Obsidian Energy (OBE.TO)

(Market Call Minute.) Have been holding on to their dividend %. Stressed balance sheet. Need to prove to the street that they can get their operations back on track.

Doesn’t know the company particularly well, but knows the space. One that he can say “never assume the dividend on an Alberta oil company is safe”. Wouldn’t want to be in this one right now.

Has been a bit of a value trap. Some of their key plays takes far more capital to bring on production than it does for others. Capital efficiencies in their Cardium play is about 33% less than peers. This will take time. Balance sheet is in pretty precarious situation with an exit of about 4X debt to cash flow, which is extraordinarily high. Payout ratio is very high and they shouldn’t be paying a dividend.

Prefers ARC Resources (ARX-T), Bonavista (BNP-T) (even though it is down badly) or Crescent Point (CPG-T). If he were looking for a 4^th, it would probably be Peyto (PEY-T). On this one, he would worry a little about the 10% distribution. Even though the stock is cheap, there are a few clouds over it, vis-à-vis balance sheet stretch etc.

Having trouble living within their means. Spending is outstripping cash flow currently so it’s at risk of a dividend cut. There are senior management exiting the company and they may have valid reasons. Also, have ongoing operational and financial issues.

Would be careful. Have one of the highest payout ratios, which he believes is at about 145%-147% so the distribution is absolutely not sustainable. Too big to be a takeout target.

On the seasonal side we could get a rally through May or June. He sees oil and gas range bound out a couple of years. You want to wait and see what February brings.

Great land but have always felt they could do more with it. Payout is somewhat in question. Their cash flow is being affected by the squeeze on pricing in Alberta. He would tend to sell this and buy Bonavista (BNP-T).

There are definite rumours that there is M&A potential. This has been a favourite Short of US hedge funds this year because of the very high financial leverage and very poor capital efficiencies. Recent management shuffle indicates there are signs of them turning around. Thinks it has bottomed. There was massive Short covering at around $10.50. Wouldn’t be a buyer because the payout ratio is very high.

About two thirds of production is oil/liquids and a 3^rd is natural gas. In the 3^rd quarter they produced 329 million a day and they lost on a netback $.03 per unit so 1/3 of the business is not making money. Need to get to $5-$6 ACO (?) prices for them to start making money. BV is $18.92. If you remove goodwill, that is still $14.68 so the stock is very cheap but it does need higher natural gas prices.

Has been a bit of turmoil in the company and stock price has come down significantly. Had some management changes. People think they are going to have to cut their dividend but management says they are not going to have to. Part of the strategy for not doing that is selling off asset packages. It really depends on hedging and how they can hedge their costs out. In this environment, you need to stick with the higher quality producers.

(Market Cal Minute) Fell below EBV -3. Losses are coming. Over distributing.

Had a difficult time creating production growth. Departure from the company that call some things into question. One of the weakest performing companies in the oil and gas sector. If you think there is risk in the market you buy the leaders and this is not a leader.

(Market Call Minute) They just had trouble growing the business

The CFO and senior managers all left in the last week. Questions about payout sustainability.