Obsidian Energy (OBE.TO)

This has really struggled. Fifth-largest producer in Canada and is probably too big in two diverse areas. They recognize that they need to have a more focused strategy and are moving in that direction. This is one of those painful transition stories. Nothing specific is driving it down, just sentiment. Thinks it has bottomed and it has been unfairly punished. Moving from a Hold category to a Buy category. 6.2% yield should be secure.

A bit of a turnaround story. Have great assets in the west. They have to monetize these assets. If they can’t make significant sales, then you will get more of the same – yield but little growth.

His company has this as a neutral with a $12 target. What he would be looking at in the oil patch right now are the companies that have cash flow and growth in earnings and very low debt levels. The overly indebted companies are being squeezed by the banks right now and, because of that, have to sell a lot of their assets. The smaller, lean ones, the royalty ones, make a lot of sense. There is some shopping to be done in the oil patch because there is restructuring being done.

Going through a turnaround process. Prefers Encana (ECA-T) over this. Good quality assets but probably not the best execution in terms of costs to bring on new production. Balance sheet is a little stretched at 3X debt to cash flow. They are intending to sell more assets into what is already a very bloated asset market.

Has been a dreadful performer but did have a rebound this year because of new management coming in. Once the payout got cut, people left this in droves because it was hard to see where growth was coming from. If they are able to get the cost base down to actually have a sustainable payout and maybe to reinvest some capital in growing …..for the moment, leave this one alone. Turnarounds are notoriously difficult to engineer. 4.7% yield.

Feels this is probably fair value at this level. Expects the dividend is safe.

Tremendous land holdings that were just validated. The big question is management’s ability to execute. Not a big holding for him, but there is very good value. Management has to prove themselves. Prefers Whitecap.

Held it higher up and then gave up. Now with Rick George at the helm this has definitely changed. The market is saying ‘show me’. Capital inefficiencies and a messy balance sheet. Dividend probably okay bit maybe new management tightens up. Take comfort in the quality of the asset base.

(Market Call Minute.) Trading at a premium and doesn’t deserve it. Has been bid up on breakup value.

This one is a bit of an enigma wrapped in a puzzle. Essentially it is a broken company and they are in the process of trying to fix it. Doing a strategic review right now. Cheap. Feels it will take a long time to fix the operations of the company.

There have been 2 knocks against this company. One was their execution and the other has been their debt. The execution they have fixed by having the CEO retire besides removing a large number of their technical team. Regarding the debt, they have cut their dividend by about 45% and have a payout ratio of about 130%, which means they are spending 30% more on dividends than they are getting on cash flow plus CapX. Debt to cash flow is over 3 times, which is a very high number.

(Market Call Minute.) There are some management changes so she would wait to see what the new team has in terms of a new strategy going forward.

Resource potential of this company is immense. Has one of the deepest inventories of any company in Western Canada on the light oil side. As a dividend investor, you need a long-term sustainable business and this company has that long-term inventory of oil and gas that can support cash flow generation going forward. They erred when they tried to grow too aggressively to please some shorter-term investors that wanted to see more production growth to pop the share price. Dividend at this level is not sustainable given their capital expenditure profile. However, they are reducing capital expenditures in order to level this out a bit.

Change of board will bring in discipline. Cap-x will come down and ability to pay distribution which had been cut will be able to continue. They have a good suite of assets. Down the road you might be looking at distribution increases. He thinks there will be a short correction and then you should buy.

Changes at the board level. Some people are reading a little bit into that as pushing the company to breakup or sale. Leverage has been higher than he likes and dividend has been less. They have struggled in terms of offsetting declines and the sustainability of the dividend has been a question. Prefers others.