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

Thank you for standing by. This is the conference operator. Welcome to Obsidian Energy's 3-year growth plan conference call. [Operator Instructions] I would now like to turn the conference over to Stephen Loukas, President and CEO. Please go ahead.

Good morning. Thank you for joining today's call where I'm joined by our senior executive team. Before we start, I'd like to point out -- first 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, so we remind you it is subject to the risks and uncertainties affecting every business, including ours. Please refer to the disclosure at the end of the presentation, along with our public disclosure filings available on both SEDAR+ and EDGAR systems for a full discussion of significant factors and risks that could affect Obsidian Energy or that could affect future outcomes for the company. Next page, please. In the way of a corporate overview, our current production is approximately 32,000 BOEs a day to day, which results in year-over-year production growth of approximately 4%. If you recall, we were impacted by -- to the tune of approximately 525 BOEs by this summer's wildfires, which would result in a pro forma average of something closer to 32,500 BOEs and approximately 6% year-over-year production growth. Our current production mix is approximately 66% oil and liquids. Our 2P reserves approximately 181 million BOEs resulting in an RLI index of approximately 13 years. Our current PDP decline rate is approximately 24%, and we have a significant tax pool position at June 30, 2023, of approximately $2.4 billion. We currently have approximately 80 million shares outstanding at the end of August, and we've been active with our buyback during the month of September. Our current market capitalization is a bit over $800 million, and our year-end -- our June 30, that balances approximately $325 million on a net debt basis. That results in a Q2 annualized net debt to FFO of approximately 0.9x of return and a current enterprise value of approximately $1.1 billion. We operate in 3 key plays, the Cardium, the Viking, and the Peace River, which we will talk extensively about today. Next slide, please. In the way of a strategic overview, I'll highlight some of the initiatives and considerations that the company has been focused on over the last couple of years. During the 2020 through 2022 time period, we were very much focused on reshaping the company as well as the business. That meant we were successful in refinancing our reserve base loan and completing a successful high-yield debenture offering in July of 2022. We successfully negotiated other legacy liabilities, including our office lease. In November 2021, we purchased residual 45% working interest in our Peace River Oil Partnership and we resumed drilling within the Pembina portion of the Cardium, the Bluesky portion of Peace River, and we successfully extended the Viking fairway to the West. Over the course of the last year or so, the Board and Management have really kind of thought through a number of strategic considerations. Firstly, we need to build additional scale given equity investors preference for companies with over 50,000 BOEs a day of liquids -- that are liquids weighted. Our equity valuation has been material and is still materially discounted making accelerated growth and building scale of the acquisitions significantly challenging. We simply won't issue equity at these valuations. Our current cash flow trajectory doesn't meaningfully utilize our large tax-pool position. And our extensive inventory position within Peace River is not reflected in our year-end 2022 reserve report as we only have 24 total proved plus probable locations booked in that report. As a result, the conclusion is the growth strategy anchored on Peace River is the key to unlocking value. Why is that? It generates a drive superior growth across all per share metrics. It builds our Peace River play to scale at approximately 24,000 BOEs by 2026, all internally funded within corporate free cash flow. It pulls forward the utilization of our significant tax pool position and it results in a differentiated value proposition with equity investors versus the dividend buyback and low growth models that most small and mid-cap Canadian energy peers have chosen to pursue. Next slide, please. On this slide, we'll outline our Peace River journey over the last couple of years, which has culminated in the announcement that we're ultimately making today. In November 2021, as I outlined, we purchased a residual, 45% interest in our Peace River oil partnership for $36 million, which added $187 million net sections and 2,400 BOEs of Bluesky production. At that juncture, we resumed drilling in the Bluesky. In December of that year, we participated in drilling of a well in Dawson to begin the initial appraisal of the Clearwater. Over the course of 2021 and '22, we rebuilt our Peace River development team by augmenting the existing Bluesky Group and creating a new Clearwater team via the significant -- via the hiring of a number of technical experts. In Q1 of 2022, we drilled our first 100% owned exploration and appraisal well targeting the Clearwater. Later that year, in September, we purchased the Seal 9-15 gas plant which contributes to our infrastructure position. We currently control approximately 70% of the gas processing in the area. In October, we spent our first well targeting the Clearwater play to provide key information that really drove our extensive 2023 exploration and appraisal program. Additionally, over the course of 2022, we acquired a total of 40 sections for approximately $18.5 million, which are prospective for both Bluesky and Clearwater, bringing our total holdings to approximately 500 sections today. In Q1 of 2023, you made an announcement that we had established a new development area within the Bluesky at Walrus, and we'll talk significantly more about that today. In the Q2 of this year, we assessed additional formations to the analysis of 4 oil sands exploration wells that we had drilled earlier in the year, and that is also driving some of the technical decisions that we've made today. Lastly, we're obviously rolling out the plan today. Next slide, please. I'll touch a bit more as to why Peace River growth is important. Firstly, provide substantial upside. Our Peace River asset is significantly underexploited. We only produce from 34 sections of approximately 500 that we own today. And the recent technical work that our team has done has led to the -- as well as the drilling success has led to the creation of this 3-year plan, where we're focused on the Bluesky, but we see significant upside in the Clearwater as well. The plan is anchored on the proven Bluesky production as well as the recent success that we've seen within the Walrus field. We also have significant potential and upside within the Clearwater as it is a top play within North America, and the Peace River region is still in the early stages of the exploration and development of that play. Our 3-year plan has us growing the Clearwater to only 4,000 barrels and as a result, we believe additional incremental upside exists. We have a solid light oil foundation that will fund this all as our light oil production is forecasted to remain flat to preserve value while we redeploy the excess free cash flow to fund the growth in Peace River. We -- furthermore, we maintain optionality to further grow our light oil business if prices are conducive to doing so. This all result in a redefined Obsidian Energy. The growth plan redefined the company offering investors a high-growth oil-weighted option that is self-funding will and generate free cash flow at levels as low as $70 WTI. Lastly, we believe that this plan will unlock value for our shareholders as our internal Peace River of evaluation significantly surpasses the current perceived embedded value for this asset in our share price. And we believe our growth plan is keep unlocking this valuation. Next slide, please. I'll walk you through our 3-year growth plan financials and what we believe this plan will ultimately deliver from a quantitative perspective. Firstly, from a qualitative perspective, we plan on growing our production to approximately 50,000 BOEs a day. As I've outlined, it's self-funded within cash flow. Unlike a lot of other growth-oriented models, the end result is still a stable decline rate of approximately 25%, given that the Bluesky wells are not fracked and have lower decline rates than fracked wells. It improves our liquids weighting from approximately 67% today to 76% in 2026. We expect strong returns on our development capital and our net debt to FFO continues to strengthen with -- in every sequential year of the plan. In the way moreover, it increases our convexity of WTI, which you can see on the table below. Every $5 move in WTI results in $43 million of incremental cash flow in 2024, $58 million in 2025 and $72 million in 2026. Lastly, we are abandoning our $225 million absolute debt target, which was indexed to 1x debt to FFO at $50 WTI. Given the higher forecast of production, that target, that level grows considerably during the plan. In 2024, we are currently forecasting approximately 36,000 BOEs with an exit rate of approximately 38,000. We believe we will achieve that with development capital of approximately $380 million, an additional $24 million in decommission expenditures resulting in $440 million of FFO or approximately $5.50 a share as per share count on August 31. We are forecasting $36 million of free cash flow, net debt of approximately $270 million and net debt to FFO of approximately $0.06 of a turn. In 2025, we further grow considerably to approximately 42,000 BOEs of production on $445 million of development capital resulting in $515 million of FFO, $6.44 of FFO per share and $47 million of free cash flow generation, once again at $75 WTI, $3 light oil differential, $3 AECO and a $15 WCS differential. In 2026, we grow to 50,000 BOEs and $420 million of capital resulting in $655 million of FFO, $8.19 per share and $213 million of free cash flow. We estimate that we would generate approximately $300 million to $325 million and free cash flow on a go-forward basis, we will simply hold production flat once we achieve approximately 50,000 BOEs a day of production. With that, I'll turn it over to Gary Sykes to walk you through the next number of slides.

Good morning, good afternoon, and indeed team [indiscernible] thanks for joining the call today. So the next 8 slides, so I'd like to talk you through some of the details of the Peace River growth plan resulting in sharing some of the asset level performance from a production and financial perspective and then talk very briefly about the light oil side of our business before passing it over to Peter, who will roll up at the corporate level. So I'll start with the subsurface description at Peace River. So as of today, Obsidian Energy owns the rights to some 500 sections of Bluesky and Clearwater in the Peace River area. This is a cretaceous age formation notionally between from 450 to 660 meters old surface. And we produce oil to surface by the application of drilling multi-leg horizontal wells. You can see in the Bluesky, typically, the architecture we use is around 11 legs per well. So just to be clear, 1 motherboard would have 11 legs, which are typically 1 mile in length. So any one particular well we can access up to 11 miles of reservoir. In the Bluesky, we typically deploy a well spacing and [indiscernible] of around 37.5 meters. And to date, we drilled over 150 of these type of wells. The Clearwater slightly shallower. You can see in the formation description quite a bit more complex. And in those particular applications, we typically see 4 wells per section, we'll drill up to 8 legs per well. Again, typical to the -- similar to the Bluesky, we'll typically deploy a 1-mile lateral length. And in this particular case, we're going to port slightly wider well spacing given the slightly improved oil viscosity and oil quality that we see in the Clearwater to date. Next slide, please. So on this particular slide, I just want to give a sense of some of the inventory that we have and the type curves that are embedded in the plan. So I would begin by telling you, look, what you're about to see is really the manifestation of a significant amount of technical work that's been carried out over the last 18 months. Effectively since acquiring in the asset, as you heard, the remaining 45% late 2021. We've rebuilt our Peace River our development team and effectively created a new Clearwater team about a very structured technical assessment of the potential and capability of the asset. That involved drilling a number of OSE or oil sand exploration wells purely to gather data to improve our understanding. We also reentered a number of existing old wells in order to gather fluid quality and sampling to help us with their understanding of some of the [ grossly ] mapping in the area. And then that manifested itself with a very substantive effort with regards to mapping not just the Bluesky holdings that we have, but also the Clearwater, a -- some of the results that we're going to talk about in a second. But what I would say is the early manifestation of some of those efforts and we realized earlier this year and the announcement we have had on the discovery of the Walrus field, which is a very significant component in terms of future development area at the Peace River asset. If you look to the bottom right-hand side of the slide, as we sit here today, we have 869 total un-risked inventory locations. 309 of those would be in the Bluesky where the vast majority of our production comes from today. We've also mapped out to this point at 560 Clearwater locations. What I would say is that in terms of the context of the 3-year plan that you're about to see is we use a total of 199 wells in the 3-year plan. The vast majority of which come from our Bluesky formation. In terms of giving you an idea of the relative type curves and the economics embedded in the plan. I'll draw your attention to the top left-hand side of -- the graph on the top left-hand side. You can see that typically, we have a range of cost of just over $2 million to $2.9 million between the Clearwater and the Bluesky and you can see the compelling values and rates of returns that are embedded into the plan as well. What I would say is just a way further explanation. And specific to the Bluesky, you'll see we talk about economics on a pre-CTF on a post CTF basis, that represents a central treatment facility. And what we see in Walrus, in particular, at this point in time, the opportunity to build a large, centralized battery. Now that particular solution to developing Walrus is only embedded in the plan from 2025. We're underway as we speak with FEED engineering on that facility. But at this point in time, we've modeled that in the plan from 2025. So wells that we drill post 2025, we'll take advantage of that central treatment facility and the commensurate uplift in the anticipated returns. Next slide, please. So here, I just want to drop down one more level and tell you a little bit more about the Bluesky inventory that we have. So again, you can see at the bottom of the slide to this point, we've mapped some 309 unrisked locations. And these effectively, there's a few locations outside of these 4 areas. But these 4 areas effectively represent the areas that we've been focused on and that from a Bluesky perspective, provide the necessary inventory to feed our growth plan. On the right-hand side, as I mentioned, Walrus is the most significant of these areas. We're presently drilling again at Walrus on the back of the success we had earlier in the year. And you can see that in the plan, although we have 163 locations mapped across our Walrus acreage, we used 68 in the 3-year plan. So more than half of the inventory required to feed up Bluesky production targets is met from the Walrus location. As I mentioned a few moments ago, one of the unique differences in the Walrus areas, we do see the opportunity given the very effect nature of the stacked pay there for us to deploy the central treatment facility and look to take advantage of some of the efficiencies that, that will create. Outside of that, the Nampa area is an area that's becoming increasingly important for us. You'll see that when we talk about some of our Clearwater inventory as well, but 12 locations are inside the plan. Cadotte another important area for us, we're having very good success. As we speak in the Bluesky in this particular part of the field, you can see that we've got some 24 locations in plan. And then Harmon Valley South last but not least, this has been a happy hunting ground for us to date. So where the bulk of our existing base production comes from. And some of those OSE wells that I mentioned a few moments ago, helped us really extend this particular part of the field to the north and the south, and you can see that there's a 59 locations. So in total, we've got 129 locations across these 4 areas that are represented in the growth plan. I'll show you the details of in a few moments. Next slide, please. Let pivot to talk a little bit about the Clearwater, 3 particular areas that we're very much focused on at this point in time. Dawson, this is the area that's close to the Pembina acreage you'll be familiar with. Again, we have drilled a number of wells in this area. And later next month, we'll be returning to Dawson again, with the 3-well plan as we continue the appraisal of that particular part of our acreage. Nampa, as I mentioned a few minutes ago, is becoming increasingly attractive to us to the extent that we will drill some of the targets we have are [indiscernible], so we're going to lean in and drill a well there this winter. And in Seal Main, there's a number of our competitors. We've been keeping close eye on. We've mapped our potential in consuming area as well. So in total, we have 70 wells out of the 560 represented in the growth plan from our Clearwater Holdings. Next slide, please. So I want to just pivot if I can, just for a moment. Just to add an additional part or additional layer to the story, if you like, a Peace River by talking a little bit about the marketing and the infrastructure. So on the marketing side of things, there's a very good pipeline egress from Peace River. And on top of that, there's multiple indices in which we sell our products, those being typically WCS, PSO, we can actually get volumes on the suite system at Peace River and indeed, we've deployed accessing egress through rail in the past as well. So lots of good options lots of regress, and that really manifests itself. The competition we took in various different indices such that we have a dedicated marketing team that looks to optimize the netback from the asset on a monthly basis. Further to that, we did execute a long-term agreement for a significant portion of our volume that fits with the current marketing strategy that we have. So we feel very good about that. In addition, as you heard earlier from Steve, we've been -- I would suggest we've been quietly picking up what we see as important infrastructure and both in terms of gas plants. So we picked up the 9-15 plant about this time last year and that gives us a very significant ownership in the total gas processing capacity in the area. In addition to that, we've been picking up a significant amount of the road network. And not only is that important for our own operations but it's -- it provides a healthy income stream from third-party users in the area. So feeling very good as well as all the work that we've done on the subsurface side of things, both from an offtake and an infrastructure perspective, trying to marry those 2 things together. Next slide, please. So let me talk to you about if we take those 129 wells in the Bluesky and the 70 wells in the Clearwater, how that rolls up through the period of the 3-year plan at the Peace River level. So the first thing to point out, it won't be last on you, of course, is we're going to see a very substantive growth in production from around 6,600 barrels a day to day to over 24,000 barrels a day on average in 2026. We actually exit the year quite a bit higher than that. But as an average for 2026, we'll see 24,000 barrels a day. You can see the relative breakdown in the chart to the right between the Bluesky and the Clearwater. And again, this is a recognition of the very strong results that we have under our belt on all of our Bluesky production to date. And the second key point, obviously, to point out is that as we work our way through the plan, we'll continue to increase free cash flow and value through the 3-year period of the plan such that our light oil business will fund our growth aspirations in Peace River in 2024 and 2025. And as I'll talk about in a moment, you'll see the asset becomes self-funding from 2026 onwards. And then I would say the last but certainly not the least to the point is we're not -- it's not lost on us that there's significant value to be had beyond 2026. Try and quantify that, as I mentioned to you, we use these 199 wells in the period of the plan. But as you've also seen in the earlier slide, we have some 869 mapped to this point already. So we're left with a very significant remaining inventory even beyond 3-year plan. To give you an idea of that, at this point in time, we would estimate that as we enter 2027, we'll still have access to around 80% of our existing land base to further continue to build future production and inventory. And to really sort of emphasize this point. The other thing I would point out, it can be [indiscernible], but we've actually built into the plan fairly significant capital in the region of $40 million. But as we go in, we develop the production profile that you see to the top right, there's also a parallel effort to continue to drill oil sand exploration wells in conjunction with further appraisal wells outside of the area that you see in the production to the top right in front of, as I say, continue to build and apprise obviously, we're a tremendously extensive land base. In terms of some of the details on the bottom right, you can see the production grows very significantly from 8,000 barrels in 2024. And as we lean in and significantly increased the number of rigs that we deploy in the area such that by 2026, just in the Bluesky alone, we're at 20,000 barrels. Clearwater, we've modeled as being by 2026, some 4,000 barrels a day. Such we see this average of 24,000 barrels a day, as I mentioned in 2026. Just jumping to the asset level free cash flow. You can see that we require to fund Peace River as we grow production through the 2024 and 2025 period. But by the time we get to 2026, obviously, as I mentioned, the asset is generating significant free cash flow and becomes self-funding. Next slide, please. So just in terms of our light oil business, I've just got a couple of slides I just want to leave you with the sense of the quality of our light oil business that we're going to use, as I mentioned, in 2024 and 2025 to fund our growth River -- our Peace River aspirations. The Cardium, this is, by far, the largest part of our existing portfolio today, some 90% of our light oil business. The Cardium field, I'm sure many of you are familiar with, needs no introduction, one of the continents, great light oil fields and some 15 billion barrels in place, of which probably around 4 billion barrels has been produced to date. First well goes back to the '50s. By really applying these advanced subsurface characterization and modeling techniques in conjunction with some of the tremendous strides that have been made in drilling technology, we are able to continue to unlock additional asset potential. The old adage is, big fields keep on getting bigger, certainly applies in Cardium, and we've been successful in identifying a very significant reserve book inventory between the 2 parts for Cardium acreage, namely the Willesden Green and Pembina parts of the Cardium. And last but not least, I would say what is relatively unique to Obsidian is not only we're the largest holder in the Cardium acreage but we also own and operate the vast majority of what we produce to such that gives us not just a very healthy income stream from the processing perspective. It also gives us tremendous control over the destiny of which we -- in terms of how we produce our production. If I move to the Viking asset, smaller component but an important one, we're just producing over 2000 barrels a day there. And Viking has been a really interesting asset for us from the perspective of we haven't drilled there for a long time. We drilled a well on the western part of the field recently last year, which really opened up a significant amount of new inventory. That the some of the wells that we filled up with, if you're a Viking [indiscernible], you've seen in the in the June top 10 well list have been tremendously successful. So this asset [ for its ] way to the table in terms of competing for our capital, and we're happy to do that given some of the success and the returns that we've had there. So 2 new very high-quality assets that we have a very strong reserve book and basically, we plan to hold flat and we throw significant cash in terms of, as I say, that 24 and 25 requirement to fund for our growth plan. If I move to the next slide and just share with you the details of that light oil strategy. As I say, you can see is that, look, just given some of the optionality and the depth of inventory that we have across both our Cardium and Viking position. We're going to accelerate some activities and into Q4, you're going to see that manifest itself in both production and funds flow as we move into 2024. And then we, as I say, we'll redeploy excess free cash flow through the period of the plan, especially in that '24 and '25 period to fund our Peace River asset. So you can see -- if I look to the table at the bottom left, you can see our production has effectively held flat through the period of the plan, light oil business as we protect the asset value but generally, as I say, significant funds to fund our Peace River growth plan. You can see the asset level free cash flow here in that $190 million to $165 million of free cash flow being generated at this asset level. Graph to the right just gives you an indication, as I say, taking that long-term asset value by holding production flat effectively through the period of plan. Who those 2 particular asset businesses come together at a corporate level. I will now pass over to Peter to explain.

Great. Thanks, Gary. Good morning, everybody. My name is Peter Scott, CFO for the company. So just on Slide 16 here to recap where we are on a corporate model basis for the 3 years. Again, this is a recap of what Steve talked about earlier. So when we look at production, we're growing up to 50,000 BOEs a day, that's representing 60% -- 16% annualized growth on an overall BOE basis and again, 25% annualized growth for liquids, oil basis. Obviously, our capital increases from levels over the last several years but it tops out here at about $445 million in 2025. Our ARO spending or decommissioning expenditures modestly declined from $24 million to $22 million. That's because as we're spending those funds, our inactive ARO starts to go down and we need less funds to maintain that. The plan is based on USD 75 a barrel WTI, as we pointed out, and our FFO grows considerably, as you can see over the plan, up over 50% reaching $655 million in 2026 or representing $8.19 basic share. That compares to our shares trading just over a little -- little over $10 to date. Obviously, that funds flow covers the expenditures, our free cash flow grows each year but it really takes off in 2026 as the Peace River asset starts to reach significant size and rival of that of our light oil business, which you can see on the chart on the right. So free cash flow in 2026 is up to the $213 million here in our plan. And finally, on the net debt side, we are showing a repayment of net debt in this plan. It's just a function of how we're choosing to show it. So we obviously have alternative uses for that, including return of capital to shareholders. We just simply modeled as a reduction of debt but don't take it as a sign that is positive of what we would do with the free cash flow. Next slide, please. So finally for me, we did update our guidance for 2023. Three key points here. As Steve mentioned, we have increased the low end of our guidance range, up to 31,750. So now the midpoint of our guidance is now slightly above 32,000 BOEs a day. We have increased capital by $40 million. But given higher prices, that is offset by higher funds flow from operations, which is now at $395 million that is based on $85 a barrel WTI for the balance of the year, and we have been layering in hedges to protect cash flow at that level or higher. So you can see the bullet points on the slide. And finally, where that capital is being spent. We're going to do an 8-well Viking program starting in October. That production should be on by the end of the year and the 4-well Pembina program with that production coming on in Q1 2024. So this spending won't really increase production in 2023 but 2024 will certainly benefit with higher production and higher resulting cash flow. So we think a positive move here in terms of where prices are going and the chance to accelerate some capital. And with that, I'll pass it over to Steve.

Thank you, Peter. So in summary, why investment in Obsidian Energy. We believe our strategy, which is focused on growing our Peace River production, which result in significant growth on a per share metric basis with additional optionality to return capital to shareholders and/or further reduce debt levels will drive significant upside for shareholders. Our low decline oil weighted asset base has significant underlying reserves. We have approximately 500 sections in the Peace River area and our Bluesky production anchors our growth plan. We've got a dominant low-decline light oil Cardium land position with a significant amount of inventory of high-return wells, resulting in strong free cash flow generation for the asset. Additionally, we have incremental exposure to short-cycle light oil weighted production through the Viking play and as Peter outlined, we will be drilling 8 wells in Q4 of this year. We traded a significant discount to both reserve values and cash flow multiples when compared to our peers. We've commenced a share buyback program through an NCIB, and we've purchased approximately 2.5 million shares through the end of August. We've been active -- further active on the plan in September, we anticipate that we will continue to do so. We have significant tax pools, which allows Obsidian Energy to be a noncash taxpayer for approximately 10 years, assuming $75 a barrel WTI. And we're dedicated to making a positive difference in the environment, our stakeholders and the communities with which -- within we live and work. And with that, that concludes our prepared presentation. We will pause in the -- for the Q&A.

[Operator Instructions] We have a couple already. And the first one is, you have addressed this but there's a lot of questions from investors regarding the NCIB and what it would be in terms of should prices go higher? Would you be returning more capital to more netback? Will the NCI be continuing, et cetera? And I think, Peter, you answered that fairly well in terms of the debt to return of capital but I'm opening it up just to provide more info.

Yes. I mean as we've outlined, we've been active in September. We'll continue to be active as it relates to what we would do. I mean, I think it's a function, as we've always done. It's a function of where our shares trade relative to our perception of intrinsic value, right? I mean right here right now, our shares trade at a material discount, and the preference would continue to be on stock buyback versus a dividend. If that valuation were to change and kind of our shares were to trade more in line with what we perceive fair value to be. We may be so inclined to introduce a dividend. But assuming $75 or greater WTI, which for the next couple of quarters, we feel very good about, you should anticipate that we'll continue to be active on that front.

Great. Thank you very much, Steve. There was a question as to how you made the decision to move towards growth from -- at this point versus putting that additional cash flow into buybacks?

Yes. I mean I think the way to think about it is buybacks at these levels are accretive but they don't necessarily improve kind of your franchise value. We have an asset in the way of Peace River that is significantly underexploited as evidenced by what we've shown what we can do over the next 3 years. And I would outline that. I think ultimately, this plan will be proven to be conservative, right? I mean we have a lot of additional upside in the way the Clearwater as well as other development areas. Within the Bluesky, we continue to delineate our land position. So against that backdrop, I'd say it's what's best for the asset. It just happens to have an ancillary benefit, which is that it also differentiates our value proposition with investors simply isn't other small to mid-cap company in the space, absent the Montney that is -- that can deliver the growth that we had while keeping our production -- or I should say, a decline really flat.

Thank you. And now I've got a question about the OFC wells. Obsidian drilled 4 OFC wells in 4 different spots in the first half. Could you please share with us in IP 30, 90 new expectations for IP 365 in the spot? And what was the API density in Bluesky and Clearwater horizons of those wells?

Yes, I would simply say that's proprietary, and we're not going to answer kind of part of that question. And those were exploratory wells. So in some instances or you don't have IP 30s, 90s et cetera. But we've got type curves and for what we believe that those subareas will deliver, but we're not going to share what beyond -- what has already been shared in the presentation.

Great. Thank you. One over for Peter. What is the hedging strategy for the company now? And what else is the plan to do to shield itself from the volatility of crude over the next 3 years as things can change.

Yes. Thanks, Susan. Of course, things can always change. Obviously, you've heard this before being constructive on crude prices. We've seen that and manifest itself recently, and we've leaned heavily into hedging over the short term, the market is still quite backward dated. So we're leary to go out too far. We have started to utilize collars a little more, which might add a little length to the term of our of our hedging. Ultimately, our balance sheet is strong, will remain strong, and we always have the ability to alter our programs either up or down in reaction to commodity prices as well. So that is another effective way for us to protect the balance sheet, which is what we want to do and not have to lock in potentially lower prices. So we will remain active on hedging. It's a tool for us but we will do it as we see it constructive in the market.

Great. Thank you, Peter. A question about the Bluesky wells in terms of, is this a more statistical play? Or will it become more homogeneous over the time as you gain experience?

Yes. So I'm happy to take. So generally speaking, we see the Bluesky is being relatively homogeneous. I mean, there will always be a difference. We can see a difference between wells that are right next to each other on the same pad. But by and large, we -- it's certainly in the areas where we've mapped and we were producing from good experience. And look, one of the interesting things for us as we think about sort of beyond the plan some of the [indiscernible] wells that will grill some of the technology we'll look at and through the period of the plan will help unlock some of those same answers for acreage that we'll get to beyond the 3-year plan. But in terms of everything that's in the plan right here right now, I think although there will be individual results that vary, I would think of it as more of a sort of homogeneous outcome.

Great. Thanks, Gary. And a follow-up of $40 million seems like a lot for 8 Viking and 4 Pembina wells. How much is the average cost per well of these 4 Pembina wells? And what's the average cost per well of Viking wells?

Yes. Just to be clear, it's not $40 million simply for 8 Viking wells and 4 Pembina wells we've just outlined. With the lion's share of that $40 million spend will be but the average cost is approximately $2.2 million for the Viking well and $4.5 million or so for Pembina oil.

Great. Thanks, Steve. Follow-up a couple here. Based on strip prices today, when do you see payout on Bluesky wells and 2x payout? And the guidance provided, what Bluesky type well curve did you use to build this?

So I'll take the second question first. I mean we've outlined what kind of the waters type curve is within the presentation and kind of the waters wells represent a very good portion of the Bluesky development plan. So -- and in regards to the strip, you see kind of 1x pay out approximately 1 year and potentially -- and it would be lower after we have the central treatment facility. And we'd have to get back to you with the 2x number.

Great. Thanks very much, Steve. We've got a question regarding management around bonuses with the performance of the company? Wouldn't that help increase institutional ownership in the stock.

Yes. I mean what I would say is, candidly, I'm somewhat offended by the question, right, I mean, at the end of the day, you won't see a management team who is more aligned in the way of bonuses with the performance of the company than this management team. What the confusion as pertains to our stock-based compensation is a function of the fact that we have an ability to settle it in equity because of the fact we can settle it -- I should say, both in cash or equity. Because of that, you see volatility, I should say, in the SBC line, depending on whether the equity has traded up or down during the quarter. That's in contrast to most companies who simply issue the equity and by extension, increase the amount of shares outstanding. So if you look at what this Board did, they opted to settle the shares at vested this year in cash because they believe that the shares are fundamentally undervalued. And as a result, they don't want to see shareholders further diluted. By giving employees cash, effectively put the decision back in the hands of the employees as to whether they wanted to utilize that cash to purchase shares in the open market on their own accord. And so what I would say is if you were to look at on a year-to-date basis, the amount of equity that we've bought on the net basis and compare that to most of our peers, I would argue we're top quartile notwithstanding that our NCIB didn't start until the middle of the year. So you won't find a management team that's more aligned. I want a considerable amount of equity, I haven't sold a share. I think certain shareholders need to do a better job of understanding how SBC accounting works.

Thank you, Steve. Turning back to the operations. Can you talk about your total ARO obligation and the long-term plan regarding ARO, comments on how we should think about ARO from an investor perspective.

Yes. I mean, look, we've outlined that -- our ARO as of June 30 is kind of outlined in our presentation. It's composed of an active and inactive component. It's formulaic as it relates to the percentage of inactive ARO that a company needs to spend in a given year. That's fully embedded within our capital plans and by extension, our projected free cash flow. I would think of it as a long-term liability that at the end of the day has no interest rates. So we'll continue to work that down on an annual basis. It's a couple of percent of our aggregate FFO. It's just another expense line item. And it's inconsequential at the end of the day.

Thank you. One person asks if we could give a little bit more information as to what -- why we believe the Walrus area is so good that we're going to be focusing on it.

Yes. So I'm happy to take that. So as I mentioned in the presentation, Walrus was really the sort of first manifestation of a lot of the [indiscernible] stuff got the team. It was an area that we sort of swung our headlights around on -- early on in that process and subsequently drilled. I would say I don't think Walrus really drove the decision. Certainly, it helped us accelerate to lean into this type of production growth in this time frame. But there's other Walruses out there that we're currently looking for and exploring for. But certainly, the quality of the well results that we had here and the extensiveness of the mapping that we have as you've seen in the plan, we did [ sell ] a substantive portion of our Bluesky being supported by activity at Walrus. So I would say a couple of things. Manifestation of the mapping early -- Walrus is one of those early results. Some of the results that we had sort of underpin the big portion of our plan. But there's other components that we've been mapping and where we've got success but also required to support the plan to this sort of level of growth.

Great. Thanks, Gary. A question, what would -- at what point of buybacks do you feel it will negatively affect liquidity?

Yes. I mean, listen, we have -- I'm not so sure we look at it simply in the way of liquidity. I think we look at it more in the context of average value that trades on a daily basis. And so I don't think we're anywhere near that point at this juncture where it would negatively impact liquidity. I mean, at the end of the day, if it's in our best interest to continue to buy back shares because shares continue to be undervalued relative to intrinsic value, then we're going to do that. I mean liquidity at some juncture will be a consideration. But we're not anywhere near there yet.

Yes, maybe just add to that, as we look at the plan and we look at the liquidity levels in the plan, we don't see that being an impediment.

Thank you. I have one that was submitted to Investor Relations earlier. What would the run rate maintenance CapEx be at 50,000 barrels per day roughly.

Well, you can reverse engineer it. We've outlined $300 million to $325 million of free cash the whole production of 50,000. So assuming $655 million or so of FFO at those levels, I mean, you can kind of back into it, it's roughly $325 million.

Next question, how much of your Peace River land base has been subject to 3D seismic?

I can take that. So we've got full 3D coverage over our Harmon Valley site and Seal properties, which is for the bulk of our existing [ coverage ] from 2D. And then we've got a pretty extensive 2D seismic database over much of the rest of the property. No immediate plans at this point in time to expand that 3D. But yes, I would say we're pretty happy with what we have right -- here right now.

Okay. Great. Thank you. From an industry perspective, is the industry doing a good job sharing-learnings on the Clearwater and when might you consider yourself as a top quartile Clearwater operator?

Yes. Look, I would say from an industry perspective, it depends on the area where there's still available land. I mean it's obvious that companies would -- it would be closer to the west where land is largely spoken for. I think it's fair to say that by and large operators are willing to share learnings, and we've shared the results of some of our core wells with certain operators. As it relates to whether when we would consider ourselves a top quartile Clearwater operator, I would simply say, look, we're a top quartile heavy oil operator today, I don't really kind of worry about differentiating between Bluesky and Clearwater. We'll get to the Clearwater as we continue to delineate our position. And as I've outlined, I think that what we have built into this plan is conservative in the way of 4,000 barrels of production at a play in 2026 and I'd be very much surprised if it ultimately turns out to be -- if it doesn't turn out to be a lot higher than that.

Thank you. At this time, we are seeing no more questions. [Operator Instructions] I have one that's just come up. While you model the ability to nearly eliminate net debt, what is your 3-year goal for net debt versus using cash flow or buybacks?

Yes. I would simply say that using the same methodology that we had used to calculate -- provided a target of $225 million net debt. One time debt to FFO and our 2026 production results in approximately a target leverage ratio -- target net debt of $300 million. So I think you can think of it through that lens. And we'll continue to use our excess cash flow to do what we believe creates the most shareholder value at that time.

Great. Thank you. I'm going to ask a question on what the decline rate looks like for the Bluesky and Clearwater.

I'm happy to take that. So low 20s is the bottom line. So what we see through the period of the plan is the lower -- holding our light oil business flat. The decline rate [indiscernible] at 25%. And as we go beyond that and we continue to add increase the oil weighting, that should at least remain steady, if not improved.

Thanks, Gary. Steve, we've had a few questions regarding what management believes is the current intrinsic value of the share price and what will it grow to by the end of the 3-year plan?

Yes. Look, we're not going to provide kind of a hard number other and simple to say, we believe the intrinsic value is materially greater. And I don't believe there's any value for our Peace River position in our share price today. I mean as it relates to what you believe -- what it can grow to in 2026, I mean that's someone for you to decide. We've outlined the plan and everyone can come up with their own number. There's a couple of questions in regards to dividends and whether we would initiate a dividend. And I think we've been fairly upfront on this. I mean right here right now, we've been returning capital to shareholders. We'll continue to return capital to shareholders. The buyback is much more impactful. If that were to change and the buybacks were no longer deemed as attractive as they are today, then surely, we would think about a dividend, assuming that prices were conducive to initiate anyone. But I just want to make a point, crystal clear, like Obsidian's management team and Board is focused on creating a total return opportunity. And so -- and when I say total return, that's also taking taxes into consideration. So right here right now, we don't think dividend has improved the intrinsic value of the company. There's other things we could be dealing with the capital and growing our Peace River position as well as buying back shares is simply much more attractive today.

Great. Thank you, Steve. At this time, there are no additional questions on the webcast. So we can just close it off.

I'd like to thank everyone for their attendance. And if there's additional questions subsequent to this call, please reach out to Investor Relations. Thank you so much.

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