CASE STUDY: Obsidian Energy (OBELF)

November 14, 2021

Many oil and gas companies appear remarkably cheap if oil prices stay at $70 to $80.  Not only is it likely that oil prices will stay at $70 to $80, but it’s quite possible that oil prices will approach $90 or $100 (or even more).

Even at $60 oil, Obsidian Energy is undervalued.  But if oil prices are much higher than that, then Obsidian Energy—like some other oil companies—will likely be a wonderful investment.



Over the past 6 to 7 years, oil producers and oil-producing countries have significantly cut their capital spending due to lower oil prices.  As a result, many oil producers do not have much capacity to produce more oil.  Similarly, even OPEC+ appears to have much less spare capacity than it did in the past.

Check out this piece by Josh Young of Bison Interests, “OPEC+ Spare Capacity is Insufficient Amid Global Energy Crisis.”  Link:

In recent years, shale oil companies have been able to boost production relatively quickly.  However, under pressure from investors, shale oil companies are now much more focused on generating free cash flow.  So they have yet to invest much in order to increase their production.

Thus, oil supply constrained.

Even more importantly, oil demand is very strong.

This is because massive monetary and fiscal stimuli have caused households to be flush with cash.  This has greatly increased demand for most goods and commodities.

See this recent note from Bridgewater Associates, “It’s Mostly a Demand Shock, Not a Supply Shock, and It’s Everywhere”:

Bridgewater argues that the supply of everything is at all-time highs.  But demand across most areas is much stronger than supply.  Due to the large amount of money the Federal Reserve has been printing, coupled with large fiscal stimulus, a massive amount of cash has been transferred to households.  Consumer spending has created demand that cannot be met by the increased supply.

Bridgewater concludes that demand is outstripping supply by a wide enough margin that high inflation will probably be mostly sustained, especially because extremely easy government policy continues to encourage further demand rather than limiting it.

Finally, even if car manufacturers started making only all-electric vehicles today, oil demand would keep rising for many years, as Daniel Yergin points out in The New Map.

Oil demand is likely to increase for at least 10 to 20 years before a peak is reached.  The peak itself could last for another 10 to 20 years.

I am, of course, in favor of the transition to a post-fossil fuel economy.  But the global economy needs a lot of oil in order to make that transition over the next several decades.

The oil and gas industry will exist in close to its current form 10 or 20 years from now, as Jeremy Grantham has noted.  (As well, most oil companies do not have more than 15-20 years of reserves.)  The fact that some investors are no longer investing in oil and gas companies means that oil and gas stocks now have even higher expected returns.

In sum, oil supply is quite constrained, while oil demand is very strong.  This situation is likely to persist for some time, which means oil prices could easily be $70 to $80, or even higher.  Also, oil stocks historically have done very well in inflationary environments.  Due to massive monetary and fiscal stimuli, the gap between demand and supply is likely to persist in many areas, which means high inflation may last for some time.



Obsidian Energy (OBELF) appears very cheap because of the recent increases in oil prices.  Here are the multiples:

    • EV/EBITDA = 1.53
    • P/E = 1.04
    • P/NAV = 0.29
    • P/CF = 1.97
    • P/S = 0.98

(We use P/NAV instead of P/B.  The NAV assumes $70 WTI.)

The Piotroski F_Score is 6, which is OK.

The market cap is $289.5 million.  The company has $4 million in cash and $406.5 million in debt.  TL/TA is 48%, which is OK.  The company plans to continuing paying down its debt, which it can easily due if oil prices remain relatively high.

Insider ownership is 7%.  That is worth a bit more than $20 million.  Insiders can make $40 million or much more if oil prices are $70 or higher and if the company continues to execute.

We calculate NAV based on 2P reserves (proved plus probable).

    • Low case: If the oil price averages $50 WTI, then NAV per share is $4.55, which is 21% higher than today’s $3.74.
    • Mid case: If the oil price averages $70 WTI, then NAV per share is $12.71, which is 240% higher than today’s $3.74.
    • High case: If the oil price averages $90 WTI, then NAV per share is $20.87, which is over 455% higher than today’s $3.74.

In March 2019, the company appointed Michael Faust as CEO.  (The previous CEO had done a poor job on costs, on where to invest, and on others areas.)

Faust significantly cut costs and improved efficiency.  Faust also focused capex on the right wells.  Overall, he did a great job.  After making these operational improvements, Faust stepped down.  But he is still on the board of directors and is deeply involved.

The interim CEO is Steve Loukas, who works at a hedge fund with a large stake in Obsidian Energy.  Loukas is doing an excellent job so far.



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods.  We also aim to outpace the Russell Microcap Index by at least 2% per year (net).  The Boole Fund has low fees.




Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC.