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

Thank you for standing by. This is the conference operator. Welcome to the Obsidian Energy's 2023 Guidance Conference Call. [Operator Instructions] And the conference is being recorded. [Operator Instructions] I would now like to turn the conference over to Susan Soprovich, Investor Relations. Please go ahead.

Thank you very much. Good morning, everyone, and thanks for joining us. My name is Susan Soprovich, and I'm the Investor Relations analyst at Obsidian Energy. This morning, we will be discussing our 2023 capital budget and 2022 reserves report. With me this morning and speaking on the call are Stephen Loukas, Interim President and Chief Executive Officer; Gary Sykes, Senior Vice President, Commercial and Development; Jay McGilvary, Senior Director of Development; and Rick Schiller, Senior Director and Controller. As well, the rest of the leadership team is also in attendance. Before I call to turn over to Steve, I'd like to point out that we will refer to forward-looking information in connection with Obsidian Energy and the subject matter of today's call. By its nature, this information contains forecasts, assumptions and expectations about future outcomes. To remind you, it is subject to the risks and uncertainties affecting every business, including ours. Please refer to our public disclosure filings available on both the SEDAR and EDGAR systems for a full discussion of significant factors and risks that could affect Obsidian Energy or could affect the outcomes for Obsidian Energy. Go ahead, Steve.

Thank you, Susan. Good morning, everyone. We will try to go through the presentation in an expedited manner to ensure that we have ample time for Q&A. Turning your attention to Page 3, I'll quickly go over our investment highlights. One, we have a low decline, oil-weighted asset base with significant underlying reserves. We are the largest acreage holder in the Cardium with significant positions in both Willesden Green and the Pembina areas. In Peace River, we have high-quality cold flow, heavy oil production from the Bluesky, and we have upside emerging from the Clearwater. We are slated to generate strong free cash flow of approximately $105 million, assuming $80 WTI and $3 AECO, which will reduce our total net debt to approximately $215 million and net debt to FFO to approximately 0.5 turn, assuming we were to use all of that free cash flow to pay down debt. The Board -- I am pleased to announce that the Board has authorized a return of capital with an initial NCIB, which is subject to maintaining $65 million of liquidity and complying with current credit facilities. We'll talk a bit more about that later in the presentation and during the Q&A session. And lastly, on the ESG front, we're committed to strong ESG practices, including minimizing the environmental impact that we leave. Turning our attention to Page 4. I'll quickly go over our corporate overview. In 2022, we had average production of approximately 30,700 BOEs a day, which resulted in year-over-year production growth of approximately 25%. Our production mix is currently approximately 65% oil and liquids. Based off of the strength of a very good reserve report last year, our 2P reserves have now grown to approximately 181 million BOEs, which resulted in very strong growth. Our ROI on a 2P basis is approximately 13 years, PDP decline of approximately 24%. And given our strong taxable position, we will not be a cash taxpayer for the foreseeable future. Current enterprise value is approximately $1 billion and net debt on a Q3 annualized basis approximately 0.8 of a turn. Shifting to Page 5, just to talk about our strategy. We continue to focus on investing in our Cardium asset and really driving -- and recycling that free cash flow to invest in our Peace River asset, where we believe we have significant running room and the ability to both grow production and reserves. We're focused on increasing scale through managing our cost structure, and we're really focused on doing that via our production adds. We continue to target net debt of $225 million, notwithstanding that the Board has authorized an NCIB to take advantage of what they believe to be a share price that is a material discount to our intrinsic value. All that results in driving per share growth via a combination of asset development, debt reduction as well as the share buyback. Turning your attention to Page 6 and what our focus is for 2023. The Board has authorized a development plan that earmarks $240 million to our base core business, while at the same time, also allocating $25 million for exploration and appraisal drilling in Peace River. The $240 million of core business development results are approximately 7% growth at the midpoint. We've forecasted minimal volumes for the $25 million of exploratory/appraisal spend, but we think it's extremely important that we further delineate the 500 sections of land that we own in Peace River. For the first half, we've utilized 4-5 rigs. At the onset of the year, we're currently down to 4 rigs, and we'll be reducing from there. And we have all of our services contracted for the first half of 2023 to ensure that we manage our cost pressures and inflation. And so we're doing our best to manage what has clearly been an inflationary environment. As I previously alluded to, at our forecasted commodity prices, we result in -- that results in $105 million of free cash flow as part of the NCIB, and we'll continue to allocate between both the NCIB as well as further debt reduction contingent on, candidly, where our shares trade. We are focused on expanding our debt capital to enhance our liquidity to allow us to start to buy back sooner rather than later, and we will address that further during the Q&A session. We're currently in the application process in regards to -- with the TSX for their approval on the share buyback, and we will disclose it once we've secured approval. With that, I will turn it over to Gary Sykes, who will walk you through our 2023 guidance.

Good morning, everyone. So just building on Steve's opening remarks, Slide 7 presents our formal guidance ranges for 2023 and -- and to reiterate, we landed on this particular construct is an optimal way to meet multiple objectives, namely continued production growth, dedicating increased funding to accelerate the appraisal of our land base at Peace River, continuing to strengthen the balance sheet in the form of continued debt paydown and looking to return capital to our shareholders. So just making our way through the table, starting with production. We anticipate a range of 32,000 to 33,500 BOE a day with a commensurate capital expenditure program of $260 million to $270 million. And again, as Steve mentioned, approximately $25 million of this is earmarked for that accelerated appraisal activity in the Peace River area. Decommissioning expenditures are estimated between $26 million and $28 million, in line with new regulatory spend targets, net operating expenses between $13.50 and $14.40 per BOE and commensurate general and administrative charges of $1.60 to $1.70 per BOE. If we look to the financial forecast associated with the midpoint of our guidance and using a WTI price of USD 80 CAD 3 per AECO. We anticipate generating an FFO of just under $400 million this year with a free cash flow of $105 million. Net debt prior to the end of the year, we're seeing has been just over $200 million with an associated net debt to FFO of 0.5x at the end of the year, all of this prior to the NCIB that Steve mentioned, of course. The bottom part of that chart gives you some sensitivities to various different commodity prices, and I'll leave you to look at that in due course. Let me move to Slide 8 and give you an update on the reserves. The first line gives you our year-end 2022 volumes, which have increased to 76.2 million barrels of oil equivalent on a PDP basis through to just over 180 million barrels of oil equivalent on a 2P basis. Associated with these new volumes, you can see the comment to the right that references, the significant increase in value year-on-year in our book at 49% on a 1P or total proved basis and over 50% on a 2P or proved plus probable basis. In addition, on the next line, you can see our reserve replacement ratios. Again, very strong in both PDP and 1P basis and really exceptional on a 2P basis, almost 400%. And what I would say is that the team this year, we simply set out to align our capital expenditure plans was the quality of our land holdings such that our FTC is now appropriately sized at $1.25 billion over the next 5-year period. So the key takeaway from this slide is a very strong year with respect to our year-end 2022 reserves. Let me move to Slide 9 and build on that reserve story as a link to what we see as part of the current value proposition at Obsidian. The table on the left shows you a breakdown of our volumes by product type and the colored bars at the bottom of the table show you the value at NPV 10 over book and different reserve categories against the USD 70, USD 80 and USD 90 WTI price. If we translate those values to a net asset value per share on the right-hand side, we can see that says the middle case of USD 80, we have a PDP per share value of approximately $14 versus where we're trading today, notionally around [ 8 70 to 8 80 ]. So in summary, our strong reserve book and values really do underpin our value proposition in our asset base. Let me move to Slide 10, and I'd like to pivot to an overview of our 2023 development program before I pass it over to Jay, who's our Senior Director of Development and we'll walk you through our area plans in detail. There's 3 points I'd like to make on this slide. Firstly, as Steve mentioned, we are presently drilling in all 3 of our asset areas and plan to deliver some 25 wells prior to breakup across that asset base. Second point I'd make is we do have a second half drilling program planned However, we do have significant flexibility in our inventory to modify that plan in response to any changes we see in the commodity price environment, and we'll continue to refine our H2 plans through the early part of this year. The last point I'd make is, look, we also have an active appraisal and delineation program planned our Peace River asset base, as we've discussed in both the Bluesky and the Clearwater formations. And in addition to that, we are planning for up to 4 incremental oil sands exploration wells. And the strategic intent here is to accelerate the future inventory in the asset and de facto increase the future optionality and development planning at a portfolio level. So again, another important year in our Peace River asset coming up. With that, I will pass it over to Jay to over the details of our development program on Slide 11.

Yes. Thank you, Gary. As Gary said, I'm Jay McGilvary, Senior Director of Development of Obsidian Energy, and it's my pleasure to provide you all with a more in-depth look at our asset base and our 2023 development and exploration plans. Gary provided you with a comprehensive update on our year-end 2022 reserve results. Our ability to grow our reserves year after year is tied directly to the incredible Cardium asset at the heart of our company. Those of you who know Obsidian Energy or our basin in general, understand that the Cardium is a top-tier asset. We continue to expand our reservoir modeling throughout the reservoir seeking new opportunities, not just with the drill bit, but also ways to optimize our infrastructure and existing well inventory. We have a slide at the appendix regarding our optimization program, which added approximately 800 BOE a day last year and with opportunities already available to us in our portfolio. We're off to another fast start in this area in 2023. However, as Gary alluded to, the obsidian value is now far greater than just the Cardium and our diverse asset base is a competitive advantage for the company. In 2021, we average production of about 20,000 BOE a day from the Cardium, 3,100 from Peace River and just about 800 from the Viking. Today, we've grown all those assets to [ 23,000, ] 6,700 and 1,400 a day, respectively. We've seen growth across our entire asset base. We've also utilized some of the multi-zone potential available to us in both the Devonian and Mannville within the Cardium and the opportunity to underlie and overlie this asset. We were extremely busy in Q2 2022 with a significant number of wells that come on throughout the process and coming on production in the upcoming weeks. We had 5 rigs running throughout January, as Steve alluded to, and we're busy across the board. On Slides 12 and 13, we go into more depth on both our Willesden Green and Pembina assets. Willesden Green, in particular, we've been in continuous development since 2017 with only a brief stoppage in 2020 to account for low commodity prices. We returned in the second half of 2022 to posting some of the top-tier Cardium results and analyst reports as alluded to in some of our previous press releases. We continue to focus our drilling campaign in the area in half 1, 2023, but also add incremental production through the field debottlenecking of our infrastructure. We see significant value in the already existing wells and plan to invest in terms of increasing total production in the field without necessarily having to put the drill bit to work. In both Willesden Green and Pembina on Slide 13, we plan to bring on an additional 4 wells in the next few weeks, inclusive of the 9 that carried over from our 2022 program across all of our assets. About 24 months ago, on Slide 13, we returned to development of our Cardium program in Pembina. It's complementary to the Willesden Green development program in that typical production rates are higher in Willesden Green, but Pembina presents very strong reserves and a rough equivalent in economic value. We're also finding additional opportunities in our asset base, not explicitly mention our well count through both waterflood investment and that optimization potential. Not in our well count in the 2023 program is the significant non-op position, where we see at least 12 wells to be drilled with both integrated waterflood opportunities on some of the unit wells where we have a significant working interest. Those are all incremental to the value that Gary presented on the total well count. Moving on to Slide 14, and Steve and Gary both strongly alluded to this, new to our program is a more significant investment in Peace River. We have both a development program and a significant exploration, delineation and appraisal program up there. And while I use those words somewhat interchangeably, know that we are balancing our development program in the core areas, where the reservoir is well established with what we see as significant incremental opportunity, both stepping out in small businesses and broadly across the entire asset base for additional opportunities in Peace River. For the first time in many years, we have as much activity in Peace River as we do in the Cardium and a development program that we're excited to lean into. We have 4 Bluesky wells currently being tied into permanent facilities in progress right now and completions underway on the first Walrus exploration well visible on Slide 14. Here, you can see that on Slide 14, you can see the core development areas. We also have wells to the east -- sorry, to the west of Harmon Valley Main and 2 wells, 1 currently drilling Walrus and one going -- being tied in, in North Walrus that will add significant reserve value should they prove to be successful. We're very excited about the initial geological results we've seen from these and are expediting the on production dates on all those wells as quickly as possible. All of this, we are running a full-scale Bluesky and development exploration program in parallel with the overlying Clearwater. On Slide 16, we highlight the potential of the Clearwater across our asset base. You see the and Clearwater exploration continues in the area with 2 main focus areas currently with wells drilled, Dawson and Seal. We currently have wells on production in both strike areas and plans to follow up with additional drilling in 2023. While we've disclosed some of the initial results in the Seal well, where we saw initial promising rates and high-quality oil better than the underlying blue sky, we are still in the appraisal process on both of these wells. In my view, we are ahead of the industry pace right now across the region with multiple license-ready locations across our assets that will allow us to quickly scale not just to our results, but also what our competitors are doing as additional drill rigs enter the area. In parallel, we have scaled up the senior technical team with established Clearwater expertise to rise to this challenge. It is early days in understanding the broader Clearwater across Peace River. But Obsidian has leveraged our competitive infrastructure and production base in the area to ensure we are positioned to be successful. In December, we released those initial early results from the Seal well, and we plan to follow up with further updates in the near future. Finally, on Slide 17 is a slide I'm excited to present our Viking development. A couple of years ago, this is an asset that sat in the appendix of our presentation. We saw an opportunity in 2022 to leverage off-cycle drilling opportunities before breakup commenced in the other areas of the basin and step in with the drilling rig where the demand for cost pressures weren't quite as significant. We drilled 8 wells in the area, and one of those was inclusive of the step-out well on the 4-22 pad, the 5-27 well. We have a slide that goes into details on that in the appendix. But needless to say, we're very excited by the results of that step out well, and they change the overall economic thesis of the area. Now Viking represents a shorter cycle economic investment with returns on par with the rest of our asset base. We plan to step in aggressively where we're drilling 11 wells immediately in Q1 of this year. We will make a significant contribution to AA as the company. And also, if able to follow up on those results of that promising 5-27 well, a meaningful impact in terms of future development in the assets going forward as well. So with that, that takes it to the conclusion of my, and I'll pass it over to Rick Schuller to go into the next slide.

Yes. Thanks, Jay. So moving on to a quick update on our ESG efforts. We wanted to point out that recently this past December, we published our first ESG report. The report outlines key information around our commitment to ESG practices across our organization and communities. It also outlines our key accomplishments and initiatives that we've been focused on over the past few years. There's obviously a lot of information in this report. So please visit our website for a copy if you want to take a read. We're currently in the preliminary stages of compiling our 2022 data. So once we have this gathered, we'll be updating the report and releasing a new version here in the coming months. Moving on to the next slide on the hedging front. Our recent focus has been on the gas side due to current projected storage levels throughout 2023. As a result, we've been building our position here over the past month or so. It's important to note that our board recently approved an increase to our hedging limit for gas, specifically up to 80% of production during the summer of 2023 and up to 70% for next winter. So that's late 2023 and early 2024. Note that the hedges on this slide are based on January 27, but we have actually added 2 incremental gas hedges over the past 24 hours, an additional 10,000 GJ per day in March of 2023 at just over $3 per GJ and an additional 10,000 GJ per day from November 2023 to March 2024 at $3.40 per GJ. So obviously, we continue to monitor prices, look for opportunities to further build on our hedge book as we move forward. With that, I'll pass it back to Steve.

Thank you, Rick. I'll turn your attention to Page 20 and summarize as to why we believe an investment in Obsidian Energy is highly compelling. First, we have a very strong Cardium land position, which allows us to generate -- utilize our deep inventory to generate strong returns, which leads to robust free cash flow generation. We have a highly compelling position in Peace River with approximately 500 sections with established Bluesky production, owned infrastructure and significant Clearwater potential that will drive further upside growth. We now have a Board authorized NCIB, which will be subject to maintaining the $65 million of minimum liquidity that we've previously discussed as well as complying with current credit facility with the provisions of our current credit facilities. We trained a significant discount, both in the way of reserve values as well as cash flow multiples when compared to our peers. We also have a significant tax pool position, which allows Obsidian Energy to be a noncash taxpayer for at least the next 6 years at $100 WTI. Obviously, at current strip pricing. We would not be a cash taxpayer for a considerably longer period than that. And with that, I'm pleased to open it up for Q&A.

Thanks very much, Steve and the whole team. [Operator Instructions] So the first question, we've got several shareholders who have asked this question, so we may also go right ahead of that is comment on as to why is it a share buyback versus a dividend? And what was the Board's thought process in favoring a dividend versus a buyback?

Sure. Thanks, Susan. So I'll answer that question. The Board ultimately looked at both forms of return of capital. I think we had, as a management team, had been fairly consistent in regards to kind of what our preference would be in light of where our shares were trading. Historically, I'm not a big proponent of buybacks within the E&P space. Having said that, as Gary outlined in his slides, when we spoke about our reserve value, we are simply trading at a material discount to our PDP at $80. And we could buy our own reserves and capture that discount without taking any execution risk, which at this juncture is a lot more attractive than paying out a dividend. What I would say to you is it's not that the Board is not open to pay a dividend once we close that valuation gap. But if we are successful in buying back a meaningful amount of our shares, we could in theory pay an even bigger dividend on other residual shares. So I think that's the way to appropriately think about it.

Great. Thank you very much. One question we have in terms of our guidance itself is a question from [ Amit ] about heavy oil differentials, what are we using in our guidance as well as what is our commodity price outlook for 2023?

Sure. Jay or Gary, do you want to handle the differential question, and I could outline our commodity price outlook?

Sure. Yes. So the simple answer is in our modeling, we're using USD 22 per WCS differential. Steve I will pass it back to you on the outlook.

Yes. Look, in the way of our commodity price outlook, we have kind of -- the price guidance, which our budget is anchored off of, which is $80 WTI and $3 AECO. In regards to my own personal outlook, which is a bit different than kind of our -- what we've guided to, I think oil probably averages high $80s, $90 in the last 9 months of the year. I still think you probably have some volatility to work through. But having said that, I think the mobility data coming out of China is very constructive as well as other anecdotals that you could look to. That, combined with what I think will be fairly muted supply growth this year and SPR release is largely behind us, I think sets up rather well for constructive pricing. And in a way of bearish gas, just given what you've seen out of winter or the lack thereof, I could see kind of gas trading certainly [ sub-2 50 ], kind of south of $2. And I think that's part of the rationale as to why we have moved to hedge more of our gas exposure. We've actually added to our hedge position in gas yesterday, which is not outlined in the presentation. The presentation was as of January 27. And as to why Rick alluded to, the Board authorized kind of a higher hedge limit for both summer and winter gas because we want to take some of that volatility out. Longer term, we're very constructive on gas pricing, but I think that storage is at levels where I think you could see some further volatility in the price.

Great. Thanks, Steve. A question here from Donald in terms of wondering why we are not paying down debt instead of the share buyback?

Sure. I'm happy to take that. I don't think we've said that we're not kind of inclined to pay down incremental debt. I think the way to think about it is we're still on a journey to target net debt of $225 million. Against that backdrop, we have shares trading at a material discount. And what the Board is effectively saying is we're going to call a bit of an audible and buy back our shares while they're very, very, very cheap. I think part of the mistake management teams make and other Boards make, and this isn't specific to energy, but as a long-term market participant, they typically buy their shares back at the worst possible time. They buy them back when everything is going great, and it's reflected in their equity price. And then once some volatility hits, those share repurchases look expensive. So I think that's really kind of what's driving the Board's thought process.

Great. I have a follow-up question from [indiscernible]. How aggressive does the company plan to be with the buyback? Is there a limit to the price that the company is willing to pay?

Yes. I mean -- look, I would say a couple of things. One, if there was a limit, I don't think we would tell the market that. That wouldn't be very smart of us. Two, somewhat of a difficult question to answer because we don't have TSX approval. We are currently in the process of talking to both our syndicate banks as well as we have offers for other debt capital that would allow us to basically implement a buyback rather expeditiously some time in the next 5 or 6 weeks. And we'll see where our shares are trading at that point in time. But if -- given an opportunity tomorrow, kind of theoretically, like -- I think we would be rather aggressive, given the valuation disconnect.

Great. Thank you. And from Ryan we have a question. When do you anticipate hitting $65 million in liquidity to start the buyback?

Yes. As I outlined, I mean, if we did it organically, it probably some time late 2Q, very early Q3 as we'll have to pay down the working capital that we've incurred as we've been executing on our Q1 drill program. But we are -- I'll reiterate in discussions with our syndicate as well as other lenders to potentially create some more liquidity. We have a significant amount of reserve value. Our current revolver's materially undersized relative to the reserves that underpin it. We could and should have a line materially bigger than we do today. And it's simply a byproduct of the refinancing that we executed last year, where some banks wanted to exit given some of the history with this company. But we're executing. Reserve report was very, very strong, and I think there's appetite for some of our syndicate members to expand. And if not them, there's plenty of others that see the reserve value. So we're going through it as we speak.

Great. Thank you very much. The other question is about adding additional banks to increase the revolver facility to $200 million to $250 million to increase liquidity? Are we looking in any discussions with banks on that, from Mike.

We're in a -- as I outlined, we're having all sorts of different discussions, and that's certainly a plausible outcome.

Great. Moving to the current topic. We've got a few questions about M&A in 2023 from Joseph and a few other retail shareholders is that in 2022, we're interested in M&A for our core Cardium area, what's your approach for M&A in 2023? And how do you see acquisitions versus share buyback, and there is even one question about discussing reopening talks with Bonterra.

Yes. Listen, we're not going to comment on individual companies. I think the value of our shares are very, very attractive today, and that's clearly going to be something that we evaluate when we look at any potential M&A opportunity. But against that backdrop, I think it's fair to say that we look at everything. We've been on record multiple times of saying that we're not going to enter a new area. And against that backdrop, we are going to evaluate any M&A opportunity against our own organic development program as well as the ability to buy back our shares. So we've been disciplined to date, and I would anticipate giving the significant shareholdings that myself and some of the other directors have that we're not going to lose that discipline.

Great. We have a follow-up question from Roger. Are there any specific acquisitions the company is looking at? I understand that you said that we wouldn't comment on any particular one, but is the company looking at sales of assets that it considers noncore to pay down debt?

Yes. Once again, I'm not going to comment on any potential scenario. I think it's just fair to say that this is a management team and Board that will look at everything and anything when it comes to creating shareholder value.

Great. So going back to a bit on the return to capital. We have a question regarding oil trading, and if it trades above $80 WTI, how would you prioritize between incremental production growth and further returns of capital?

Yes, I think it's a difficult question to answer in the abstract. It's very much contingent on where our shares trade, some of the potential delineation results that we see out of Peace River, we'll evaluate it at the appropriate time. But we're going to be more skewed towards whatever we think can create the most value.

Great. Now let's turn to operations. A question from [ Amit ] on the Bluesky wells from the 2022 program. The question is that they're just coming online, and the new wells in 2023 have the oil production growth of 1,000 barrels per day seems a bit low. Can you please explain?

Sure. Absolutely. So there's a variety of factors that weigh in on that. One, the extended spring breakup slowed our initial production rates across the board on a bunch of our assets as you're excluding the Viking. So that weighs in. But the other one is what we chose to do in the second half in the Bluesky. First of all, we had some challenges at the end of the first half, particularly on one pad that we weren't happy with those results. So we pivoted modestly and returned primarily to the Seal trend. The Seal trend represented very low reservoir risk, but the methodology in which we drill those wells is quite a bit different. Those wells have fewer legs. They're in an area where we've already had production and we go in and redevelop between the existing legs. So the overall economic thesis is a little bit different in that we don't expect the same rates necessarily. But what we do see is overall economic return is just as robust because we're able to utilize the existing infrastructure. So the overall well cost is less. That's one factor in terms of why that's a little lower. The other is we chose to lean a little bit more heavily into temporary facilities on some of our pads. The temporary facilities have an advantage in that when you look at the overall economic thesis in Peace River, facilities make up about 50% of the total cost. So there's a true stage gate once the well is drilled to test and make a hypothesis on whether we want to make a significant investment further. Now universally on the second half program, we've reached the conclusion that yes, we do, but it does provide us a little bit of derisking. So particularly, we talk about wells that are not in permanent facilities. Some of those wells have constrained peak rates. As a result, you can imagine that the permanent facilities provide a lot of incremental production value up in Peace River, particularly when you're trying to manage the harsh results of minus 40-degree winters and the ability to heat and transport that oil, [indiscernible] facilities present a significant uptick in terms of what those wells are capable of doing. So right now, as we transfer into the second half of the year, we have 4 wells that we still expect to come on our 6-24 pad and our 2-05 pad. One of those wells, the Western most on 2-05 has run into temporary facilities. We derisked that pad. In fact, we've gone back with the drilling rig subsequently based on those results and are drilling a third well off that pad as we speak. But as a result, the overall peak rate was modestly delayed as we took that view towards risk. So while the outcome has been good, it does represent a modest delay in terms of what we expect for peak rate. And actually, our 2022 Peace River program, we expect to hit peak production rates in very early Q2 2023 as a result, as those heavy oil wells clean up and then come on to full production.

Yes. Good. So the only thing I would add to that [indiscernible] is, look, we've got a significant amount, to Jay's point, of production coming on in the Peace River area. And our next operational update will provide some additional details with respect to that.

Great. Thanks, Gary and Jay.

Yes, let me just kind of add my 2 cents. Look, what I would say to you is that with the benefit of hindsight, hindsight it was being 2020, we probably kind of when we upwardly revised our guidance in the middle of last year, somewhat priced it for perfection. And that was really off the back of -- we had 3 years where everything has gone kind of as well as could be on the development side, notwithstanding that we had to deal with the volatility that came out of 2020. I think what we're saying this year in our guide is we're stepping out into where we're going to drill a bunch of offset wells kind of in the Viking. We're stepping out into some newer areas or areas that we haven't kind of drilled in recent memory in Peace River, and there's a bit more risk in the production forecast. And so if those wells come on strongly, then one should anticipate that will little bit of luck will be at the high end of the range. And if they don't, then I think the range is kind of appropriate. So I think that's kind of how to think about it from my seat.

Thanks, Steve. A bit of a follow-up, Jay, you did talk about production and some of the impacts in the Peace River area. We've got several questions from Adam about more detail -- if you could provide more detail on production volumes and why they were not as high in the fourth quarter and pushed out into the first quarter of this year.

Yes. So I think that question probably covered that relatively comprehensively in terms of the temporary facilities, the delayed spring breakup that pushed a lot of activity down. And then third point on that is we had a really cold snap right at the end of December that was impactful to overall activity across all of our assets. Everyone was dealing with that equally. We had a slightly longer break during the holidays. As a result, some of our drilling rigs continue through some sat down for a brief period, will that to mitigate some of the cost exposures of that extreme cold. And as a result, we have a significant amount of additional production coming on here in the weeks ahead of us.

Great. We've got a few questions, Jay, on the Clearwater specifically, if there's any different noticeable difference geologically between the Seal Clearwater test and the Dawson and also kind of an explanation why there's no [indiscernible] as of yet.

So on the geological perspective, I'm not going to reveal too much on that, obviously, because we view that to be a bit of a competitive advantage. I will say that Dawson and Seal or similar sands of similar geological providence, but different sense and that they're depositionally stratigraphically not equivalent, one is higher, one is lower than the stratigraphic column. And each of them presents unique characteristics that we have to address, not just on the geological perspective but also well placement, fluid type and stuff. And so there's a bit of a secret sauce that goes into across the board that everyone in the area is building their own view on it, and we think we're modestly ahead of the curve in terms of our expectations on how to delineate that going forward.

Great. Thank you.

In regards to rates, I mean, we'll have more to say when we release Q4 in 3 weeks' time, approximately 3 weeks' time.

Thank you. And we've got a couple of questions regarding our hedging. Specifically, would we be open to hedging at $90 WTI, would we do that? Because at $90 nearly doubled compared to $80. This is from Ryan.

Yes. I think $90 is very much a constructive price or a very constructive price and hedging is a lot more attractive at that price. And I think appropriately identifies our free cash flow kind of nearly doubles at that price. So we're not oblivious to that.

Great. A question from [ Amit ] again. What is your best estimate of maintenance capital, excluding ARO?

Do you want to take that, Steve?

Yes, I mean, I think, go ahead Rick.

That right. Yes, I'll take that. I mean Go ahead, Rick. Well, yes, simplistically, year-over-year, sustaining capital for us would be in that $200 million range. So that's assuming we're kind of in that 33,000 barrel a day range. So...

Okay. And what WTI price would lead you to revisit increasing CapEx, assuming no change in stock price?

Yes, I would say it's probably north of $85, $85 or better, sustained $85 or better. Great.

Thank you. One question regards what will be the free cash flow allocated to buybacks? Do we do -- does the company feel pressure in the industry for greater return of capital?

I mean, we're not going to comment as regards to kind of the percentage of free cash flow that we'll allocate to buybacks because we just don't know where our shares are going to trade when we're in the market. So as it relates to do we feel pressure, I mean, no, we don't feel pressure. I mean we feel self-inflicted pressure to kind of create the most value for shareholders. But above and beyond that, we've got a great business. We've got an enviable position in Peace River. I mean, we've got kind of a really strong base business in the way of the Cardium. We have optionality in the Viking. On a relative basis, I don't feel pressure at all.

Great. Thank you. A question comes in. Given the drop in crude over the last few months, do you expect service cost inflation to stop in the second half of 2023.

I mean -- go ahead.

Yes. So maybe I can comment, so obviously, during 2022, we really seen very significant cost pressure, not just across services, but on consumables as well. I think our view at this point in time is we really expect that to moderate as we look into 2023. As we talked about at the start of the call, all the services and consumables we need for this first part of the year were already tied up and secured. And in terms of as we think about our 2022 program in the second half, we'll get modest inflation built into our assumptions. But certainly, the overarching view is that we expect that to not replicate what we've seen in 2022, but some modest impact in the back half of the year.

Jay, do you want to add anything to that or...

Yes. I guess the only other incremental challenge is the 250 rigs currently running in our basin as of this morning that the scarcity of services and potential downtime associated with it is something that every company has to address and it's going to reward those through the best at the execution side, and it's something that we're managing very carefully through our program this year.

Yes. I'll just add. I mean, the short answer is, look, we clearly expect them to moderate. The longer answer is if we're right on gas, I won't be surprised if you see service costs marginally come down.

Thank you. Regarding returns, comment that returns look excellent. Why would you pay back capital?

Well, I think what we're telling you is that the Board finds kind of the -- that they can buy back their shares on a risk-free basis to be more attractive than further growing production.

Great. Thank you.

It's that simple. It's math.

Another question -- follow-up question from Adam on Bluesky -- well cost versus Clearwater well. Is there an explanation as to why Bluesky is more despite only minor depth differences?

Yes, primarily in terms of how we've forecasted that. So we put more legs and more horizontal length as well into our Bluesky wells. We also have a slightly more robust surface footprint on the facility side. All of that is still being somewhat streamlined. Clearwater wells right now are not necessarily forecast to be tied into our gas gathering system. Bluesky wells within the heart of our field are. So it's really just a sum total of some modest differences both on the well design side and the facility perspective.

Great. Thank you very much. Wait on. We have a question from Jack. Does Obsidian ever plan to be debt free? Or will it always carry some debt?

I'll answer that. No. I mean we'll always have some level of debt. I think it's prudent to do so given the underpinning of reserve values here.

Thank you. And here's a question to the logistics of the buyback program. How much time does the Toronto Stock Exchange usually take to give approval for your buyback?

Mark, do you want to go ahead?

Yes. Normally, the typical application is through a Form 12, and it's about a 7-day process to kind of get it through. And then we'll obviously -- once we have that, there's a formal press release that we have to release. So the market will be well aware of when all that approval is completed.

Thank you. And a general question here from [ Amit ]. Can you share your thoughts on well performance in the different areas? What was better versus worse where would you allocate your capital?

Yes, I can start with that. So what I would say specifically to the sort of second half program in the world are coming on right now, as Jay mentioned, we've kind of been active across all of our areas. I think the Cardium area has been very strong for us in the second part of the year, we're a little bit of a purple patch regardless of some really strong results that we're very pleased with. And that's obviously front and center to us in terms of where that fits in our portfolio. So it's very pleased to see that. I think Peace River, we talked about that some challenges there with regards to weather and delays [ time to present ]. And again, we leaned into that Seal area. But I think by and large, what you'll see is these volumes present themselves over the coming weeks here that we've hit the ball right down the middle of the fairway with regards to Peace River. Clearwater, I think we've talked about that already. We're going to have more to say with regards to our upcoming Q4 release. And then Vikings, the last area that, again, really had one exceptional well last year in the western portion of the field. It's really opened up a significant inventory for us. And we've got a very active program drilling as we speak, [ Brenda ], that really builds on that success. So I'd say, by and large, pleased overall with the results we're sharing and looking forward to saying more about that in the next operational update. It's great.

Thanks, Gary. Follow-up from Mike on the Bluesky and Clearwater horizons. Are you working on drilling both Bluesky and Clearwater horizons from the same pad, would it provide some cost and time savings?

Yes. We're certainly looking into it. That's the endgame we'd love to get to knowing that we can't control geological deposition. So we have to work within the bounds of the hand that's dealt to us. But to a large extent, don't underplay the fact that our extensive road and gas gathering infrastructure already weighs into the economics of the wells that we're drilling currently.

Thank you very much. We've got a follow-up on the buyback from a couple of people, Jack is one of them. Can we get some more color on the buyback when it is approved, et cetera? When will we get it paid, how much capital is being allocated to it. Steve, do you want to start that one off?

Yes. Mark has already alluded to the fact that we're obligated to issue a press release once we have TSX approval. And I'll just reiterate that we're currently in discussions with both our syndicate as well as other lenders in regards to incremental debt capacity that would allow us to implement the buyback as exponentially as possible. I mean above and beyond that, there's not much more we can say right now other than simply the Board has authorized this because we are trading at a material discount to our reserve value, our NAV value -- our own estimate of NAV value. And once we get into the market, we'll have more to say.

Thank you I've got one more question at the moment from [ Amit ]. As to what strategies are you thinking about for increasing liquidity? Is this getting another senior lender? Or is there something else?

Well, it will all be senior. I mean I think it's fair to say that it's easiest if you can simply expand your revolver. I certainly think that's a plausible outcome. And there's other options that on a secured basis that are available to us. I mean clearly, we have unsecured options available to us as well. We simply don't need to go that route.

Great. Thank you, Steve. At this time, we still got 7 minutes left in the call. There are no other questions showing up. I don't know if you want to give people a chance to add any last questions on the webcast or...

Yes. Let's just pause for 30 seconds. And if there's any final questions, we'll be happy to address them. If not, we'll conclude the call.

Steve, I'd say that nothing else is coming up at this time -- sorry, we do have a couple of comments and one question. One comment; thanks, Steve and team, for addressing all these questions. Thank you, Ryan. And Jeff wants to know, will we get more color on the NCIB after the approval.

The answer is yes.

Yes.

So if there's no other questions...

I've got 2 more now. They're all coming in all quick now. [ Nicholas ] has a follow-up. Last June, you estimated your 2022 production was 37,000 to 38,000. Now it's been lowered. CapEx is the same. Why the lowered production estimate?

Yes. I mean -- I'm happy to initially address that, and Gary and Jay can add their thoughts. I mean, number one, we reduced our 2022 production guidance during Q3 of last year. That clearly had implications in regards to 2023 as well. I mean if we wanted to hit 37,000 to 38,000, we could. It would just take more capital. But with all that having been said, our -- when we basically disclosed or where we outlined our preliminary forecast in June of last year for 2023, it was just that. It was just a forecast, and it was at a time when commodity prices were higher, differentials were tighter, service costs were lower. And it's just not prudent at this juncture to follow through on that preliminary forecast in the way of a formal 2023 budget. Additionally, we have our shares trading kind of significantly cheaper than they were in June of 2023. We've obviously demonstrated the ability to materially grow our reserves as well as reenter other areas such as the Viking, where we had not drilled for a number of years. And so then the result of all that is a budget that yields lower production. But I think when it's all said and done, contingent on how aggressive we potentially are on the buyback, your per share metrics probably aren't going to look that different. And in the meantime, we will save some of our inventory for a higher price environment and at the same time also send the service codes a message that there's a limit to how much inflation we're willing to bear. And so I want to make sure that, that message does not get lost in translation. Hopefully, some of my peers will join me because at the end of the day, we're indifferent. We'll cut our capital even further, and we'll go buy production cheaper if that makes sense to do. So I think we're at the upper bound as to what we're willing to accept in the way of service cost inflation and kind of that's how we've landed on the budget that we ultimately landed on. The other point I want to make is the Board and management felt it was important that there was a component of exploratory/appraisal capital in the budget to better delineate our Peace River position. I think we've sized that at a level where we can make some kind of meaningful progress, but at the same time not allocate a disproportionate amount of the budget in that direction. If the results that we see are encouraging, then as I outlined earlier in the call, that would potentially be an area where if price -- commodity prices are conducive, we would allocate some more capital to in the second half of the year. I mean we have 500 sections in Peace River. We have a very, very, very strong position. We're only producing, just to contextualize, the 65 -- or 600 to 700 BOEs that we currently produce out of Peace River out of maybe 35 sections. Now all 500 sections are not going to be prospective for Bluesky and/or Clearwater, but I can guarantee when it's all said and done, we'll be producing a lot more than from 35 sections. So it's important that we embark on delineating -- better delineating that position. So that's kind of why and how we've landed where we've landed versus what we had forecasted on a preliminary basis 7 months ago.

Thank you, Steve. I think at this point, we are running out of time for the conference call. So feel free to close it up, and then we will try and answer any other questions that come on, on the Investor Relations e-mail individually.

Thanks to all for their time.

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