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

Welcome to the Obsidian Energy's 2022 Guidance Call. [Operator Instructions] The conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Stephen Loukas, Interim President and CEO. Please go ahead.

Thank you. Good morning, everyone. I would like to thank you for joining our 2022 guidance presentation webcast. We will be taking you through our guidance as well as answering questions that investors have at the end of the session. With that, I'd like to turn it over to our CFO, Peter Scott. Thank you.

Thanks, Steve, and good morning, everyone. Next slide, please, Susan. Our guidance presentation this morning obviously includes some forward-looking information, and we encourage you to review our advisory slide here on Slide 2 as well as some slides at the back of the deck about relying on this information. So that's there for your perusal at your leisure. Next slide, please. So Obsidian has a lot of strong attributes. I think as we all know, we are a leading player and largest acreage holder in the Cardium play. And with our Peace River acquisition late last year, we now have 100% interest in the tremendous heavy oil resource there, which has Bluesky production as well as Clearwater potential. These resources provide us with a very stable low decline production base, supported by also a very solid reserves position. Our asset base has significant infrastructure in place and allows us to grow production with minimal spend on infrastructure, which is an advantage, I think, we have over a number of our peers. And the nature of our assets also allow us considerable optionality around development plans is great as we do not have any third-party spending commitments that we would have to meet. And as you've seen from us in the past, we've been able to quickly alter our spending plans either up or down as necessary. We're also strongly committed to ESG practices. On the east side, that is really most evidenced by the very active decommissioning program that we employ in that. I think you've seen us activate in the past. Next slide, please. So here is just a quick snapshot of some corporate statistics, some of which we would be looking forward to updating soon. Just waiting for the slide to catch up. Production for 2021 has averaged 24,605 BOEs per day. That's about 2/3 liquids weighted, most of which is light oil. As you can see on the map on the right-hand side of this presentation, our production is mostly centered around the Cardium -- sorry, back one slide, please. Around the Cardium as well as the Peace River production of Northern Alberta and from Viking production down at the East stream Alberta Edge. As I mentioned, reserve a bit dated here there at the end of 2020, and we'll have an update to 2021 reserves coming out soon and look forward to that, given the strong development program that we've had and the increase in the commodity prices that have occurred during the year. Our reserves are conservatively booked. They do not heavily rely on FTC for our 2P numbers, and at year-end 2020, you can see that was 128 million BOEs per day on a 2P basis with a reserve life index of 14 years, which I think you'll find as longer than most of our peers. As I mentioned, decline rate is shallow. It's about 18% on a PDP basis, again, which makes for a very efficient capital spending. And what's becoming more important, given the free cash flow generation of the company as well as the industry or tax pools, we have a very strong tax position with $2.5 billion of pools which will enable us to shelter taxable income for many years in the future. Just looking over on some of the market summary information, shares outstanding now is a little under $81 million. That's up a little bit from previously given our equity issue in November with the PROP acquisition. Market capitalization is around $600 million. This was done on [ $1,740 ] a share, and our total enterprise value is just over $1 billion. Next slide, please. Just want to look at 2021 highlights for us. It was a very successful year with our development program, a substantial debt repayment, our PROP acquisition, all of these events really set us up well for a strong 2022 as well. On the development side, we restarted our program back in December 2020 when oil prices started to increase and had risen to a level that then started to justify reinvestment after the COVID [ lows ]. We first went back into the Willesden Green area of the Cardium with containing excellent results there. And then after a several year hiatus, we also went back into the Pembina area. The Cardium began with some very successful well results that exceeded our expectations. In conjunction with the PROP acquisition, we also went back into the Peace River area in Q4, drilling 4 Bluesky wells, which we're very excited about, and I'll show you later in this slide deck. And we also participated in the Clearwater well. The PROP acquisition allowed us to consolidate our non-op partner's interest here, a 45% interest that we didn't tone. So now we control the asset 100%. We think this will prove to be an excellent acquisition. We financed it in part with an equity issue, which was very well received and oversubscribed. Also on the financing front, we repaid about $85 million of our senior credit facility and senior note debt so a substantial debt reduction there. And then again, we are very active on the decommissioning side with downhole abatement the 292 walls or about 11% of our inactive inventory as well as 184 kilometers of pipeline, so keeping up that activity there. Next slide, please. We're very excited about 2022 and building on the successes from 2021. We will again be active with our development program. We expect to achieve substantial free cash flow for debt pay down. We are looking to refinance our debt structure in the first half of the year, and then ultimately, a potential return of capital to shareholders, assuming commodity prices remain strong in the overall macro environment. What form that could take, will be dependent on several factors, including what our share prices and the macro environment at the time. Looking at our development plan, it is first half weighted to take advantage of the current commodity prices that we're seeing and also building on the momentum from our 2021 program, keeping the rigs running as a far more efficient way to deploy that capital and stopping operations. In terms of activity, we'll have 3 rigs running in the Cardium in the first half of the year and 1 rig running in the Peace River area drilling, both Bluesky as well as Clearwater wells. We do have the ability to expand our second half program, and we'll take that into consideration with our other corporate initiatives as we move through the year here. Overall, we expect production to grow about 13% compared to 2021, and that's excluding the 2,500 BOEs a day of production that we bought in the PROP acquisition. So just on the development to development program basis. On the financing side, we do expect substantial debt paydown from free cash flow and ultimately take our debt to fund flow ratio down to below 1 at our forecasted prices, which is a key change from where we were several years ago. We mentioned, we are looking to refinance our debt structure in the first half of the year. Going to more of the senior subordinated debt structure will give us an ample operating liquidity as well as some term to our debt profile. We believe given the company momentum that we have right now and the constructive nature of the debt markets, this is a very achievable project. And then finally, as you all know, we have applied to be listed on the New York Stock Exchange American and that is in process. Next slide, please. So taking all this into what does our guidance for 2022 actually look like? The slide catches up here. This chart will show you all the various elements of our guidance and the forecasted prices. Average production, we're looking at 29,100 to 30,100 BOEs per day. Again, that would be about 13% up over the previous year, excluding the PROP acquisition barrels, if you include those barrels on a headline basis, about a 20% increase. Capital expenditures will be $143 million to $149 million, similar type of activity level as last year prior to us looking at our second half plans. Decommission expenditures will be off from last year, looking at $14 million there. On net operating expenses, we have a range of $12 to $12.90 a BOE, that is an improvement over 2021. And that's lower really due to the low-cost barrels that we're adding through our development program, and we will remain very competitive on the G&A side with a range of $1.55 to $1.65 per BOE. In the bottom half of the chart, you can see various WTI prices from $70, $75 and $80, whereas our funds flow would be ranging from about $310 million to $345 million or free cash flow that comes from that would be about $150 million to $185 million. And then the resulting net debt would be around $270 million to $235 million, all below 1x debt to funds from operation ratio. So again, looking forward to delivering these results. And with that, I'll turn it over to Jay.

Yes. Thanks, Peter. Good morning, everyone. My name is Jay McGilvary. I'm the Senior Director of Development. I've been with Obsidian Energy since 2017, and I've had the pleasure of looking after our development programs on a portfolio basis since essentially middle of 2018. So it's a pleasure to speak with you all today. On Slide 8, you'll see leading Cardium play areas. If you're familiar at all with Obsidian Energy, you probably had some tangential knowledge of the Cardium formation. But for those of you who are new to our story, the Cardium field is one of North America's largest significant light oil fields. It's been in some stage of development since the 1950s with some variation of both halo drilling, horizontal drilling and waterflood iterations throughout the course of his life cycle. I always stick by a mandate that if you want to find good reserves of oil, start where it's already been found and the Cardium definitely meets that criteria. But in terms of why this asset is so strong to our portfolio, it meets 2 of the most basic criteria I look for in an asset: one, is it economic through a wide range of WTI prices and without a doubt, what we've proven over the last 3 years is that we can find strong economic projects throughout our portfolio in this asset; and the other, is it nimble? Are we able to scale it with a result of increases in WTI prices that we can leverage our inventory? And I think what you're going to see as we talk about 2022 is that something we're very effectively able to accomplish. As we move into 2022, we're moving up to 3 active rigs in the Cardium, and we recognize the fact that was going to be supply pressures into early 2022, we moved early in 2021 to ensure that we had the viability and the ability to scale into this asset. I'm pleased to say that we picked up a third rig late in 2021, and we had a fourth rig lined up and ready to go as soon as the clock turned 2022, and all of those are successfully developing in the field as we speak today. This brings us on to Slide #9. Slide #9, we look at the highlights of our 2022 development program, but I would highlight to not start 2022 from the stopped position. We were rolling. We were at a running start as we went into 2022. We had 6 wells already behind pipe with completions in the Cardium pending. I'm pleased to say as we sit here today, every single one of those completions is done either in flowback or wait and tie in. Those are throughout Pembina and our Willesden Green asset, and we're pleased with the results we've seen from both so far. And we had 4 Bluesky wells in the process of cleanup. Heavy oil wells take longer to see initial production. You have to recover some of the drilling fluids that went into the formation before they hit the peak rate. And Gary will speak on this later, but we're very pleased with the rates that we've seen as the capture to 2022 out of the 4 new Bluesky wells. For 2022, we plan to drill 29 wells in a front half-weighted program to leverage both what we see for current WTI prices, but also the fact that we have this four-rigs money, but we're also exploring a broader range of our portfolio. In 2021, we weren't just Cardium players. We drilled Bluesky, we drilled Manville and we drilled some of the deeper formations that are leveraged off of our optimization program. We'll continue that in 2022. Though our focus is 2 rigs in Willesden Green, our primary unit where we've been developing for a long period of time. We also have 5 wells up in Pembina in the Cardium and 2 deeper target vertical wells that we'll talk a little bit more later. As well, we have 6 Bluesky wells and 4 Clearwater appraisal wells that Gary speak to as well. Going into more detail on Slide 10. Let's talk about Crimson Lake. Crimson Lake has been the primary focus of what we initially called our Fast Track development program back in 2018, and we've essentially had a rig active in the area ever since with only brief pauses for low commodity prices. We've successfully marched up the east flank of Crimson Lake, developing with high IP, top quartile wells as we prestressed northward. And we've moved in using our reservoir waterflood modelings technological capabilities on the west side of the unit as well. So for 2022, we plan to continue that march northward. I'll note that as you move northward in Crimson Lake, the gas oil ratio increases towards gas, which with current commodity prices further opens up opportunities as you move up that trend. As we're able to average higher gas prices, more and more opportunity presents itself further northward. We also, as you move into Slide 9, have really begun to exploit a detailed understanding of the reservoir, both with a sophisticated geological model and comprehensive reservoir modeling to understand how to best develop in a mature waterflood. You'll see that as it pertains to some of our peers, we've had some of the best results in the Willesden Green area, but we're also drilling some of the longest most complex wells through mature waterflood. A good portion of our 2022 development in the first half of the year will be focused in faraway, where we drove the 6-21 pad and 6-22 pads as highlighted in the press release where we saw good results, not just drilling towards the fringes of the unit, but also down into the heart of the mature waterflood. A 8-10 pad and the 8-03 pad will both capture some of that opportunity that we've seen from those pads, drilling through undertreated fairways with really high-quality reservoir. 9-17 and 14-17 are more to the fringes, but are offset by strong peer production, where we plan to fast follow and capture reserves that are getting on our land base. Taking that knowledge then into Slide 12 and what we've accomplished in Central Pembina. As a technical team, we were very pleased to return to our Pembina asset in 2021. We drilled 5 wells in the second half of the year, the 7-17 pad, which are the 3 wells to the West, heading east, west and on the 2-15 pad. All 5 of those wells are on production, and we're very pleased with the results that we've seen as part of that development program. To highlight that, the 7-17 pad has displayed IP60 of almost 200 BOE a day and our 2-15 pad IP30s of 240 BOE per day. As we sit today, the one North South well, far up north there, the 12-17 pad is currently in flowback operations, and we hope to have that tied in soon. As we spoke to a running start in the year, we've already drilled the 2 follow-up wells on the 2-15 pad. So we'll follow up and be tied in shortly. The rig will be moving off in the next day or 2 from complete -- to allow completion rigs to come on for the second half of the month and into early February to get that pad welling as quick as possible, and we'll move northward on the 8-27 pad. As I said, we have 2 additional deeper target wells that we'll also follow up with on this asset base, that leverage our optimization knowledge of the other reservoir is available in the area with a strong technical team that has a skill set to exploit some of these reservoirs that are a little less known, but have economic returns that are extremely valid and presents a really opportunistic opportunity to drill a lesser capital-intensive vertical well into a highly profitable and robust plant. With that, I'll pass it over to Gary to walk you through some of our Peace River Oil Partnership. Thanks very much.

Thank you, Jay. Good morning, everyone. Just by way of introduction, my name is Gary Sykes. I'm the Senior Vice President of Commercial at Obsidian. So just in the next 3 slides, starting on Slide 13, I'd like to give you an update of our Peace River Oil Partnership, also known as PROP. Let me start by talking about ownership and as our investment community will know, at the end of last year in late November, we completed the acquisition of the remaining 45% ownership from our partner to give us full 100% ownership in the asset. With that full control and operatorship, we get reliable, low decline, cold-flow heavy oil production, and importantly, a seamless transition from an operational perspective given our Obsidian team already operate the asset. We also get to benefit from very significant historical capital investment in the asset. An example would be, we have an extensive gas gathering infrastructure such that we're fully compliant with the AER Gas Observation directive in the area. From a sales perspective, we have multiple offtake points and options for our crude and a team that is focused on optimizing our netback on a month-to-month basis. In terms of new wells, we also returned to drilling in Q4 of last year with a 4-well Bluesky program, and I'll talk more about those wells on the next slide, but suffice to say that we're extremely pleased with the results to date. Finally on this slide, to give you a flavor of plans for 2022, we have 6 new Bluesky wells planned, 2 in the first part of the year and the a further 4 in the second half of the year. So just here on Slide 14. Here are some of the more detailed around our recent drilling activity in Peace River. With respect to the 4 wells we drilled in Q4 are now have online, you can see the really exceptional results with the first 3 wells shown in the graph now producing over 500 barrels a day each. The last well, which is contained clean up is now producing 400 barrels a day, such that around 2000 barrels a day from this 4 well pad. So you can see why we're so pleased. In addition, another byproduct of these well results. With commodity prices where they are in conjunction with currently highly constructive heavy oil differentials that gives us tremendous future optionality as we think about what the right portfolio mix should be for future drilling programs. So lastly on PROP, let's move to the next slide please, on Slide 15. We really just want you to take the opportunity to introduce our Clearwater play holdings. In conjunction with our 2022 plans, suffice to say, the Clearwater play is one of the most exciting place of merging North America for a number of years. And the punchline is that, we have a very significantly possession with over 473 sections or as I like to say, over 473 square miles of rights, which are commensurate with our Bluesky rights. At the end of last year, we did partner with another operator on one well in the Dawson area, and that well is still cleaning up. But importantly, we have plans for 4 Obsidian-operated wells in the Clearwater this year. We have 2 wells licensed and ready to go, and we'll build those in the early part of this year. The remaining 2 wells we will drill after breakup. So in summary, early days in our own Clearwater journey, but we've been excited to see the success of the play, post our own holdings and there's tremendous excitement internally for us to begin to delineate and appraise our own very substantial land base. Obviously, a lot more to come for us as we progress through the year, so watch this space. With that, I will pass it back to Jay.

Thanks, Gary. Just one more slide on -- for me on optimization. I think Gary and I both give you good reason to feel optimistic about some of the new production that we're going to add to our assets, but one of the things that are going to [indiscernible] significant amount of pride in is our ability to leverage our existing assets and maximize their value, from our operations, through our production and on to our optimization team. Year-over-year, we've established a track record of an ability to take what is already producing and maximize additional value out of it. Our expectations for 2022 are no different from 2021, where we added 945 BOE a day of additional oil through a series of reactivations, stimulations, recompletions and waterflood optimization projects. This is a staple of what Obsidian is able to deliver from the Cardium asset, and we're taking that same expertise now and expanding through the broader sections of our portfolio. Where we're not able to use existing wellbores and existing infrastructure to tie into our optimization program, that's where we leverage into our development program and drill some of the wells with high-impact, low-cost opportunities that just scale over into the other side of the organization. All of that has set a track record of an ability to really manage decline on the existing assets and drive additional value through a very efficient and a quick payout program. And with that, I'll pass it back on to Slide 17 and our hedging and production. Thank you very much.

Thanks, Jay. So Slide 17 as it catches up here. Just a quick update on our hedging program. As those of you who have been following us for a while, our hedge program, particularly on the oil side, has been purposely near-term focused, given we have a constructive view on pricing, and this has certainly served us well over the last while here. In the near 2 or 3 months, you'll see, we're trying to get oil hedged up into that 50% to 65% range of production, and that's the counteract near-term fluctuations that might occur like the Omicron drop that we saw around U.S. Thanksgiving. We will continue to view and watch the market. We'll potentially alter our stance on the near-term focus, depending on how the market changes. So we're not married with respect to this. And then you can see the hedges that we currently have in place for January, February, March on the oil side as well as some physical differentials on the chart on the right-hand side. On the gas side, we wanted to lock in some winter pricing fairly early on in the year, so prior to entry gas starting, and you can see we have a decent position hedged there at $4.63 in mcf. And as we go through the year here, we'll look to be adding into the summer gas position as time marches on. So just a quick update on the hedging, and I'll turn it back over to Steve.

Thanks, Peter. So next slide, please. So why invest in Obsidian Energy. There's a number of reasons for that. Firstly, our strategy continues to be focused on maintaining operational excellence while improving our debt leverage as well as delivering top quartile total shareholder returns. We have a dominant Cardium land position and a very deep inventory of high return wells that we can use to accelerate development at appropriate WTI levels. We have a new core area within PROP with compelling Bluesky production. As evidenced by our most recent 4 wells, the significant Clearwater potential that will further drive potential, that will further drive future oil production growth. We have a low decline production profile that allows us to generate very strong free cash flow, while also -- which we will initially focus on incremental debt reduction. We have a targeted leverage ratio of less than 1x net debt to FFO. We'll achieve that sometime in 2022 at current prices. Notwithstanding the recent move in our equity price, we continue to trade at a significant discount both in terms of reserve value as well as when compared to market peer comparables. Lastly, we have significant tax pools that allow us to be a noncash taxpayer for at least the next 5 years, and I think there will be a further differentiating factor as prices in the scenario that prices stay at these levels. With that, that concludes our prepared remarks. We'll prepare to answer investor questions.

[Operator Instructions] So the first one, Steve, that has come from Amit is talking and asking about how the board and management is thinking about growth, dividend, buyback, acquisitions, debt paydown, all those combinations in terms of free cash flow? And at what free cash flow debt level would you start considering capital returns?

Sure. Happy to take that. I think we've been upfront that in the immediate near term. We continue to be focused on: Number one, funding our capital plan in the first quarter. It is a first half skew capital program. So we're very busy between now can break up. Number two, targeting our free cash flow generation towards debt repayment. We've been also very upfront about the fact that we will pursue a refinancing in the first half of the year. And I think from there, there's a lot of fluidity with regards to what our future uses will be in regards to our free cash flow generation. We will look at acquisitions that potentially are in our wheelhouse, that can create value for our shareholders. I think we'll be very disciplined in that regard. I think we're quite happy with our inventory position. And with that having been said, that's not to suggest that there may not be other opportunities to create value via acquisitions. And in regards to returns on capital or of capital, as you said, I think it's going to be very much contingent on where our stock trades versus both fair market value as well as the comparables, and also what the WTI, what kind of the commodity price environment looks like in the second half of the year. So I know it's a long-winded answer other than simply to say that we will take all those inputs into consideration and make the appropriate decision at that time.

Thanks, Steve. A follow-up question to that from a shareholder, Nicholas, is do you have any -- I think you've answered this, but does the company going to start paying a dividend and win? And what would be the dividend payout ratio is leaning towards?

I think it is in the cards of the company, will look to pay a dividend. I'm not going to qualify the win because I think the short answer is, we don't -- we're not exactly sure. And moreover, just as per my prior answer, there'll be somewhat contingent on where our shares trade and what the -- and how we allocate capital between buybacks versus dividends versus potential acquisitions or production growth.

Great. Thank you very much, Steve. Quick question from one shareholder, wondering what date do we expect to start trading on the NYSE American.

So we're in the midst of that process as we speak. We don't have an exact date, but I expect it to be somewhat imminent.

Great. Turning a little bit to the debt facilities. We've got a couple of questions from a couple of different shareholders, Mark and Nicholas, on the discussion around refinancing our debt facilities during 2022. Wondering how much debt the company is presently anticipating to be restructured as senior and subordinated debt and the timeline around that?

Sure. Let me take the first part of that question before I turn it over to Peter. To be clear, we're simply pursuing a refinancing and not a restructuring. I think the fluidity in regards to how we think we think about the split between senior and junior debt. I think that these types of commodity prices, we will delever generally a lot of free cash flow. So it's a topic that the Board is spending a lot of time on. And we will make the appropriate decision based off of both our internal business plan as well as just the state of the capital markets as we work our way deeper into the first half of the year. But I'll turn it over to Peter to give him an opportunity to provide his two cents as well.

Thanks, Steve. Yes, not a lot to add there. In terms of looking at what we're refinancing, ideally, we refinance almost the pieces of our debt being the senior credit facility, the seasonal notes and the limited recourse finance we have with the PROP acquisition, so bringing all those together. And in terms of sizing it, as you talked about, you need to look at the macro environment and the subordinated piece of debt, we want to make sure we size it appropriately for the company on an ongoing operational basis, that would support all our initiatives and objectives. So more work to be done on that. It's a project that's underway and looking to complete in the first half of the year here.

Great. Thank you very much, Peter. Turning on to the PROP assets. One question is around the strategy of the company as a whole, coming from Mark. And you often stated in the past that the goal was to become the Cardium champion. We'd like to know if this signifies any change with the acquisition -- remaining acquisition of the 45% interest in PROP in overall company strategy? Has it changed into both the Peace River and the Cardium simultaneously? And if so, do you -- how do you plan to distribute capital to each area development?

Sure. So a number of questions to -- parts to do, but I think the short answer is, our strategy has not changed, the strategy has been and continues to be to focus on the best economic returns within our portfolio. I'd say, over the last 2 to 3 years, that was in the Cardium, specifically Willesden Green, as WTI prices have strengthened, heavy oil differentials have narrowed. And as we have rebuilt our technical team specific to PROP, we have drilled 4 wells or we did drill 4 wells late last year, the returns are very, very strong. And obviously, if you can drill 500-plus barrel day wells, some [ $2 million or $2.5 million ] cost, that is highly compelling and you going to want to pursue more of those. I think the Clearwater is in the delineation phase. We already have drilled 1 well with a partner and we'll drill 2 wells in the front half of the year and 2 wells -- currently, we have 2 wells slated to the back half of the year. Our peers are also doing quite a bit of delineation as well. So we have the luxury of sitting back and letting them play, both because of actions of our own as well as peers be better understood and I think that's part of the rationale to why our second half capital plan is structured in the way that it is. If commodity prices are accommodative and with the debt refinancing behind us, assuming that we garner more comfort with the Bluesky and the Clearwater, you very well may see us pivot and commit more capital there. So -- but I don't think the underpinning of our corporate strategy has changed, which is to pursue the best economic returns within the portfolio.

Great. Speaking to -- you touched on costs there. There's a number of questions around if we anticipate operating costs or drilling cost increases either due to lack of rigs, labor shortages, increased demand or cost pressures on operations such as power, et cetera. Could you expand on that and how it impacts Obsidian?

Sure, happy to turn that over to Gary and Jay.

Yes. So just in terms of cost pressure, look, I think what we're seeing throughout the industry is that our upward cost pressures, both on the drilling side of things and on our operating front, but we've got programs in place to try and mitigate that. So those pressures that we anticipate, those are all fully -- been folded and modeled with regards to the guidance that we've shared today. And rest assured it's something we're keeping a close eye on as we move into 2020. Jay, do you want to add any more specific detail to that?

I think you said it well, Gary. And the question is phrased in the right order. Obviously, maintaining the cost structure that we established over the last couple of years is of the utmost priority, but 2022 is also going to award those who are able to meet the supply crunches coming on some of the things. And I'm pleased to say that we -- because we put those wheels in motion so early in 2021 to get both the rigs, but also the necessary vendor and commodity aspects to keep those rigs running that we're well positioned to make sure that we aren't feeling any undue pressures on the supply side through the first half of this year.

And a follow-up to that is, have you seen the drilling cost change in the various areas? And how do they compare with each other?

Peter, you want to take that?

Sure. Absolutely. Yes, we are absolutely seeing some inflationary pressures on the organization. They're manifesting twofold, obviously, both on the vendor side, but also on the risk of idle time on the rigs. We've been able to leverage pretty strong vendor relations to make sure that both our idle time and our supply is well established, but at the same time, as WTI increases, you are going to see some inflationary pressures. We're seeing that in the range of probably 9% to 12%, but we've also been able to cap that pretty effectively. With 4 rigs running, we're also seeing additional economies of scale that help reduce that pricing, but without a doubt, it's something we're going to be managing through as WTI increases, and we look forward to that challenge.

Great. Thank you very much. And another one, again, related to that is, at current price, how do Peace River and Cardium net cap or capital efficiencies and cost and payback comparable?

Jay, you want to start with that before I provide my two cents?

Sure. Stephen, I apologize. Do you mind just repeating the questions.

Certainly. The question is comparing the economics and the capital efficiencies, except for payback between our Peace River asset's drilling and our Cardium drilling and if they are comparable.

Yes. On a pure numeric equivalency, they are comparable, but they get there from very different directions. So the Bluesky up in Peace River is a shallower decline, long-life heavy oil asset. Whereas, our Cardium with the multi-frac approach and long laterals is a high IP, steeper decline. So when you look at capital efficiencies, the capital efficiency of the heavy oil well is usually a little bit better. But at the same time, it doesn't necessarily achieve that high IP, and we do have that longer time to first production. I think what you see in terms of payback and everything else is that you end up in a similar place, but you get a profile that's quite a bit different. So balancing those 2 outcomes, making sure that you do a little of each and then leverage your portfolio appropriately is something we'll be focused keenly on.

I would just take with those sentiments. I mean, they compete with one another, I think it speaks to the depth of our inventory and. And I think marrying their respective declines this is something that we do give -- we will be giving more thought to as we think about go-forward portfolio construct.

Great. One question drilling down a little bit into our CapEx is, I'm wondering how much CapEx was allocated for Q1 and H1 2022?

Do you want to take that?

Yes, sorry. Just one second.

We can come back to that, Peter, if you prefer.

Yes, go ahead. Take your next question and then come back.

Great. The next question is, how many wells will be coming online in Q1 2022?

Jay, do you want to take that? Or do you want me to?

Sure. Absolutely. The answer to that is a little dynamic. It has the 6 that we carried over as we spoke to and I'd say, the total answer is no less than 15. But the reason I'm not giving a firm number is, we're going to carefully manage our Clearwater drilling and timing as well as part of that. So that may have some impact, but the short answer is, no less than 15.

Great. Speaking of the Clearwater, can you comment on the drilling techniques in Bluesky and Clearwater? Are they similar? Are they different? How is the rock in the resource different from a technical perspective?

Do you want to take it?

Sure, you bet. They're very similar, but what I think you see is that we're able to, with our Bluesky knowledge and history, drill much more complex and longer wells. So when you look at the press release and the total open hole length, I know people are asking how many legs you want to do in the Bluesky. We have drilled as much as 45 individual legs on 1 well. We've gone to a more manufactured approach or we try to stay somewhere between 11 and 16, but where we see reservoirs not being captured by existing wells. We will add additional ways to bury in debris and make sure that we capture the entire resource. So while the fundamental basis of the drilling is very similar, we have a lot of expertise and very complex drilling operations from the Bluesky that we do plan to employ overtime into Clearwater, but it's far more in its infancy where we see most of the producers so far drilling somewhere between 4, but typically 8 very straight, very one-mile-ish-type wells.

Great. Thank you very much. A follow-up to that is, if you are providing any information at this time around the Clearwater in terms of where they are and the timeline.

We are not at disjuncture for competitive reasons.

Understood. Great. Another question, maybe this one over to you, Steve, is talking about, again, the strategy of the company and if Obsidian is still pursuing M&A opportunities. Or is this more of a growth to the drill-bit story?

I think the short answer is, we will look at all M&A opportunities. I think as I've outlined before, we will be very disciplined in that regard.

Thank you. Going -- Peter, I'm not sure if you're ready to go back to the question previously or not.

Sure.

Okay. CapEx allocated for Q1 and the first half of 2022.

Yes. So the first half will be a little over $100 million probably in the order of $100 million to $500 million, because that doesn't include decommission expenditures. Most of that will probably be incurred in the first quarter as Q2, as everybody knows, they usually typically pretty look to the breakup. So the exact split between Q1 and Q2 will really depend on when breakup occurs as a result of that. But round terms, think of a number, just a little north of $100 million.

Great. Thank you. Another one regarding operations and expenses. Could somebody comment on the current plans and situation regarding transporting oil and gas to market and the impact of any new transportation methods that might become available in the near future and expected timeline.

Gary, do you want to take that?

Sure. Yes. So look, from an Obsidian perspective, we're not seeing any particular impact with regards to the ability to get our own product to market. And there are obviously Line 3 that's recently come on, has been optimized, is helping in the main line. We are keeping an eye on the takeaway capacity in the Peace River area, and of course, longer term, there's interest in obviously a Trans Mountain. And we see that as being very constructive, especially with regards to heavy oil differentials. So at this point in time, from a Obsidian perspective, obviously, it's something we keep a close eye on. There is a portion that we manage from time to time, but by and large, we don't see any particular issues with regards to getting our product to market.

Thank you. Another one going back to the refinancing, a follow-up from Amit. Do the banks and credit market give credit to PROP acquisition in the trailing FFO or EBITDA calculation?

I think the short answer is, we don't have a EBITDA or FFO covenant, and the banks do not give credit to the reserve-based lending facility because of the separate collateral now. Clearly, there's significant value in that state, and credit markets when we go to refi, they say we will give value to it due to the fact that we will be collapsing the structure at that juncture.

Excellent. Thank you so much. Another question about Bluesky's formation well cost and if you have any guidance in terms of the economics, specifically with that as it is the newest -- one of the newest areas we've gone into.

Those costs were roughly $2.5 million per well, and we don't have any incremental information on what we've said as it relates to economics in that they're very much competitive with the Cardium.

Okay. Great. Thank you very much. Interesting question. What are Obsidian succession plans once Steve Loukas decides to go to -- move on.

I will say that the Board is for a fair amount of time, we're focused on this issue. There are a number of options in that regard, and I think what I'll say that I have a significant shoulder through a very comfortable succession plan as well. So at the appropriate time, we will disclose.

One other question which you may have answered is the return requirement for CapEx versus buying back shares. When you've reached your target and leverage, what portion of cash flow is expected to go to CapEx and shareholder dividend buyback?

Yes, I'm not so sure that we're in a position at this juncture to break it down in that simple manner. I think there's a lot of fluidity to that question. I think it depends on the commodity price, environment at the time. It depends on our outlook. It depends on where our shares are trading relative to out-years intrinsic value as well as the comparables. It depends on, candidly, a bit of our strategic plan at that juncture as well. So I can give you a wishy-washy answer, but I think it's probably more appropriate that we reserve and give shareholders a much more nuanced answer as that decision point is near term. I think what investors should take a lot of comfort [indiscernible] you have a Board and CEO that has a significant stake in the company and they are going to be the value in all of these decisions through that one.

Great. Thank you very much, Steve. [Operator Instructions] Otherwise, at this time, Steve, I don't know if you have any closing comments, but we have answered the majority of these questions. So I think unless anything else comes in, we can forward with the call.

No, I think that's it Susan, I would like to thank all of our investors and those listening to the call for their time and attention. I hope we've gone a long way in providing a lot more insight in regards to not just our 2022 guidance, but also some of the methodology that helped drive that outcome. In the meantime, should more questions arise, do not hesitate to reach out to Susan. Thank you, everyone.

Thank you very much, Steve. Thanks, everybody, on the call, both from the management team and as well as everybody listening in are participating. As Steve said, if you have any other questions, please don't hesitate to contact us through [email protected]. As well, the work will be put up on our website. It will remain live for some time as you wish to relisten to it. At this time, this concludes the call, and I'll turn it back to the operator.

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