Obsidian Energy Ltd. (OBE) Earnings Call Transcript & Summary

Welcome to the Obsidian Energy corporate update conference call. [Operator Instructions] And the conference is being recorded. After the presentation, the presenters will take pre-submitted questions and questions from the webcast link. [Operator Instructions] I would now like to turn the conference over to Stephen E. Loukas, Interim President and CEO. Please go ahead.

Thank you. On behalf of Obsidian Energy, I'd like to welcome and thank everyone for dialing in to our 2021 annual meeting presentation. I'm joined by our senior executive team. And today, we will walk you through our presentation and ultimately, we'll end with a Q&A session. And so with that, let's get started. Next page, please. Here, you see our advisories and disclaimers. I assume everyone has read them or will read them at the conclusion of this presentation. Next slide, please. So in regards to investment highlights, I'd really like to focus on what is our strength, and that is our Cardium assets. We are the largest acreage holder in what is a world-class low-decline light oil resources. We have over 900 locations, which translates to approximately 25 years' worth of drilling inventory at current drilling rates. So a very enviable position. That results in us having a very low decline production base. It is oil weighted. We have significant underlying reserves, and our well results have been peer leading. Because of the fact that we control our strategic infrastructure, that allows us to basically grow our production with minimal incremental infrastructure spend. So it allows us -- it truly allows us to capture half-cycle economics. And as a result of that, we have a significant amount of flexibility and optionality that allows us to both be flexible and responsive to commodity prices. We can chase additional upside via our diverse asset base. So when it makes sense to grow our production, we can easily do that. And at these higher prices, it allows us to be thoughtful around waterflood management and other EOR projects as we can potentially look to maximize our reserves. All of that translates into a what we believe to be a very superior -- compelling value proposition. We trade at a compelling valuation relative to our peers on both a financial and reserve basis, and we'll talk through that in great detail later in the presentation. And then lastly, on the ESG front, we're committed to strong ESG practices, which include minimizing the environmental impact that we make. Next slide, please. So it's just a very high-level corporate overview. In the way of our current production profile, we're forecasted to average somewhere between 23,300 and 23,800 BOE a day. We should assume that as part of our second quarter earnings release, we will look to tighten up that range. And given the cadence of our capital spend this year with a lot of our drilling activity skewed towards the third and fourth quarter, we expect to exit at a fairly healthy rate. Our production mix is 65% oil and liquids. So further just speaking to the liquid profile of our production base. In regards to our reserves, we have 128 million BOE equivalent as of year-end 2020 on a 2P basis, and that translates into an ROI or a reserve life index of approximately 14 years. Once again, that is anchored off of our year-end 2020 2P. Our P2P decline rate as of year-end is approximately 18%, and we have a significant amount of tax pools at approximately $2.5 billion as of year-end. In regards to our market stats, we have approximately 75 million shares outstanding. Our market capitalization is as of Monday's close at approximately $267 million, $455 million of net debt as of first quarter end. And that all translates into an enterprise value of approximately $725 million. So with that, I will turn it over to Aaron Smith, who will walk you through our Cardium -- both our Cardium property as well as our Peace River and Viking play. Over to you, Aaron.

Thank you, Steve, and good morning, everyone. It's a pleasure to speak to you today about the high-quality assets that Obsidian Energy holds and the special results that our talented staff have been able to deliver. I'll start with Slide 5, which gives a brief overview of the jewel in our portfolio, the Cardium. At right is a map sheet outlining our land base broken into 4 fairways, each with strengths and attributes that our team understands very, very well. For scale, each light gray square represents a 6-mile by 6-mile area. So it's very easy to see just how significant this land position is. The quality and extent of this resource has been assessed by industry since the late 1950s through vertical wells and quickly followed by waterflood projects that can really only be done in high-quality light oil reservoirs like this. We're very fortunate to hold more land than the #2 and the #3 players combined in this area. The advent of horizontal drilling technologies in the mid-2000s unlocked unconventional fairways at the fringe of the larger pool. And now with additional support by reservoir analysis and modeling, we've been very successful targeting under-swept areas, land inaccessible to vertical wells and other areas of historically low recovery to really maximize the tremendous potential of these assets. Using these tools, our talented team has identified over 900 gross unrisked drilling locations across this map sheet. While our drilling focus over the last few years has been on the very special potential in Crimson Lake, shown in light green here, we will be expanding our development to include East Crimson, Central Pembina and West Pembina as well. The doughnut charts in the middle of your screen highlight their relative production and 2P booked locations. You can see that all are meaningful players in our portfolio. Additionally, our work to optimize our producing wells, lower back pressure in our gathering systems and identified bypass [ plays ] has been very successful over the past 3 years, with the net result being a shallowing of our base decline, and in some areas, an increase to our booked reserves. And not shown on the slide and as Steve alluded to, is our extensive and high working interest oil and gas gathering infrastructure that is run by our dedicated and talented field staff. Next slides, please. In addition to these special Cardium assets, Obsidian enjoys strong positions via our Peace River oil partnership in Northern Alberta and our Southeastern Alberta Viking position as illustrated on the slide. I'll begin with PROP. As operator and 55% working interest owner in the partnership, we control -- sorry, we enjoy control over a large, contiguous cold flow, heavy oil resource that we developed using open-hole multi-leg wells, leveraging our strong horizontal drilling experience. Our significant historical investment in gas handling in the area is also a competitive advantage, and recently updated mineral tenure regulations allow us to methodically assess and develop the resource. And in parallel, evaluate peer results in the region to really design the best development plan we can. Our land position is shown at right in green, again with the light gray squares representing a 6-mile by 6-mile area. Our Viking assets, shown in yellow at right, represent a sweet, light oil development play with significant torque to AECO natural gas pricing and represents great optionality for the company to leverage low per-well cost, owned and controlled infrastructure, and a very scalable program design in a region that has seen a fair bit of activity by industry. We're confident that our team's execution on these top-quality assets will continue to drive strong performance. Next slide, please. I'd like to take the next few minutes to describe to you the very strong operational performance and continuous improvement we've demonstrated in our recent programs in Crimson Lake and East Crimson, often referred to collectively as Willesden Green. We know that as we drill longer and longer lateral distances into the reservoir, we generate higher production rates and greater reserves recovery. And our large land position gives us a lot of flexibility to do exactly this. Since 2018, we've extended our lateral length by a significant 27%. There is a considerable cost reduction price here as well. The chart on the left conveys our drilling cost per lateral meter over the same time period, and you can see a 23% reduction. In addition to these statistics, so far in 2021, we've drilled the well with an intermediate casing in 11.1 days, and our longest Cardium well to a length of 5,571 meters, our best performances to date. Not to be outdone, our completion costs have enjoyed similar cost reductions over this time period. It is also important to note that our completion's intensity or extract tonnage used per lateral meter is also lower than many of our peers in the area, which is possible because of the high-quality reservoir that we hold. Next slide, please. Certainly, drilling and completing wells efficiently is essential, but the story gets better with strong well results like ours. The chart at the left illustrates our strong oil recovery over time from these wells shown on a cumulative basis for the first 3 years of their production. The plot, which includes wells drilled in the Willesden Green field since the beginning of 2018, shows our wells have strong early time performance, but really pull away from the field over time, which is essential to achieving payout quickly and generating additional value. This performance isn't just from 1 or 2 wells, it includes all 53 wells we've drilled here in this time span as an average, more than double our nearest competitor and have shown strong and repeatable results. In fact, our wells drilled in the last year have some of the highest 1-year oil volumes in the Cardium province-wide. Combined with the well cost structures that continues to improve and peer activity that helps us accelerate our learnings and derisk our map sheet, we're very excited about what the future holds. Next slide, please. Moving to Slide 9. Our massive land-based, talented team, strong well construction and special well results all add up to a compelling reserve story. The inventory I mentioned previously gives us over 25 years of drilling inventory. In addition, we feel our reserves are conservatively booked when comparing our 1P and 2P volumes to our PDP, but we still have an impressive 14-year 2P reserves life index. Moreover, our future development capital to capture these reserves has been done in a manner consistent with our historical activity levels. Despite these advantages, our enterprise value sits at a 1x multiple to our PDP. Next slide. Sound ESG performance is sound business. For us, our environmental performance improvements are focused on safely and efficiently addressing our decommissioning liability, enhancing our already strong pipeline performance, reducing freshwater used in our water floods, and participating in Alberta's industrial greenhouse gas emissions programs. Our decommissioning activity has been bolstered by significant support from the Alberta site rehabilitation program. With these grants and allocations, we see being able to safely and efficiently retire nearly 600 wells and over 700 kilometers of pipelines in this year and next. Put simply, decommissioning is a core competency for our company. And we have a very strong team that is committed to this work. Speaking of pipelines, our production and operations team has worked very hard over the past several years and have delivered improvements every year over the past 5 years. Now our pipeline system has half the failures per thousand kilometers of pipe as the industry average. Socially, we understand that our activity has an important impact on the communities near which we work and live. When you combine capital spending, operating expenses, decommissioning activity, royalties paid, mineral and property taxes and salaries, you can see that we've driven nearly $2 billion worth of economic contribution over the last 5 years. Further, from 2018 through 2020, our site saw 3 years of work without a single lost time injury, which demonstrates a commitment by all of our staff to safety. On governance, our Board leads by example, with an independent board chair, significant Board tenure and an equally significant insider ownership. Next slide, please. My final slide here this morning gives a bit more context for our decommissioning liability activity. The chart at the far right illustrates the significant progress we've made over the last 4 years on our total undiscounted uninflated liability and our work isn't done. We are active contributors with our industry association at the Alberta energy regulator and are working to ensure efficient and effective regulations are built and improved over time. Our environmental team is very strong using industry best practices and a commitment to efficiency. And I believe we are a leader in this space. As I mentioned previously, we enjoy over $28 million worth of gross support from the ASRP and we are well underway in putting this support and Albertans back to work, with over 7 million of these grants deployed. Additionally, the majority of our inactive wells fall within our Cardium asset, which, as we've mentioned, has significant reserves, shallow declines and high netbacks. Meaning these liabilities can be retired at the very -- at the end of their very long producing life. In addition, the pie chart illustrates the impact of our near-term activity on our legacy assets with nearly 90% of these legacy wells planned to be abandoned by the end of next year. Thank you very much for this opportunity to tell you a bit more about our operations and why we're so excited. With that, I'd like to hand it back to Steve.

Thank you, Aaron. So what I'd like to do is take a moment to discuss our strategy. So what is our strategy? Our strategy is simple. It is to deliver superior shareholder returns. How do we plan on achieving that? I think there's a number of ways as to how we will go about achieving that goal. Firstly, we want to drive per share growth via primary development and debt reduction. In regards to debt reduction, for the first time, we are outlining our target leverage ratio, which is south of 1.5x net debt to EBITDA. At current prices, we expect to achieve that sometime in 2022. Additionally, our plan is to generate excess free cash flow while restoring production and giving -- and allowing us flexibility to pursue further growth opportunities contingent on higher commodity prices. Lastly, we would like to increase scale, and we -- in order to maintain or reduce our cost structure through primarily focusing on the target. In other words, we can increase our scale by growing our production organically, while at the same time pursuing accretive bolt-on acquisitions to further lower our cost structure. All of that in totality, we think, will lead to a superior shareholder return. Next slide, please. Our 2-year corporate plan. As you will see from the bar charts, our plan has been to effectively grow our production, and we start our production back to pre-COVID levels. In 2020, we averaged 25,400 BOE a day. And the plan basically has us averaging 23,300 to 23,800 barrels a day of this year. Having said that, we will drill 7 wells late this year that will not on stream until early next year. That, coupled with our forecasted capital spend at this juncture has us averaging 25,400 -- 26,400 BOE a day in 2022. As a result, the midpoint of 25,900 BOE a day in 2022 is 2% higher than we averaged in 2020. Now what that allows for us to do at price interval between $60 and $65 WTI, is generate somewhere between $180 million and $195 million of FFO during calendar year 2021. That results in free cash flow between $45 million to $60 million this calendar year. If you recall, we have a number of onetime expenses that we incurred this year. Some were a function of expenses associated with the Bonterra bid as well as our credit renegotiation and credit extension, and then there were a couple of other settlements that we achieved with our own secured creditors, all of which have an impact of suppressing our 2021 free cash flow. Additionally, as I mentioned earlier, we will be drilling 7 wells this year that will not be on stream until next year. So there's a bit of a timing dynamic. As it relates to our year-end net debt, we expect it to be somewhere between $440 million to $423 million between a WTI price of $60 to $65. And that results in year-end net debt to last 12-month EBITDA of 1.8x to 2.1x. Looking to 2022, we expect our FFO to grow somewhere between $224 million to $254 million at the WTI price between $60 to $65, resulting in free cash flow between $101 million and $130 million on the year. That results in year-end net debt between $348 million and $303 million. And as you will see, net debt to EBITDA is approximately 1.1x to 1.4x, and in either scenario below our target of 1.5x debt to EBITDA. Next slide, please. I'd like to take a moment to speak to our valuation compared to our peers. As you will see from this slide, in what is a fairly encompassing comp set, we paid a material discount to the comparables on both a 2021 enterprise value to EBITDA as well as on a 2022 enterprise value to EBITDA basis. We also traded a material discount both on 2021 and 2022 on a flowing barrel basis. I think the point of this slide is to illustrate that if you take the market comparables, and in this instance, on 2022, the Peer Mean and Peer Median is on top of one another at 3.9x. And you take our 2022 forecast, which I outlined in the previous slide of 25,400 barrels a day to 26,400 barrels a day on the high end of the range. And this chart is basically at the midpoint, assume $60 WTI. And also basically include our lease obligation as debt, and that's an incremental $30 million or so. You will see that we traded approximately 3x on 2022. And should we trade at the market comparable that would imply a share price of $6.72 a share. So a material discount relative to the comparables. And we would argue that our inventory base on an ROI basis is as good as anyone on this page. And so I think as the subsequent quarters as we execute on our operational plan over the next subsequent quarters, we would anticipate that this valuation discrepancy and gap will close. Next slide, please. Speaking to reserves, reserves underpin our current and future value and are getting another valuation point. You will see that on a PDP basis, assuming $55 WTI and a 10% discount rate, we have about -- we have a reserve value of $733 million. At $65 WTI, our reserve base would be worth $942 million. This is as of year-end 2020, and we clearly expect to grow our reserves over the course of 2021 given our forecasted capital spend. In the way of net asset value on a reserve basis, once again, this current share price is as of Monday's close. But at $55, we have a PDP value of $2.04; on a 1P value, we have a per share value of $5.26; and on a 2P basis, $8.22. And as we previously alluded to in the previous slide, we believe our 2P value is significantly underbooked given we only have 172 locations embedded within our reserve report. Assuming $65 WTI, those values increase to $5.77 on a PDP basis, $9.49 on a 1P basis and $13.38 on a 2P basis. Suffice it to say, at our current share price, we are significantly undervalued on a reserve basis. Next slide, please. So a question many investors have is why do we trade at such a material discount. And I think there's a number of reasons for that. Firstly, this company has had a historical track record of operational underperformance. Clearly, that dynamic has changed over the last 2 or so years. But notwithstanding that, we've had a very challenging commodity price environment. And I think there were significant doubt as to whether or not we would be able to weather the market in 2020. I think we've put that question to bed. And I'm extremely confident in our ability to continue to outperform on a go-forward basis. Just delving a little bit deeper into some of the historical headwinds that we faced. In 2018, what was a marginally over-levered balance sheet subsequent to the disposition of our Saskatchewan assets, quickly grew to an overleveraged balance sheet position due to what was just a very poor year. Debt grew by $100 million. There were a confluence of factors in that regard. One, we had a capital plan that just didn't deliver. We had a hedge profile that was materially underwater. And then in Q4 of '18, we had a multiple standard deviation events in the way of extremely wide, heavy and light oil differentials, all of which contributed to a very poor year. In early 2019, we had a legal decision that is referred to as Redwater, which resulted in the market doing a bit of a rethink in regards to asset retirement obligations. And this court ruling was deemed to be -- or was thought to be a significant go-forward headwind for the company. The reality is, is that we had already been spending -- we already were an ABC plan participant, and continue to be an ABC plan participant and have been spending a healthy amount of capital in regards to our ARO obligations. We have very long reserve life assets, and we have very deep inventory position, and we'll continue to chip away at this over the subsequent decades. And so we thought that this was blown out of proportion, but it's not surprising that the market needed some time to come to an opinion in regards to the impact that this decision would have both on Obsidian as well as other peer comparables. In 2019 and 2020, we had an announced -- publicly-announced strategic review. And that created substantial market uncertainty. I think there was candidly some fear that we might have a result very similar to what occurred at [ Penngrove ]. And clearly, with the announcement that the strategic review has been concluded, coupled with an intermediate term bank extension, those fears are nonexistent. Lastly, We've had a lack of analyst research coverage. We currently have only 2 analysts who cover the name. And I think it's fair to say that some of their estimates are stale, coupled with, I think they've made a decision to really take a bit more of a wait-and-see approach. And given the historical track record of underperformance here, it's not surprising that, that is the case. Next slide, please. So in conclusion, I'd really like to talk about why an investment in the Obsidian Energy is an attractive proposition. We have a dominant position in the Cardium, and by extension, a very deep inventory of high-return wells. And that affords us the ability to accelerate development at appropriate WTI levels. We have a low base decline production profile. And that, coupled with the high return wells that are embedded within our inventory position allow us to generate strong free cash flow as we don't have to drill many wells to keep our production profile flat. And the initial focus is to reduce that and achieve our forecasted target leverage ratio of south of 1.5x net debt-to-EBITDA sometime in 2022. We traded a material discount to our peer comparables on both a reserve value basis as well as market trading metrics. And we have significant tax pools that it will allow for us to be a noncash taxpayer for a minimum of the next -- for a minimum period of at least 5 years. And with that, I would like to open it up to Q&A.

Great. Thanks, Steve, and thanks to everyone attending today and who submitted questions ahead of time, either through the webcast portal or through the Investor Relations e-mail. [Operator Instructions] The first question, I would like to know what the projection and/or goal for the net debt by the end of 2021 and 2022, given that WTI prices stay at or above $70 per barrel as an average for the rest of the year. And added on to this is also a request from another shareholder about free cash flow at that $70 level.

Sure. So I'm happy to take that question. In our presentation, we outlined projected free cash flow levels and as well as net debt levels at $16.65. Clearly, those metrics would be even better at $70. I think the way to think about it is, historically, there's been roughly a $6 -- or 6 million per dollar of WTI sensitivity. But in regards to providing a more nuanced answer, I think as we work our way deeper into this calendar year, we'll provide more disclosure in that regard. And really, what we're thinking through is how much we want to potentially grow production at these types of WTI prices to the extent that they hold, and we believe that they will. So to the extent that we were to increase our production profile, it may suppress our free cash flow generation in the near term. But clearly, we would only be doing so to the extent that we thought it created incremental value. So a long-winded way of saying stay tuned.

Great. Thank you, Steve. The next question from the shareholder is, could you discuss the cost of decommissioning the old wells? According to your financial notes, it shows undiscounted liability was $596 million. Is this normal for this size of company?

Sure. Aaron, why don't you take that question, please?

Sounds good. Thanks, Steve. Two parts to the answer, to be honest, individual costs for wells and facilities are aligned with the Alberta Energy Regulators estimates, as outlined in what they call Directive 6 and Directive 11. So to that extent, our per well costs are normal. In aggregates and as I mentioned in our presentation, the bulk of these wells sit in our Cardium assets that enjoy long life, high netback and very low decline. This is primarily as a result of the significant land position that we have. We have a number of wells. And by virtue of the fact that the play was developed historically with smaller vertical wells. And so by extension, you have a lot of wells to manage. However, this inventory of wells gives us plenty of an opportunity to become even more experienced and efficient with this activity. And they sit in a very, relatively speaking, dense area and the wells are quite similar to each other. On top of that, and as I mentioned previously, we're certainly very engaged with the industry association and the regulator to make sure that the regulations and requirements are intelligent and as efficient as possible. One way to think about the liability is to consider it an annual annuity. That's certainly how I do. That is manageable within our FFO. Through our participation in the ABC program that Steve alluded to, we commit to an annual spend. And on the vast majority of the wells, we can have them where and when we can be the most efficient. In some areas, by example, the downhole well abandonments cost of this liability can be up to 35% cheaper than what you find in Directive 11. Hopefully, that answers your question.

Great. Thank you very much, Aaron. This is somewhat related. If the discounted amount is considerably lower, can you please explain? Would the decommissioning liability have to be paid first before any funds were distributed to shareholders?

Sure. Let me take that question, Susan. So the discounted amount is considerably lower, and there's really 2 reasons for that. Firstly, all the ARO will not be incurred at the same time. These are liabilities that will be incurred over a multi-decade period. And moreover, our wells are long life given that many of them have waterflood support. So if you actually were to plot these out, a fair amount of the wells, of the active wells are not remediated until not just decades out. And so using a 10% discount rate or a 9% discount rate, the discounted value is considerably lower than the non-discounting liability of $596 million. In regards to a scenario where oil prices dropped and Obsidian was forced into bankruptcy, this liability would be paid -- not only be paid ahead of shareholders, but it would be paid in front of the banks. I think the more important kind of point is we're not going bankrupt. We didn't go bankrupt in 2020, and I wouldn't stay up at night giving it too much thought.

Great. Thank you very much, Steve. The next question. Most oil and gas companies are writing off reserves. Do you anticipate doing the same?

Sure. I'd like to let our CFO, Peter Scott, take this question, please.

Thanks, Steve. Thanks, Susan. As most of you know, 2020 had very low commodity prices, particularly oil prices, which curtails capital and impacted reserve reports, which did cause a number of companies, including ourselves to take asset write-downs. 2021 is obviously a very different story, turning out to be the opposite, in fact, with capital expenditures returning back to more normalized levels and prices at continuing to increase essentially more than double where they hit in 2020. And I expect we'll continue to see this environment as we go forward. So as a result, I think we will see an increase in reserves, as Steve alluded to, and it's also an increase in the value of the assets and that should likely result in asset write-ups, not write-downs. So I think we'll see the opposite happening this year.

Great. Thanks, Peter. Obsidian has been decreasing its operating cost every year. I suspect this is due to a continued decrease of legacy wells and outstanding results from the Cardium. Can this continue?

Sure. Let me take that question. I think it's fair to say that offloading legacy wells has been a small component of reducing our cost structure. There's been other steps that we've taken, including streamlining the organization. I think the reality though is the most impactful way we could continue to reduce our operating cost is to continue to add kind of volumes in Willesden Green and in Pembina. If you look at our Willesden Green volume as that comes at an OpEx of roughly $5.50. It's not quite that low in Pembina, but it's been certainly significantly lower than the corporate average. And so I think to the extent that we continue to grow our volumes, while at the same time, leveraging our existing infrastructure footprint. If you were to extrapolate that out, you will see -- continue to see a decline in our corporate operating costs. And so that's certainly part of the strategy.

Great. Thank you, Steve. We've got a couple of questions related around establishing or reestablishing a dividend. Wondering when a dividend could be reinstated? And if you consider a monthly dividend of $0.01 per month, et cetera, given the future of oil and gas.

Sure. Let me initially take that question, and then I'll turn that over to Peter Scott for his comments. I think as we outlined in our strategy slide, front and center for us is to regrow our production profile to pre-COVID levels. I think it just speaks to leveraging our existing fixed cost. Fixed cost, both in the way of human resources as well as infrastructure in the field. Secondly, we want to achieve net leverage on a debt-to-EBITDA basis of below 1.5x. Where exactly below 1.5x is really a function of WTI price that one projects out into the future. Clearly, to the extent that you're marginally more negative on pricing, you may want to be a little bit at the lower end. You might want to be closer to 1.25x. But somewhere in that ZIP code, we think, is an appropriate amount of leverage. I would say to you, additionally, an overarching goal is to refinance our bank facilities. I think we've been upfront and on record that we don't think an RBL that is subject to semiannual redetermination is an appropriate way to capitalize not only Obsidian, but I don't think it's an appropriate way to capitalize most companies that are most upstream producers. So I think we want to get to a more diversified capital stack that is covenant based. And I would say to you that getting to our target leverage is certainly part of that strategy. I mean, I think it's fair to say that if we simply wanted to refinance, we could do so today. We're confident we could do so today. We may not like the rates, but I think as we work our way deeper into this year and pay down debt as well as increase our production profile, we think that there's going to be refinancing opportunities that are much more attractive. And so once we achieve those 2 objectives, I think some dividend or reinstatement of a dividend is certainly appropriate. The exact magnitude of dividend reinstatement versus production growth versus other strategic options that we have available to us to increase shareholder value will be determined. But I think suffice to say, we will do what's best for shareholders. Pete, I'll turn it over to you.

Yes. Thanks, Steve. No, I think you covered a lot of that in the comments that I would have. I'd just say that we're always trying to strike that right balance between capital program and debt reduction. We are, as you know, focused on debt reduction. So that will continue. I think there was a question about how do we plan on achieving that. I think as we've shown through our guidance and forecast that the free cash flow levels will certainly make a meaningful dent in that and get us into those target ratios in fairly short order, which is positive. And then of course, decision on a dividend, which is at a Board level. But any time you put in a dividend, you want to try and make sure that's sustainable as possible. So that's also a consideration that you need to take into account as we're looking out in the environment, and as Steve said, the opportunities that are before us. So that's all I'd add to that.

Great. Thanks, Peter. We've got a couple of questions around the plan to reduce debt. One individual asked if it was wrong to view Obsidian as a 4-year paydown debt story rather than an aggressive wildcatter? What kind of future do you see? And what is the plan to reduce debt?

Sure. Let me take that, Susan. Firstly, I don't view us as a wildcatter. We're really not an exploration company. We are a production company. We're focused on the Cardium, kind of the oil is in place. We don't drill wells that don't produce oil. And so they're fairly low on the risk kind of spectrum. And I don't think it's going to take us 4 years to get to our target leverage ratios. I think we will be there sometime in 2022. Exactly when, I think, is a function of WTI prices. We've been conservative in regards to how we have forecast or what our base case plans are anchored off of, which is $60 WTI. I think you see a $65 WTI. We have a fairly short sprint down to our target leverage ratios. And clearly, we're at prices above that today. And so I think it's really more of a -- by the side of 12-month debt paydown story, and we'll decide from there kind of what the strategy is. But I think the way to think about it is we're going to do what's best for shareholders and what drives the most amount of shareholder value creation.

Great. Thank you, Steve. We've got several questions related to our Peace River assets. I will attempt to paraphrase them. But first of all, what are the plans for Peace River? At current prices, are Peace River netbacks per BOE capital efficiency and paybacks comparable to Cardium? Or do you have any plans to sell Peace River? Or perhaps given the oil rate and significant increase in price, would you allocate some of the incremental cash flow to increasing production in Peace River?

Sure. I'd like to let Gary Sykes, our Head of Commercial, take that question.

Yes. So good morning, everyone. Happy to take that, Steve. So look, great question, very timely. And you can probably [ fill the PROP one ] with our Viking asset that Aaron ran you through in Slide 6. And fair to say, we've not been active in terms of drilling in these assets for a number of years, 2018 in PROP and 2017 in Viking. Look, I think it's fair to say, obviously, these price levels, both assets really do offer compelling investment opportunities. And in conjunction, with our other opportunities that we're thinking through, it's really just a question of us establishing when and to what extent we would want to pick back up the drill bit on these assets. So again, I think it's a similar comment, again, I would say, is to watch this space, and we'll have more to say [ about time ] in these assets as we roll forward later into the year.

Okay. Great. Thank you very much, Gary. Speaking just a follow-up question on the Viking. Can you elaborate on that as well a little bit more as the Peace River in terms of CapEx for raising production?

Gary, do you want to take that as well?

You want me to take that, Steve?

Sure.

Yes. So look, Viking, again, is an asset that's got tremendous torque to equal. We knew -- who would've guessed, it's a wonderful problem for us to have. First part of June has been trading well above $3. So capital costs are obviously significantly less at Viking. So again, just as I mentioned in my previous comment, we're sort of folding all that into really some portfolio analysis that we've got underway at the moment. That's really trying to guide us with regards to the decisions we want to make about how we spend our capital dollars in the second half and beyond.

Great. Thank you, Gary. Next question...

And I would just add to -- I would just make one incremental point. If you look at our activity over the last 2 or so years, it's been almost exclusively focused within Willesden Green with the exception of some -- or a fair amount of optimization work that has been focused on Pembina. We're going back into Pembina for the first time in a number of years during the second half of this year. I think it's fair to say that at current commodity prices, you can make a case that you could or should potentially be drilling in the Viking and PROP as well. But I also think, just from a risk perspective, I'm not sure it makes sense for us to spread ourselves too thin too quickly and start drilling in multiple plays. I mean, it just theoretically increases the chances of screwing something up. And so I think we want to be very tactical and sure-footed in what we do and how we do what we do. And so I'm very much focused on ensuring that everything goes well in the second half when we drill in Pembina, and I'm more than confident that will be the case. But I don't think we need to or want to take too much risk on spreading the team too thin.

Great. Thanks very much, Steve. Next question. How does the Board and management get comfortable that Obsidian is protected from a fourth quartile oil price differential issue when a lot of production comes online? This happened before in 2018, I believe.

Sure. Let me take first crack at that. Look, what happened in 2018 was a multiple standard deviation event. I don't see it happening again for a variety of reasons. Not to suggest that there won't be volatility in differentials, but I think the takeaway picture is much different today than it was in 2018. Market structure is different today than it was in 2018. We've seen a significant ramp in rail capacity since then. I think there's a pretty good chance you'll have Line 3 operational or close to operational towards the end of this year. Clearly, you've got -- you have Trans Mountain as well sometime in late '22, early '23, And you've seen a significant decrease in the aggregate production profile, specifically on the light oil weighted side, given most companies wanted to blow down or some version of blow down during 2020. So I don't anticipate that you'll see differentials widen much. And we do have some hedges. It's not an easy market to aggressively hedge. But notwithstanding that with the exception of maybe nothing more than a couple of dollars of volatility, I think will be rather -- I think will be more than fun.

Great. Thank you, Steve. Next question. Obsidian has a lot of inactive legacy wells. Can many of these be used for carbon capture or well restimulation?

Aaron, do you want to take that question, please?

Yes, absolutely. A lot of these legacy wells are in Southeastern Alberta. And of course, you're getting closer to some of the major carbon sequestration projects in Saskatchewan. However, the reservoirs really aren't large enough or have the containment that, that particular project in Saskatchewan has. So I don't see these wells as have utility in that regard. What I would say is that we're seeing projects across industry that have a geothermal angle to them. Again, I don't want to create the illusion that we're advanced in that thinking, but it is something that could be considered with these types of wells. Certainly, I'd consider that to be much more likely than a carbon sequestration with our legacy wells.

Great. Thanks, Aaron. The next question is around our drilling and development program. After starting the second half program earlier in June, is there a change in the first half and second half CapEx figures of $35 million and $92 million, respectively? Will first half CapEx increase at the expense of the second half? If yes, by how much?

Peter, do you want to take that question, please?

Sure. So we're keeping the same guidance for overall capital at this juncture. Obviously, as Steve said, we'll monitor how prices go on the forward and make those decisions. There'll be a slight shift from capital into -- given that we started in June from July, I think we're drilling probably about 3 more wells in June than we would have originally planned. So that's in the order of -- depending on completion time, et cetera, probably $7 million, I guess, shifted up from that standpoint.

Great. Thank you. The next question is a question around our go-forward acquisition strategy. What would our targets be post Bonterra?

Let me take first stab at that, Susan. So I think the way to think about our acquisition strategy is as follows. First and foremost, we have highlighted that, notwithstanding the recent run in our share price, our equity continues to be materially undervalued. So against that backdrop, any acquisition where we are -- we would be issuing our equity would have to be, number one, highly strategic and would still have to be significantly accretive. We also have a very deep inventory position. So we don't need an acquisition in order to grow our production profile to the extent that we decided that, that's what we wanted to do. Now having said that, I think when you look at the Cardium, it's a fairly fragmented basin. And I think there's a commercial proposition in consolidating the basin. To the extent that we can do so kind of accretively, we'll look at that. But I wouldn't say that acquisitions that we need to do a transaction, we'll only do one within our current production profile, our current operating footprint, probably the better way to put it, is it creates value for our shareholders. Gary, is there anything you want to incrementally add to that?

Yes. So I mean I think that captures most of it, Steve. I mean, obviously, it's normal course of business assets to become available to business development growth. We look at these things through the lens of does it make sense for the company? Does it make sense for our shareholders? So yes, I mean, we'll continue to look at these things as they become available because that makes sense to do so.

Great. Thank you. The next question is, if there is any plan at some point to have a share buyback program.

Sure. Let me take that first. So I think in order of strategic priorities, it first, reduce that, get down to our target leverage ratio, increase our production profile, refinance our bank facilities and most probably kind of reinitiate a dividend ahead of a potential share buyback. I think in the way of -- just in regards to cadence and sequencing, I think that, that's directionally how we think about it. Now that's always subject to change. I mean to the extent that our equity work to continue to trade at a material discount to the comparables. And we have achieved both our target leverage and refinanced our bank facilities. We may decide to prioritize the share buyback ahead of a dividend. But both are forms of return of capital to shareholders. And we will prioritize kind of what makes the most sense at that appropriate time.

Okay. Thank you, Steve. Noting that we are fairly close to the end of the call. I think time for one last question, is just about what is the hedging strategy in terms going forward for the company?

Sure. Let me take first crack and then Peter can -- Peter Scott can also weigh in. We have a public strategy of hedging up to 50% of our production net of royalties. In that regard, we also have a market outlook overlay. So as opposed to some companies who take a more systematic approach, and sometimes that works for you and sometimes that works against you. And clearly in a rising oil price environment, coupled with one that is backward-dated, it's more skewed, obviously, towards working against you. We've had a view that gas prices were rather attractive, and we moved to hedge a healthy percentage of our forecasted production in that regard. We also had a view that oil prices were likely to go up as demand kind of returned and increased kind of sooner than anticipated, coupled with a fair amount of production discipline on the part of the U.S. I think there's another component to how things are marginally different today than in the recent past, and that is -- there's just a different mindset in regards to oil prices in regards to the Biden administration versus the Trump administration. I mean, at $70 WTI, I mean, it's fair to say you would have liked to seen a number of tweets from President Trump to get to talk the oil price down. And we don't have that today. So we're constructive on pricing. Our hedge strategy has been one where we've been really just hedging the front month on a rolling basis to allow us to better capture those higher prices. We still likely think that there's some upside in WTI. I think that once we feel the market is -- or prices are kind of in line with the supply/demand picture, you should not be surprised if you see a more aggressive hedge program that is farther out in the way of term. That's certainly my vantage point, but I'll pass it over to Peter.

Yes. Thanks, Steve. No, I think that covers off a lot of it. I just would add that Steve mentioned the various elements that we look at hedging, we do hedge differentials. We do hedge gas. We do hedge oil prices. So looking to try and lock in those various components as we see those attractive prices and taking advantage of what the market gives us. So we've been quite nimble in that regard. But looking at that market view, as Steve said. So -- but we are active in the hedging market, mostly front month as Steve has said, but we'll continue to look at it and evaluate it and layer in as appropriate.

Great. Thanks, Peter, and Steve. With that, I'd like to turn the call back over to Steve, for closing comments as we're ending up the hour here.

Sure. Thanks, Susan. I wanted to thank all the attendees for their time and interest in Obsidian Energy. We're clearly extremely excited in regards to both our current and future outlook, and happy to answer any incremental questions that come out of either this presentation or in the future. Please send those questions over to Investor Relations, and look forward to continuing the rapport with many of our shareholders. Thank you.

Thank you. This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.