CASE STUDY UPDATE: Obsidian Energy (OBE)

July 9, 2023

I first wrote about Obsidian Energy on November 14, 2021 here:

Since then, the stock has gone from $3.74 to $6.18, an increase of 65%.  But the company’s cash flows have increased even more, meaning the stock is more undervalued today than it was in November, 2021.



Here is a superb article on oil prices:

OPEC+ has not only continued to cut production targets, but it has been under-producing its targets simply because it cannot produce more.  Meanwhile, oil demand is healthy and increasing about 1% a year.

No one can predict oil prices, especially over shorter periods of time.  But demand is likely to exceed supply going forward, and inventories are likely to decline.  This probably means higher oil prices in the range of at least $75-90 per barrel (WTI).

But even if oil prices were to stay closer to $65-70, Obsidian Energy would still be very profitable.

If there’s a recession, oil prices could decline temporarily, but would quickly snap back.

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.

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.



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

    • EV/EBITDA = 1.15
    • P/E = 0.79
    • P/B = 0.39
    • P/CF = 1.14
    • P/S = 0.72

The Piotroski F_Score is 8, which is very good.

The market cap is $507.4 million.  The company has $67 million in cash and $264.8 million in debt.  The enterprise value (EV) is $705.5 million.

TL/TA is 28.8%, which is excellent.

Insider ownership is 7%.  That is worth a bit more than $35 million.  If the stock at least doubles, insiders can make at least $35 million.

ROE is 68.1%, which is outstanding.

Obsidian Energy continues to buy back shares of its stock, which creates significant value because the stock is very undervalued.  If the stock remains undervalued, the company plans to increase buybacks once it has lowered its net debt to $169 million.

We calculate NAV based on 2P reserves (proved plus probable).  Intrinsic value scenarios:

    • Low case: If there is a bear market or recession, the stock could temporarily decline 50%.  This would be a major buying opportunity.
    • Mid case: If the oil price averages $70 WTI, then NAV per share is $16.24, which is over 160% higher than today’s $6.18.
    • High case: If the oil price averages $80 WTI, then NAV per share is $20.61, which is over 230% higher than today’s $6.18.
    • Very high case: If the oil price averages $90 WTI, then NAV per share is $24.66, which is 300% higher than today’s $6.18



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.