2 | 72.8 | |||||||||||||
| Diluted |
11 | 73.5 | 73.0 | 73.2 | 72.8 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
See accompanying notes to the unaudited interim consolidated financial statements.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | 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 | 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Operating activities |
||||||||||||||||||
| Net income (loss) |
$ | (4 | ) | $ | (28 | ) | $ | (772 | ) | $ | (244 | ) | ||||||
| Other income |
3 | — | (1 | ) | — | (2 | ) | |||||||||||
| Depletion, depreciation, impairment and accretion |
5,8 | 29 | 58 | 873 | 328 | |||||||||||||
| Provisions loss (gain) |
8 | 1 | (7 | ) | (22 | ) | (9 | ) | ||||||||||
| Financing |
6,7 | — | 2 | 1 | 6 | |||||||||||||
| Share-based compensation |
12 | 1 | 1 | 2 | 3 | |||||||||||||
| Unrealized risk management loss (gain) |
9 | — | (3 | ) | — | 5 | ||||||||||||
| Unrealized foreign exchange loss (gain) |
6 | (2 | ) | 1 | 1 | (5 | ) | |||||||||||
| Other |
— | 1 | 1 | 2 | ||||||||||||||
| Decommissioning expenditures |
8 | (1 | ) | (5 | ) | (9 | ) | (8 | ) | |||||||||
| Onerous office lease settlements |
8 | (2 | ) | — | (7 | ) | (2 | ) | ||||||||||
| Change in non-cash working capital |
12 | 13 | 1 | (46 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| 34 | 32 | 69 | 28 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Investing activities |
||||||||||||||||||
| Capital expenditures |
5 | (5 | ) | (27 | ) | (46 | ) | (69 | ) | |||||||||
| Property dispositions (acquisitions), net |
5 | — | — | — | 11 | |||||||||||||
| Change in non-cash working capital |
1 | 14 | (13 | ) | (5 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| (4 | ) | (13 | ) | (59 | ) | (63 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Financing activities |
||||||||||||||||||
| Lease receivable receipts |
3 | — | 2 | 2 | 7 | |||||||||||||
| Lease liabilities settlements |
7 | (1 | ) | (5 | ) | (5 | ) | (20 | ) | |||||||||
| Increase (decrease) in long-term debt |
6 | (25 | ) | (12 | ) | (4 | ) | 67 | ||||||||||
| Repayments of senior notes |
6 | — | — | — | (17 | ) | ||||||||||||
| Realized foreign exchange loss on repayments |
6 | — | — | — | 3 | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| (26 | ) | (15 | ) | (7 | ) | 40 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Change in cash and cash equivalents |
4 | 4 | 3 | 5 | ||||||||||||||
| Cash and cash equivalents, beginning of period |
2 | 1 | 3 | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Cash and cash equivalents, end of period |
$ | 6 | $ | 5 | $ | 6 | $ | 5 | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
Cash and cash equivalents includes cash and bank overdraft.
See accompanying notes to the unaudited interim consolidated financial statements.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | 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, 2020 |
$ | 2,187 | $ | 102 | $ | (1,197 | ) | $ | 1,092 | |||||||||||
| Net and comprehensive loss |
— | — | (772 | ) | (772 | ) | ||||||||||||||
| Share-based compensation |
12 | — | 2 | — | 2 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at September 30, 2020 |
$ | 2,187 | $ | 104 | $ | (1,969 | ) | $ | 322 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| (CAD millions, unaudited) |
Note | Shareholders’ Capital |
Other Reserves |
Deficit | Total | |||||||||||||||
| Balance at January 1, 2019 |
$ | 2,185 | $ | 99 | $ | (409 | ) | $ | 1,875 | |||||||||||
| Net and comprehensive loss |
— | — | (244 | ) | (244 | ) | ||||||||||||||
| Share-based compensation |
12 | — | 3 | — | 3 | |||||||||||||||
| Issued on exercised equity plans |
12 | 1 | (1 | ) | — | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Balance at September 30, 2019 |
$ | 2,186 | $ | 101 | $ | (653 | ) | $ | 1,634 | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
See accompanying notes to the unaudited interim consolidated financial statements.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | INTERIM CONSOLIDATED FINANCIAL STATEMENTS | 4 |
Notes to the Unaudited Consolidated Financial Statements
(All tabular amounts are in CAD millions except numbers of common shares, per share amounts, percentages and various figures in Note 9)
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.
These interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that Obsidian Energy will be able to realize our assets and discharge our liabilities in the normal course of business.
As at September 30, 2020, Obsidian Energy was in compliance with all financial covenants in our syndicated credit facility and senior notes and had sufficient liquidity under our syndicated credit facility to meet our current obligations. In the first quarter of 2020, our Debt to Adjusted EBITDA covenant was eliminated; thus, our going concern assessment is focused on liquidity capacity over the next 12 months. Based on strip commodity pricing as of October 22, 2020, the Company is currently forecasting that sufficient liquidity exists under our syndicated credit facility to fund operations, including planned capital expenditures. The Company continues to generate positive cash flow from operations and funds flow from operations at recent commodity prices as evidenced by our results in the third quarter and for the first nine months of 2020. Additionally, under the Company’s current forecast, sufficient liquidity exists in the event that additional strip commodity price reductions were to occur due to a combination of available borrowing capacity and the ability to implement additional proactive actions within the Company’s control.
However, given the short-term nature of our credit facility extensions and due to significant commodity price volatility experienced since March 2020 mainly due to the impact of the COVID-19 pandemic on the demand for commodities and OPEC production levels, future significant decreases to commodity prices may occur which could impact future cash flows and cause uncertainty as to whether the Company has sufficient liquidity over the next 12 months. As a result, the Company may be required to obtain additional financing to increase liquidity, the availability of which is uncertain at this time. As such, there is a material uncertainty that casts substantial doubt on the Company’s ability to continue as a going concern. These interim consolidated financial statements do not include adjustments in the carrying values of the assets and liabilities that would be necessary if the going concern assumption were not appropriate. Such adjustments could be material.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | 5 |
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.
The 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, 2019. Beginning in March 2020, the impact of the COVID-19 pandemic and potential supply and demand implications for crude oil has resulted in significant commodity price volatility. The Company’s critical accounting judgements and key estimates remain the same as disclosed in our annual consolidated financial statements as at and for the year ended December 31, 2019, however, the COVID-19 pandemic and resulting market volatility has increased the complexity of these judgements and estimates when preparing these interim consolidated financial statements, particularly within the measurement uncertainty of the inputs used in the Company’s assessment of the recoverability of asset carrying values as well as the credit risk-adjusted discount rate used within our decommissioning liability and office lease provision.
All tabular amounts are in millions of Canadian dollars, except numbers of common shares, per share amounts, percentages and other figures as noted.
The interim consolidated financial statements were approved for issuance by the Board of Directors on October 30, 2020.
c) Significant Accounting policies
Government Grants
Obsidian Energy recognizes government grants as they are received or if there is reasonable assurance that the Company is in compliance with all associated conditions. The grant is recognized within the Consolidated Statements of Income (Loss) in the period in which the income is earned or the related expenditures are incurred. If the grant relates to an asset, it is recognized as a reduction to the carrying value of the asset and amortized into income over the expected useful life of the asset through lower depletion and depreciation.
3. Lease receivable
Lease receivable relates to the lease component of sub-leased office space. Total lease receivable included in the Consolidated Balance Sheets is as follows:
| Nine months ended September 30, 2020 |
Year ended December 31, 2019 |
|||||||
| Balance, beginning of period |
$ | 39 | $ | 43 | ||||
| Additions (terminations) |
(37 | ) | 3 | |||||
| Finance income |
— | 2 | ||||||
| Lease payments received |
(2 | ) | (9 | ) | ||||
|
|
|
|
|
|||||
| Balance, end of period |
$ | — | $ | 39 | ||||
|
|
|
|
|
|||||
| Current portion |
$ | — | $ | 9 | ||||
| Long-term portion |
$ | — | $ | 30 | ||||
|
|
|
|
|
|||||
In the first quarter of 2020, the Company entered into an amending agreement with our building landlord which resulted in renewed lease terms for our Calgary office space. Under the revised agreement, the amounts received from subtenants no longer meet the criteria to be classified as a finance lease and thus the lease receivable has been removed. The office lease provision referenced in Notes 7 and 8 has been updated to reflect the accounting treatment under the revised terms.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | 6 |
4. Assets and liabilities held for sale
Assets and liabilities classified as held for sale consisted of the following:
| As at | ||||||||
| September 30, 2020 |
December 31, 2019 |
|||||||
| Assets held for sale |
||||||||
| Cash |
$ | — | $ | 2 | ||||
| Accounts receivable |
— | 4 | ||||||
| Property, plant and equipment |
— | 77 | ||||||
|
|
|
|
|
|||||
| $ | — | $ | 83 | |||||
|
|
|
|
|
|||||
| Liabilities related to assets held for sale |
||||||||
| Accounts payable and accrued liabilities |
$ | — | $ | 6 | ||||
| Decommissioning liability |
— | 7 | ||||||
|
|
|
|
|
|||||
| $ | — | $ | 13 | |||||
|
|
|
|
|
|||||
At December 31, 2019, the Company was continuing to progress through a sales process for our interest in the Peace River Oil Partnership. As a result of commodity price volatility, primarily due to the COVID-19 pandemic, the completion of a potential transaction is uncertain at this time, thus the Company has no longer classified this asset as held for sale.
5. Property, plant and equipment (“PP&E”)
Oil and Gas assets/ Facilities, Corporate assets
| Cost |
Nine months ended September 30, 2020 |
Year ended December 31, 2019 |
||||||
| Balance, beginning of period |
$ | 10,388 | $ | 10,776 | ||||
| Capital expenditures |
46 | 103 | ||||||
| Dispositions |
— | (52 | ) | |||||
| Transfer from/(to) assets held for sale |
423 | (423 | ) | |||||
| Net decommissioning dispositions |
(42 | ) | (16 | ) | ||||
|
|
|
|
|
|||||
| Balance, end of period |
$ | 10,815 | $ | 10,388 | ||||
|
|
|
|
|
|||||
| Accumulated depletion and depreciation |
Nine months ended September 30, 2020 |
Year ended December 31, 2019 |
||||||
| Balance, beginning of period |
$ | 8,709 | $ | 8,202 | ||||
| Depletion and depreciation |
99 | 236 | ||||||
| Impairments |
763 | 658 | ||||||
| Transfers from/(to) asset held for sale |
346 | (346 | ) | |||||
| Dispositions |
— | (41 | ) | |||||
|
|
|
|
|
|||||
| Balance, end of period |
$ | 9,917 | $ | 8,709 | ||||
|
|
|
|
|
|||||
| As at | ||||||||
| Net book value |
September 30, 2020 | December 31, 2019 | ||||||
| Total |
$ | 898 | $ | 1,679 | ||||
|
|
|
|
|
|||||
| OBSIDIAN ENERGY THIRD QUARTER 2020 | NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | 7 |
Right-of-use assets
The following table includes a break-down of the categories for right-of-use assets. Refer to Note 8 for further discussion on amendments to our office lease agreement.
| Cost |
||||||||||||||||||||
| Office | Transportation | Vehicle | Surface | Total | ||||||||||||||||
| Balance, January 1, 2019 |
$ | 15 | $ | 17 | $ | 3 | $ | 2 | $ | 37 | ||||||||||
| Additions (Terminations) |
(2 | ) | — | 1 | — | (1 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, December 31, 2019 |
$ | 13 | $ | 17 | $ | 4 | $ | 2 | $ | 36 | ||||||||||
| Additions (Terminations) |
(13 | ) | (2 | ) | 2 | — | (13 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, September 30, 2020 |
$ | — | $ | 15 | $ | 6 | $ | 2 | $ | 23 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Accumulated amortization |
||||||||||||||||||||
| Office | Transportation | Vehicle | Surface | Total | ||||||||||||||||
| Balance, January 1, 2019 |
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Amortization |
3 | 6 | 1 | — | 10 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, December 31, 2019 |
$ | 3 | $ | 6 | $ | 1 | $ | — | $ | 10 | ||||||||||
| Amortization |
— | 4 | 1 | — | 5 | |||||||||||||||
| Termination |
(3 | ) | — | — | — | (3 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance, September 30, 2020 |
$ | — | $ | 10 | $ | 2 | $ | — | $ | 12 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| As at | ||||||||
| Net book value |
September 30, 2020 | December 31, 2019 | ||||||
| Total |
$ | 11 | $ | 26 | ||||
|
|
|
|
|
|||||
In the first quarter of 2020, the Company entered into an amending agreement with our building landlord which resulted in renewed lease terms for our Calgary office space. Under the revised agreement, the office lease no longer meets the criteria to be classified as a right-of-use asset. The office lease provision referenced in Notes 7 and 8 has been updated to reflect the accounting treatment under the revised terms.
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, 2020 | December 31, 2019 | ||||||
| Oil and Gas assets, Facilities, Corporate assets |
$ | 898 | $ | 1,679 | ||||
| Right-of-use assets |
11 | 26 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 909 | $ | 1,705 | ||||
|
|
|
|
|
|||||
At September 30, 2020, the Company completed an assessment to determine if indicators of impairment or an impairment reversal were present. No indicators were noted.
During the first quarter of 2020, the Company completed impairment tests across all of our Cash Generating Units (“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 lack of storage forcing production shut-ins. This led to the Company recording $763 million of non-cash impairments, which included $702 million within our Cardium CGU, $58 million within our Peace River CGU and $19 million within our corporate assets. Additionally, a $16 million impairment recovery was recorded within our Legacy CGU as a result of the Company increasing our discount rate used in our decommissioning liability due to current market conditions.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | 8 |
6. Long-term debt
| As at | ||||||||
| September 30, 2020 | December 31, 2019 | |||||||
| Bankers’ acceptances and prime rate loans |
$ | 395 | $ | 399 | ||||
| Senior secured notes – 2008 Notes |
||||||||
| 6.40%, US$4 million, maturing November 30, 2021 |
5 | 5 | ||||||
| Senior secured notes – 2010 Q1 Notes |
||||||||
| 5.85%, US$10 million, maturing November 30, 2021 |
13 | 13 | ||||||
| Senior secured notes – 2010 Q4 Notes |
||||||||
| 4.88%, US$13 million, maturing November 30, 2021 |
18 | 17 | ||||||
| 4.98%, US$6 million, maturing November 30, 2021 |
8 | 8 | ||||||
| 5.23%, US$2 million, maturing November 30, 2021 |
3 | 3 | ||||||
| Senior secured notes – 2011 Q4 Notes |
||||||||
| 4.79%, US$12 million, maturing November 30, 2021 |
16 | 16 | ||||||
|
|
|
|
|
|||||
| Total long-term debt |
$ | 458 | $ | 461 | ||||
|
|
|
|
|
|||||
| Current portion |
$ | — | $ | 434 | ||||
| Long-term portion |
$ | 458 | $ | 27 | ||||
|
|
|
|
|
|||||
As a result of entering into amending agreements with our banking syndicate in 2020 and the extension of the term-out period to November 30, 2021, the Company’s syndicated credit facility was classified as non-current on September 30, 2020.
Additional information on Obsidian Energy’s senior secured notes was as follows:
| As at | ||||||||
| September 30, 2020 | December 31, 2019 | |||||||
| Weighted average remaining life (years) |
1.2 | 1.5 | ||||||
| Weighted average interest rate |
5.2 | % | 5.7 | % | ||||
|
|
|
|
|
|||||
The Company has a reserve-based syndicated credit facility with an underlying borrowing base and amount available to be drawn of $550 million and $450 million, respectively. The revolving period of the syndicated credit facility ends on January 29, 2021, with the end date of the term period on November 30, 2021. The syndicated credit facility is subject to a semi-annual borrowing base redetermination in May and November of each year. The last two amending agreements are described below.
| a. | In September 2020, the Company entered into an amending agreement with our lenders. Under the agreement, the syndicated credit facility continued to be available on a revolving basis until October 31, 2020, subject to further extensions, with the end date of the term period set at November 30, 2021. In connection with the extension, the lenders had the option to complete a borrowing base redetermination on October 31, 2020. |
| b. | Subsequent to September 30, 2020, the Company entered into an amending agreement with our lenders which extended the revolving period of the syndicated credit facility to January 29, 2021, subject to further extensions. The end date of the term period remains at November 30, 2021. In connection with the extension, the lenders have the option to complete a borrowing base redetermination on January 29, 2021. Additionally, the lenders have elected to not proceed with the borrowing base redeterminations on October 31, 2020 and on November 30, 2020. |
In 2020, the Company agreed with holders of our senior notes to move the maturity dates of the notes due on March 16, 2020, May 29, 2020, December 2, 2020, December 2, 2022 and December 2, 2025 to November 30, 2021.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | 9 |
In September 2019, the Company announced the initiation of a formal strategic alternative process to maximize shareholder value, and this process continues. Such strategic alternatives may include, but are not limited to, a corporate sale, merger or other business combination, a disposition of all or a portion of the Company’s assets, a recapitalization, a refinancing of our capital structure, or any combination of the foregoing. On September 21, 2020, the Company formally launched an offer to purchase all issued and outstanding common shares of Bonterra Energy Corp. (“Bonterra”) for consideration of two common shares of Obsidian Energy for each Bonterra common share. The offer is open until 5:00pm (Mountain Standard Time) on January 4, 2021, unless extended, accelerated or withdrawn. The Company continues to pursue strategic alternatives however there can be no guarantees on the outcome. The outcome of the strategic review process as well as various factors such as government regulations and the commodity price environment lead to risk and uncertainty around revolving period reconfirmations and the terms of future renewals for the syndicated credit facility.
Drawings on the Company’s bank facility are subject to fluctuations in short-term money market rates as they are generally held as short-term borrowings. As at September 30, 2020, 86 percent (December 31, 2019 – 87 percent) of Obsidian Energy’s long-term debt instruments were exposed to changes in short-term interest rates.
At September 30, 2020, letters of credit totaling $5 million were outstanding (December 31, 2019 – $8 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 |
|||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Interest on long-term-debt |
$ | 5 | $ | 8 | $ | 19 | $ | 22 | ||||||||
| Advisor fees |
2 | 2 | 8 | 3 | ||||||||||||
| Unwinding discount on lease liabilities |
— | 2 | 1 | 6 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Financing |
$ | 7 | $ | 12 | $ | 28 | $ | 31 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
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 |
|||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Realized foreign exchange loss |
$ | — | $ | — | $ | — | $ | 3 | ||||||||
| Unrealized foreign exchange loss (gain) |
(2 | ) | 1 | 1 | (5 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Foreign exchange loss (gain) |
$ | (2 | ) | $ | 1 | $ | 1 | $ | (2 | ) | ||||||
|
|
|
|
|
|
|
|
|
|||||||||
The Company is subject to Senior debt and Total debt to Capitalization financial covenants with a maximum ratio of 75%, as more specifically defined in the applicable lending agreements. At September 30, 2020, the Company was in compliance with our financial covenants under such lending agreements.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | 10 |
7. Lease liabilities
Total lease liabilities included in the Consolidated Balance Sheets are as follows:
| Nine months ended September 30, 2020 |
Year ended December 31, 2019 |
|||||||
| Balance, beginning of period |
$ | 114 | $ | 136 | ||||
| Additions (terminations) |
(97 | ) | 1 | |||||
| Unwinding of discount on lease liabilities |
1 | 7 | ||||||
| Lease payments |
(5 | ) | (30 | ) | ||||
|
|
|
|
|
|||||
| Balance, end of period |
$ | 13 | $ | 114 | ||||
|
|
|
|
|
|||||
| Current portion |
$ | 5 | $ | 29 | ||||
| Long-term portion |
$ | 8 | $ | 85 | ||||
|
|
|
|
|
|||||
In the first quarter of 2020, the Company entered into an amending agreement with our building landlord which resulted in renewed lease terms for our Calgary office space. The revised agreement no longer meets the criteria to be classified as a lease liability, thus the office lease portion has been removed. The office lease provision referenced in Note 8 has been adjusted to reflect the revised appropriate accounting treatment.
The following table sets out a maturity analysis of lease payments, disclosing the undiscounted balance after September 30, 2020:
| 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | ||||||||||||||||||||||
| Transportation |
$ | 1 | $ | 3 | $ | 2 | $ | — | $ | — | $ | — | $ | 6 | ||||||||||||||
| Vehicle |
— | 2 | 1 | 1 | — | — | 4 | |||||||||||||||||||||
| Surface |
— | — | — | — | — | 6 | 6 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Total |
$ | 1 | $ | 5 | $ | 3 | $ | 1 | $ | — | $ | 6 | $ | 16 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Amounts recognized in Consolidated Statements of Income (Loss) and Consolidated Statements of Cash Flows
The Company recorded $nil of 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.
8. Provisions
| As at | ||||||||
| September 30, 2020 |
December 31, 2019 |
|||||||
| Decommissioning liability |
$ | 60 | $ | 100 | ||||
| Office lease provision |
35 | 13 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 95 | $ | 113 | ||||
|
|
|
|
|
|||||
| Current portion |
$ | 17 | $ | 16 | ||||
| Long-term portion |
$ | 78 | $ | 97 | ||||
|
|
|
|
|
|||||
| OBSIDIAN ENERGY THIRD QUARTER 2020 | NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | 11 |
Decommissioning liability
The decommissioning liability was determined by applying an inflation factor of 2.0 percent (December 31, 2019 - 2.0 percent) and the inflated amount was discounted using a credit-adjusted rate of 9.0 percent (December 31, 2019 – 7.0 percent) over the expected useful life of the underlying assets, currently extending over 50 years into the future. At September 30, 2020, the total decommissioning liability on an undiscounted, uninflated basis was $605 million (December 31, 2019 - $621 million).
Changes to the decommissioning liability were as follows:
| Nine months ended September 30, 2020 |
Year ended December 31, 2019 |
|||||||
| Balance, beginning of period |
$ | 100 | $ | 129 | ||||
| Net liabilities added (disposed) (1) |
— | (6 | ) | |||||
| Increase (decrease) due to changes in estimates |
(42 | ) | (10 | ) | ||||
| Liabilities settled |
(9 | ) | (14 | ) | ||||
| Transfers from (to) liabilities for assets held for sale |
7 | (7 | ) | |||||
| Accretion charges |
4 | 8 | ||||||
|
|
|
|
|
|||||
| Balance, end of period |
$ | 60 | $ | 100 | ||||
|
|
|
|
|
|||||
| Current portion |
$ | 8 | $ | 13 | ||||
| Long-term portion |
$ | 52 | $ | 87 | ||||
|
|
|
|
|
|||||
| (1) | Includes additions from drilling activity, facility capital spending and disposals related to net property dispositions. |
Office lease provision
The office lease provision represents the net present value of non-lease components on future office lease payments. These payments are reduced by recoveries under current sub-lease agreements that were recognized as non-lease components. The office lease provision was determined by applying an asset specific credit-adjusted discount rate of 6.5 percent (December 31, 2019 – 6.0 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, 2020 |
Year ended December 31, 2019 |
|||||||
| Balance, beginning of period |
$ | 13 | $ | 22 | ||||
| Net additions (dispositions) |
26 | (5 | ) | |||||
| Increase (decrease) due to changes in estimates |
1 | (3 | ) | |||||
| Cash settlements |
(7 | ) | (2 | ) | ||||
| Accretion charges |
2 | 1 | ||||||
|
|
|
|
|
|||||
| Balance, end of period |
$ | 35 | $ | 13 | ||||
|
|
|
|
|
|||||
| Current portion |
$ | 9 | $ | 3 | ||||
| Long-term portion |
$ | 26 | $ | 10 | ||||
|
|
|
|
|
|||||
In the first quarter of 2020, the Company entered into an amending agreement with our building landlord which resulted in renewed lease terms for our Calgary office space. Under the terms of the amending agreement our annual net rent payable will be a maximum of $0.8 million per month ($10 million per annum) for the period from February 1, 2020 through January 31, 2025, when the lease expires. Additionally, the building landlord has agreed to indemnify the Company on all existing subleases. Based on the revised terms, all costs associated with the agreement now meet the criteria to be classified as an onerous lease.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | 12 |
9. 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, 2020, except for the senior notes described in Note 6 with a carrying value of $63 million (December 31, 2019 – $62 million) and a fair value of $47 million (December 31, 2019 - $59 million), the fair values of these financial instruments approximate their carrying amounts due to the short-term maturity of the instruments.
The fair values of all outstanding financial and commodity 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, 2020 and December 31, 2019, 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, 2020 |
Year ended December 31, 2019 |
||||||
| Balance, beginning of period |
$ | — | $ | 9 | ||||
| Unrealized gain (loss) on financial instruments: |
||||||||
| Commodity collars and swaps |
— | (9 | ) | |||||
|
|
|
|
|
|||||
| Total fair value, end of period |
$ | — | $ | — | ||||
|
|
|
|
|
|||||
Obsidian Energy had the following financial instruments outstanding as at September 30, 2020. 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) |
|||||||||||||
| Financial AECO Swaps |
|
|||||||||||||||
| AECO Swaps |
23,700 mcf/d | Nov 2020 - Mar 2021 | $ | 2.94/mcf | $ | — | ||||||||||
|
|
|
|||||||||||||||
| Total |
$ | — | ||||||||||||||
|
|
|
|||||||||||||||
Based on commodity prices and contracts in place at September 30, 2020, a $0.50 change in the price per mcf of natural gas would have changed pre-tax unrealized risk management by $2 million.
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 |
|||||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Realized |
||||||||||||||||
| Settlement of commodity contracts |
$ | — | $ | 1 | $ | 22 | $ | (8 | ) | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total realized gain (loss) |
$ | — | $ | 1 | $ | 22 | $ | (8 | ) | |||||||
| Unrealized |
||||||||||||||||
| Commodity contracts |
$ | — | $ | 3 | $ | — | $ | (5 | ) | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Total unrealized gain (loss) |
— | 3 | — | (5 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Risk management gain (loss) |
$ | — | $ | 4 | $ | 22 | $ | (13 | ) | |||||||
|
|
|
|
|
|
|
|
|
|||||||||
| OBSIDIAN ENERGY THIRD QUARTER 2020 | NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | 13 |
Additionally, the Company had the following physical contract outstanding at September 30, 2020.
| Notional volume |
Remaining term |
Pricing | ||||||||||
| Physical Crude Oil Contracts |
|
|||||||||||
| WTI |
530 bbl/d | Oct - Dec 2020 | $ | 56.64/bbl | ||||||||
|
|
|
|
|
|
|
|||||||
Subsequent to September 30, 2020, the Company entered into an additional physical crude oil contract for 542 bbl per day from January – March 2021 at a price of $55.54/bbl.
Market risks
Obsidian Energy is exposed to normal market risks inherent in the oil and 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.
Beginning in March 2020, the oil and gas industry has experienced significant volatility with crude oil prices due to macro-economic uncertainty, mainly due to reduced demand for crude oil as a result of the COVID-19 pandemic, fluctuating OPEC production levels and potential supply and demand implications. The duration and impact of these global events remain uncertain and could impact our cash flow and financial condition in the future.
There have been no material changes to these risks from those discussed in the Company’s annual audited consolidated financial statements.
10. Revenue
The Company’s significant revenue streams consist of the following:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
|
|
|
|
|
|||||||||||||
| 2020 | 2019 | 2020 | 2019 | |||||||||||||
| Crude Oil |
$ | 59 | $ | 83 | $ | 158 | $ | 265 | ||||||||
| NGL |
4 | 3 | 11 | 10 | ||||||||||||
| Natural gas |
12 | 5 | 33 | 23 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Production revenues |
75 | 91 | 202 | 298 | ||||||||||||
| Other revenue |
— | — | 6 | — | ||||||||||||
| Processing fees |
2 | 2 | 5 | 6 | ||||||||||||
| Financing income |
— | 1 | — | 2 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Oil and natural gas sales and other income |
$ | 77 | $ | 94 | $ | 213 | $ | 306 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| OBSIDIAN ENERGY THIRD QUARTER 2020 | NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | 14 |
11. Shareholders’ equity
i) Issued
| Shareholders’ capital |
Common Shares | Amount | ||||||
| Balance, December 31, 2018 |
72,473,719 | $ | 2,185 | |||||
| Issued on exercise of equity compensation plans (1) |
537,769 | 2 | ||||||
|
|
|
|
|
|||||
| Balance, December 31, 2019 |
73,011,488 | $ | 2,187 | |||||
| Issued on exercise of equity compensation plans (1) |
495,255 | — | ||||||
|
|
|
|
|
|||||
| Balance, September 30, 2020 |
73,506,743 | $ | 2,187 | |||||
|
|
|
|
|
|||||
| (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:
| Three months ended September 30 |
Nine months ended September 30 |
|||||||||||||||
|
|
|
|
|
|||||||||||||
| Average shares outstanding (millions) |
2020 | 2019 | 2020 | 2019 | ||||||||||||
| Basic and Diluted |
73.5 | 73.0 | 73.2 | 72.8 | ||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||
For the third quarter of 2020 and for the first nine months of 2020, 1.0 million common shares (2019 – 0.2 million) that are issuable under the Stock Option Plan (“Option Plan”) were excluded in calculating the weighted average number of diluted shares outstanding as they were considered anti-dilutive.
12. Share-based compensation
Restricted and Performance Share Unit plan (“RPSU plan”)
Restricted Share units (“RSU”) 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 Toronto Stock Exchange (“TSX”). Consideration can be in the form of cash or shares purchased on the open market or issued from treasury.
| RSU plan (number of shares equivalent) |
Nine months ended September 30, 2020 |
Year ended December 31, 2019 |
||||||
| Outstanding, beginning of period |
1,100,278 | 1,235,202 | ||||||
| Granted |
1,818,840 | 971,916 | ||||||
| Vested |
(507,565 | ) | (574,706 | ) | ||||
| Forfeited |
(36,244 | ) | (532,134 | ) | ||||
|
|
|
|
|
|||||
| Outstanding, end of period |
2,375,309 | 1,100,278 | ||||||
|
|
|
|
|
|||||
| OBSIDIAN ENERGY THIRD QUARTER 2020 | NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | 15 |
The fair value and weighted average assumptions of the RSU plan units granted during the nine-month periods were as follows:
| Nine months ended September 30 | ||||||||
| 2020 | 2019 | |||||||
| Average fair value of units granted (per unit) |
$ | 0.55 | $ | 2.77 | ||||
| Expected life of units (years) |
3.0 | 3.0 | ||||||
| Expected forfeiture rate |
0.6 | % | 1.0 | % | ||||
|
|
|
|
|
|||||
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.
| PSU awards (number of shares equivalent) |
Nine months ended September 30, 2020 |
Year ended December 31, 2019 |
||||||
| Outstanding, beginning of period |
92,424 | 163,129 | ||||||
| Granted |
376,310 | 144,211 | ||||||
| Vested |
— | (22,929 | ) | |||||
| Forfeited |
(4,173 | ) | (191,987 | ) | ||||
|
|
|
|
|
|||||
| Outstanding, end of period |
464,561 | 92,424 | ||||||
|
|
|
|
|
|||||
The liability associated with the PSU’s under the RPSU plan was insignificant at both September 30, 2020 and December 31, 2019.
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, 2020 |
Year ended December 31, 2019 |
|||||||||||||||
| Options |
Number of Options |
Weighted Average Exercise Price |
Number of Options |
Weighted Average Exercise Price |
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| Outstanding, beginning of period |
89,178 | $ | 10.41 | 287,996 | $ | 25.34 | ||||||||||
| Granted |
917,490 | 0.56 | — | — | ||||||||||||
| Forfeited |
(44,714 | ) | 12.06 | (198,818 | ) | 32.04 | ||||||||||
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| Outstanding, end of period |
961,954 | $ | 0.94 | 89,178 | $ | 10.41 | ||||||||||
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| Exercisable, end of period |
44,464 | $ | 8.74 | 77,066 | $ | 10.67 | ||||||||||
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The fair value and weighted average assumptions of the options granted during the nine-month periods were as follows:
| Nine months ended September 30 | ||||||||
| 2020 | 2019 | |||||||
| Average fair value of options granted (per option) |
$ | 0.29 | $ | — | ||||
| Expected life of options (years) |
2.2 | — | ||||||
| Expected forfeiture rate |
1.0 | % | — | |||||
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| OBSIDIAN ENERGY THIRD QUARTER 2020 | NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | 16 |
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, 2020, 1,863,521 DSUs (December 31, 2019 – 847,100) were outstanding and $1 million was recorded as a current liability (December 31, 2019 – $1 million).
Share-based compensation
Share-based compensation consisted of the following:
| Nine months ended September 30 | ||||||||
| 2020 | 2019 | |||||||
| RSU grants |
$ | 2 | $ | 3 | ||||
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| Share-based compensation |
$ | 2 | $ | 3 | ||||
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The share price used in the fair value calculation of the DSU plan obligations at September 30, 2020 was $0.49 per share (2019 – $1.10). Share-based compensation expense related to the DSU plan, PSU plan and Option plan were insignificant in both periods.
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.
13. 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.
14. Government grants
The Company has received payments as part of the Canadian Emergency Wage Subsidy (“CEWS”). The CEWS allows eligible companies to receive a subsidy of employee wages, subject to a maximum. For the first nine months of 2020, this resulted in a benefit to the Company of approximately $2.8 million which resulted in a $1.8 million reduction to operating costs and a $0.6 million reduction to general and administrative costs.
15. Potential Business Combination
In September 2020, the Company formally announced the commencement of an offer to purchase all of the issued and outstanding common shares of Bonterra for consideration consisting of two common shares of Obsidian Energy for each Bonterra common share. This resulted in recording certain transaction related costs during the third quarter of 2020.
| OBSIDIAN ENERGY THIRD QUARTER 2020 | NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS | 17 |
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, 2020. |
| 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, 2020 and ended on September 30, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. |
| Date: November 2, 2020 | ||
| (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, 2020. |
| 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, 2020 and ended on September 30, 2020 that has materially affected, or is reasonably likely to materially affect, the issuer’s ICFR. |
| Date: November 2, 2020 |
| (signed) “Peter Scott” |
|
|
| Peter Scott |
| Senior Vice President and Chief Financial Officer |