Executive Summary / Key Takeaways

• Obsidian Energy has strategically repositioned itself through the divestiture of its Pembina assets, streamlining its portfolio to focus on high-potential heavy oil in Peace River and stable light oil assets, significantly reducing debt and asset retirement obligations.
• The company is prioritizing per-share value creation through aggressive share buybacks, viewing this as a financially superior option to forced production growth in the current $60 WTI commodity price environment.
• Technological advancements, including the innovative "waffle well" drilling technique and the Clearwater waterflood pilot in Dawson, are critical to unlocking the substantial, undeveloped resource potential within the vast Peace River asset.
• Despite a challenging commodity price backdrop and some operational hurdles in exploration, Obsidian maintains a strong balance sheet, ample liquidity, and significant tax pools, providing a robust foundation for self-funded growth and shareholder returns.
• Obsidian Energy trades at a notable discount to its Proved Developed Producing (PDP) value and peers, suggesting a compelling investment opportunity for those recognizing the long-term value of its focused strategy and asset base.

A Strategic Evolution: Forging Value in Western Canada's Energy Landscape

Obsidian Energy Ltd. (OBE) has undergone a significant transformation, evolving from its roots as Penn West Petroleum to its current identity, focused on maximizing shareholder value through a disciplined approach to its asset base in the Western Canada Sedimentary Basin. The company's overarching strategy centers on driving per-share growth through a combination of production expansion, share repurchases, and debt reduction. This is achieved by leveraging the free cash flow generated from its light oil assets to fuel the growth of its heavy oil operations in the Peace River region.

The Canadian oil and gas industry, where Obsidian operates, is characterized by intense competition from larger, more diversified players such as Canadian Natural Resources (CNQ), Cenovus Energy (CVE), and Suncor Energy (SU), as well as mid-sized producers like ARC Resources (ARX). Obsidian Energy occupies a mid-tier position, offering regional strength but with a more concentrated portfolio compared to its integrated counterparts. While larger competitors benefit from economies of scale and diversified revenue streams, Obsidian's focused strategy in specific plays, particularly Peace River, allows for agility and specialized operational execution. The broader energy landscape is also influenced by trends like increased infrastructure investments and the growing energy demands from sectors like AI and data centers, which could indirectly benefit natural gas producers, alongside a global push towards renewable energy that poses a long-term challenge to fossil fuel demand.

Technological Edge and Peace River's Untapped Potential

Obsidian's Peace River asset is a cornerstone of its growth strategy, offering substantial future production growth and significant potential for Enhanced Oil Recovery (EOR). This vast heavy oil region, spanning nearly 70 miles, holds considerable undeveloped land, particularly within the established Bluesky and emerging Clearwater formations. The company's early consolidation of its land position in Peace River in late 2021, followed by a thorough technical review, identified substantial unrealized value, providing a definitive advantage over competitors who have since increased their activity in the area.

A key technological differentiator for Obsidian is its innovative "waffle well" drilling technique. This method involves drilling conventional horizontal legs, typically 11, and then adding subsequent legs perpendicular to the primary producing leg, creating a waffle-like pattern when viewed from above. This design provides more avenues for hydrocarbons and pressure to move within the reservoir before reaching the pump, as opposed to a single, potentially limited flow path. This approach results in slightly more open-hole conditions and has shown promising results, contributing to improved production.

Beyond specialized drilling, Obsidian is at the forefront of EOR implementation in Peace River. The company has commenced its first integrated waterflood pilot in the Clearwater formation at its Dawson field. This five-well pad includes three producers, two of which are already online and cleaning up, with the first of two dedicated water injection wells currently being drilled. This pilot is designed to mimic successful waterflood patterns in other fields and is viewed with considerable excitement for its potential to broadly enhance future area development and unlock significant reserves. The Clearwater formation, driven by these development programs, has already grown from initial testing to over 4,000 BOE per day, representing 60% of the region's development program.

Strategic Repositioning and Financial Discipline

A pivotal move in Obsidian's strategic evolution was the divestiture of its operated Pembina assets, which closed in the first week of April 2025. This transaction, valued at approximately $320 million, included $211 million in cash (after closing adjustments) that was immediately deployed to reduce debt. As part of the consideration, Obsidian also received approximately 9.1 million common shares in InPlay Oil Corp. (IPO) and acquired a 34.6% working interest in the Willesden Green Unit Production Unit #2, increasing its ownership in this operated unit to nearly 100%. The Pembina disposition, representing an average of 10,300 barrels of oil equivalent per day for 2024, was executed at a robust 2.7x multiple based on 2024 net operating income, which management considered full and fair value.

This divestiture materially strengthened Obsidian's balance sheet and significantly reduced its corporate Asset Retirement Obligations (ARO) by over 50%, from $747 million to approximately $357 million on an undiscounted basis. Furthermore, the sale is expected to improve operating costs by approximately $1.60 per BOE going forward. The streamlined portfolio now allows for increased focus and optionality on the two key operated banner assets: the heavy oil Peace River and the light oil Willesden Green. The company also retained its valuable 44% working interest in the Pembina Cardium Unit #11, a non-operated asset considered a "jewel" in the core Pembina oil field.

Financial Performance and Prudent Capital Allocation

Obsidian Energy's first quarter 2025 results reflected a company in transition, yet demonstrating operational strength in its core areas. Production for Q1 2025 averaged 38,400 BOEs a day, a 12% increase over Q1 last year, primarily driven by the Peace River program. Capital expenditures for the quarter were $128 million, consistent with Q1 typically being a heavy capital quarter. Operating costs increased slightly to $1,572 per BOE from $1,391 last year, attributed to Peace River activity and higher water handling as new wells came online, partially offset by lower power costs. General and administrative (G&A) expenses per BOE, however, decreased to $1.61 from $1.77 in Q1 last year. Funds flow from operations (FFO) rose by 19% to $100 million, and by 25% on a per-share basis, benefiting from the company's Normal Course Issuer Bid (NCIB) activity.

Despite this, heavy capital spending and nearly $10 million in NCIB expenditures resulted in negative free cash flow of approximately $35 million for the quarter. Net debt increased to $460 million from $411 million at year-end, largely due to a $50 million build in negative working capital, which is expected to normalize in Q2.

Looking ahead to the second quarter of 2025, Obsidian Energy projects an estimated production midpoint of approximately 29,200 BOEs a day, pro forma for the Pembina sale. Capital expenditures are guided to be significantly lower, between $37 million and $42 million, reducing first-half capital expenditures by $15 million to $20 million from original forecasts. Net operating costs are anticipated to decrease in Q2 due to the higher-cost Pembina assets no longer being part of the portfolio.

At a $60 WTI price assumption, Q2 FFO is expected to be $60 million, or $0.86 per share, with positive free cash flow of $16 million. The company forecasts net debt to drop to approximately $255 million by the end of Q2 2025, resulting in a conservative net debt to FFO ratio of approximately 1.1x (annualized for Q2), which does not include the value of its InPlay shares.

Obsidian maintains a strong liquidity position, with its syndicated credit facility redetermined at $235 million, and only $30 million drawn immediately post-Pembina transaction, leaving $200 million in available liquidity. The company also has $112 million of bonds outstanding. Furthermore, Obsidian Energy possesses significant tax pools, which are expected to shield it from being a cash taxpayer for approximately 10 years at $70 WTI, and even longer at current commodity prices.

Competitive Positioning and Outlook

Obsidian Energy's competitive standing is defined by its focused asset base and operational expertise in Western Canada. While it faces formidable competition from larger, more diversified players like CNQ, CVE, and SU, Obsidian's agility in niche operations and its deep understanding of its core basins provide a distinct advantage. Its established asset base in Western Canada fosters stronger regional partnerships and potentially faster project execution compared to the broader scale of CNQ. Furthermore, Obsidian's regulatory expertise allows for superior operational execution in a complex environment, potentially leading to better capital efficiency and faster innovation cycles than some rivals.

However, Obsidian's more concentrated portfolio exposes it to greater commodity price sensitivity compared to integrated companies like SU, which benefit from downstream operations. Its limited diversification also means a higher reliance on specific markets, potentially increasing customer acquisition costs and making it more susceptible to shifts towards renewable energy. Despite these vulnerabilities, Obsidian's strategic decision to prioritize per-share value growth over forced production growth at lower commodity prices is a key differentiator. Management has explicitly stated that at WTI prices around $60 per barrel, buying back shares at a material discount to intrinsic value offers superior economics to primary development. The company has been actively executing this strategy, repurchasing 3.5 million shares for $24.5 million through May 6, 2025, and over 2 million shares in April alone, representing approximately 3% of outstanding shares.

The company has opted not to reissue a three-year growth plan at this time, acknowledging the impact of the Pembina asset sale and the current market environment. Instead, it will release a second-half budget at the end of June, with future plans for 2026 and beyond to be communicated as market conditions evolve. Operational risks include challenges encountered in some Cadotte wells in Peace River, where higher viscosity oil led to temporary shut-ins, and the inherent seasonal access limitations for exploration in the region. Additionally, one Clearwater well is producing at a sub-economic rate of 24 barrels of oil per day due to high viscosity. While the Asset Retirement Obligations for the divested Pembina assets transferred to InPlay, Obsidian retains responsibility for the 2025 minimum spend target set by the AER for assets owned prior to the transfer.

Conclusion

Obsidian Energy Ltd. is executing a clear and disciplined strategy to unlock per-share value by focusing on its high-quality, low-decline asset base in Western Canada. The recent Pembina divestiture has been instrumental in streamlining the portfolio, strengthening the balance sheet, and significantly reducing future liabilities, allowing for a concentrated effort on the substantial growth potential of the Peace River heavy oil asset and the stable cash flow generation of its light oil properties.

The company's commitment to technological innovation, exemplified by the "waffle well" drilling technique and the pioneering Clearwater waterflood pilot, positions it to maximize recovery and efficiency in its core Peace River plays. In a commodity price environment that favors financial prudence, Obsidian's aggressive share buyback program underscores its dedication to shareholder returns, viewing its own stock as the most attractive investment. Trading at a discount to its intrinsic value and peers, Obsidian Energy presents a compelling narrative of strategic focus, financial discipline, and technological application, poised to deliver long-term value in a dynamic energy market.