Peace River assets drive corporate production growth to 50,000 boe/d in 2026, while maintaining 25 percent flat annual corporate decline rate
Peace River area production growth to 24,000 boe/d in 2026 from current rate of 6,600 boe/d, resulting in a nine percent increase in our total liquids weighting to 76 percent
Plan generates $291 million of free cash flow from 2024 to 2026 at US$75.00/bbl WTI
2023 capital budget increased to $300 million with recent increase in oil prices
Obsidian Energy is pleased to announce our three-year corporate plan, focused primarily on growth from the Peace River asset, as well as a $40 million increase to our 2023 capital program.
"Following the acquisition of the remaining working interest at our Peace River asset in late 2021, we have successfully completed several initiatives to access its value, including rebuilding and expanding our Peace River team," said Stephen Loukas, President and CEO. "With enhanced knowledge and understanding of the area and its formations, we have unveiled a three-year plan with expected production growth reaching 50,000 boe/d in mid-2026. This increase is driven primarily by the development of our Peace River assets, which are expected to increase from 6,600 boe/d to 24,000 boe/d. The successful execution of our plan is expected to generate $291 million of cumulative free cash flow ("FCF") over the period at a US$75.00/bbl WTI oil price and forecasted 2026 funds from operations ("FFO") of $8.19 per share."
Loukas continued, "We have also elected to increase our 2023 capital program by $40 million given the recent strength in oil prices to accelerate development, which will result in added production volumes in 2024. Our oil price forecast for the balance of the year increased to US$85/bbl WTI while our FCF remains unchanged in our revised guidance, which includes the 2.5 million shares repurchased and cancelled for $21.2 million as at August 31, 2023."
2024 - 2026 GROWTH PLAN1
Our strategy for the three-year corporate growth plan is to maintain production levels in our Willesden Green and Pembina (Cardium), and Viking light oil businesses, and use the significant FCF to fund growth in our heavy oil business at Peace River until it becomes self funding in 2026. While our plan anticipates continued development in both the Bluesky and Clearwater formations, the largest growth is expected from Bluesky production given the significant inventory adjacent to existing fields and our new Walrus development area.
In addition to increased production and cash flow, we expect significant reserve additions at Peace River as it is further developed. We are drilling 16 (16 net) development and appraisal/exploration locations in 2023 and plan to drill an additional 199 (199 net) development and appraisal/exploration locations over the three-year plan, compared to only 24 (24 net) total proved plus probable locations as currently identified in our 2022 year-end reserve report.
Three-Year Growth Plan Highlights
Annualized production growth rate of 16 percent with liquids growth rate of 25 percent - We expect our production to grow steadily over the three-year period, reaching 50,000 boe/d in 2026. We plan to maintain our light oil production at approximately 26,000 boe/d while the Peace River asset grows substantially from 6,600 boe/d to 24,000 boe/d.
Our liquids weighting is expected to increase nine percent over the three-year plan due to the growth in Peace River (from 67 percent in 2024 to 76 percent in 2026).
Significant inventory remains for growth post 2026 - In total, our plan anticipates drilling 346 (318.3 net) development and appraisal/exploration wells over the three-years: 199 (199 net) wells in Peace River and 147 (119.3 net) wells in our light oil business (Willesden Green/Pembina and Viking, including non-operated wells).
Peace River: Based on our current internal estimates, the Company will have 869 un-risked locations in Peace River as at year-end 2023, leaving 670 (670 net) locations remaining at the end of 2026 to further exploration and exploitation of our large undeveloped land base.
Light oil business: Post the wells drilled in our 2023 program and three-year plan, there will be 43 percent of the proved plus probable locations remaining from the total identified in our year-end 2022 reserve report. The remaining locations do not include any potential future locations beyond the five-year future development capital horizon.
Stable decline rates of 25 percent - Corporate decline rates are expected to remain stable over the period. Decline rates in our light oil assets are anchored by our Pembina asset, which benefits from waterflood support, while new wells in Peace River typically exhibit lower declines compared to other horizontal wells as they are not fracture stimulated.
New Peace River infrastructure - To efficiently manage the three-year production growth, we expect to optimize field operations and lower future costs by adding road infrastructure, disposal wells and a central treating facility at our new Walrus field, which will minimize the requirement for well pad production tanks and reduce trucking costs.
Increased FFO - With year-over-year production growth and an increasing liquids weighting, we expect our FFO will grow from $440 million in 2024 to $655 million in 2026 at US$75.00/bbl WTI, representing $8.19 per share in 2026 (based on our issued and outstanding share amount of 80.0 million as at August 31, 2023).
Higher FCF generation - Our three-year growth plan calls for capital expenditures of $380 million, $445 million and $420 million in 2024, 2025 and 2026, respectively, which is expected to generate FCF of $53 million, $36 million and $213 million in each year.
As we build the Peace River asset, our FCF generation substantially increases in the third year to a level on par with our light oil business. We expect to use the excess FCF to create further shareholder value, including return of capital, additional growth and acting on acquisition opportunities.
Substantial flexibility and optionality - Our plan is based on an oil commodity price of US$75.00/bbl WTI and a WCS differential of US$15.00/bbl. While both WTI and WCS prices have shown volatility, current WTI prices are higher than our plan forecast, and we expect WCS prices to improve as western Canada transportation options continue to increase.
With full ownership of our Peace River land, we control the pace of development and can quickly respond to changes in commodity prices. Currently, our plan is essentially FCF neutral at US$70.00/bbl WTI during 2024 and 2025. As the plan is executed and our production base increases, we expect the FCF neutral price to decrease.
Improved Debt to FFO ratio - With production, FFO and FCF growth throughout the three-year period, our net debt to FFO ratio continues to fall to nil in 2026 at US$75.00/bbl WTI.
Three-Year Growth Plan Details
The details of our self-funding three-year plan are provided in the table below and are based on our 2023 updated guidance (provided later in this news release). Our formal 2024 guidance will be provided later this year or in early 2024.
(1) Guidance and forecasts based on US$75/bbl WTI and $3.00/GJ AECO, US$3.00/bbl MSW differential, US$15.00/bbl WCS differential, FX of 1.34x CAD/USD.
(2) Per share calculations are based on 80.0 million shares outstanding at August 31, 2023.
UPDATED 2023 GUIDANCE
Given recent improvements in WTI oil prices averaging higher than our prior guidance and considering recent new hedging (see 'Hedging Update' below), we have updated our 2023 guidance by increasing our WTI forecast to US$85/bbl for the balance of 2023, and our total 2023 FFO guidance by $45 million. Approximately $40 million will be used to increase our 2023 capital expenditures and accelerate our 2023 development plan, which will be primarily allocated to the drilling of an eight (8.0 net) well Viking program (production expected by the end of the year) and a four (4.0 net) well program in Pembina (production expected in the first quarter of 2024). To date, our second half development program in Peace River and our Cardium assets at Willesden Green and Pembina are proceeding with results at or ahead of our expectations. In addition, our Willesden Green debottlenecking project is on schedule for completion in early November.
In addition to the increased capital, our revised guidance also reflects a minor increase to the lower end of our production range (slightly increasing the midpoint) and an additional $3 million of share buybacks in August 2023. For the year, we repurchased and cancelled 2.5 million shares as at August 31, 2023, for proceeds of approximately $21.2 million.
(1) Approximate mid-point of August 2023E guidance range: 12,400 bbl/d light oil, 6,100 bbl/d heavy oil, 2,500 bbl/d NGLs and 65.3 mmcf/d natural gas with a minimal amount of forecasted production associated with exploratory capital expenditures. Approximate mid-point of Revised 2023E guidance range: 12,700 bbl/d light oil, 5,800 bbl/d heavy oil, 2,600 bbl/d NGLs and 66.2 mmcf/d natural gas with a minimal amount of forecasted production associated with exploratory capital expenditures.
(2) Capital expenditures include approximately $25 million for exploration/appraisal well activity with minimal impact on forecasted production volumes.
(3) Pricing assumptions of August 2023E guidance were forecasted for August 1, 2023, to December 31, 2023. Full year pricing assumptions, including actuals realized to that date, resulted in WTI US$74.90/bbl, AECO $2.91/mcf, WCS differentials of US$17.15/bbl and FX of 1.32x CAD/USD.
Pricing assumptions of Revised 2023 guidance are forecasted for October 1, 2023, to December 31, 2023. Full year pricing assumptions, including actuals realized thus far, result in WTI US$79.18/bbl, AECO $2.66/mcf, WCS differentials of US$16.87/bbl and FX of 1.34x CAD/USD.
(4) August 2023E guidance FFO and FCF included risk management (hedging) adjustments up to August 1, 2023, and included approximately $6 million of estimated charges for full year 2023 related to the deferred share units, performance share units and non-treasury incentive plan cash compensation amounts which are based on a share price of $9.00 per share. FFO per share was based on 80.3 million shares outstanding as of August 1, 2023.
Revised 2023E guidance FFO and FCF include risk management (hedging) adjustments up to September 18, 2023, and includes approximately $5 million of estimated charges for full year 2023 related to the deferred share units, performance share units and non-treasury incentive plan cash compensation amounts which are based on a share price of $10.00 per share. FFO per share was based on 81.2 million shares outstanding, which is the total average issued and outstanding shares for 2023, as calculated with actual shares from January 1 to August 31, 2023, and 80.0 million shares for September 1 to December 31, 2023.
(5) August 2023E guidance net debt figures estimated as at December 31, 2023, and included the impact of approximately $18.2 million of share purchases under the NCIB to August 1, 2023. Revised 2023E guidance net debt figures estimated as at December 31, 2023, and includes the impact of approximately $21.2 million of share purchases under the NCIB to August 31, 2023.
HEDGING UPDATE
We have recently completed hedge positions through a combination of WTI near months swaps and collars due to the increase in oil prices. In addition, we also added to our power swap position to help protect operating costs against potential increases in electricity prices in 2024. Currently, the following contracts are in place on a weighted average basis:
