Wednesday, July 24, 2019

Obsidian Energy Ltd

Sound bite for Twitter and StockTwits is: Resource Stock. It is probably cheap, but it does continue to do poorly and debt is continuing to rise. The recent consolidation is also bad news. I would personally not take a chance on it at the present time. See my spreadsheet on Obsidian Energy Ltd.

I do not own this stock of Obsidian Energy Ltd (TSX-OBE, NYSE-OBE). I bought this stock as Maximum Energy Trust (MXT.UN) in 1998. In November 2001, there was a stock exchange and the stock became Ultimate Energy Fund. In June 2004 fund changed from Ultimate Energy Income Trust to Petrofund Energy. Petrofund Energy merged with Penn West in July 2006. The company changed its name from Penn West Petroleum Ltd. (TSX-PWT, NYSE-PWE) to Obsidian Energy Ltd TSX-OBE, NYSE-OBE) in 2017.

When I was updating my spreadsheet, I noticed that the Liquidity Ratio is too low for 2018 and has not improved in the first quarter. For 2018 the ratio is 0.40 and for the first quarter it is 0.46. After considering the cash flow and current portion of debt the ratios are 1.01 and 0.62. They cannot cover their current liabilities and this is a vulnerability. The Debt Ratios are very good for 2018 and the first quarter they are 3.39 and 3.09. So, they can probably work this out, but it is a vulnerability.

They also just did a consolidation in July of 2019. The consolidation is on the basis of 7 to 1. The means that for every 7 shares, shareholders now have 1 share. So, if a shareholder had 700 shares, they now have 100 shares. Consolidations are never a good sign.

When the company was an income trust, it paid distributions. It started to decrease the dividends in 2009 and kept reducing them each year until they were cancelled in 2016.

Debt Ratios are a mixed bag, but the company is vulnerable because of some awful debt ratios. The Long Term Debt/Market Cap ratio is too high. It was 1.55 in 2018, but is now 4.63. I talked above about the Liquidity Ratio and how vulnerable the company is because of it. The final ratios are good with the Debt Ratio at 3.39 in 2018 and 3.09 now (when a good ratio is 1.50 and above). The Leverage and Debt/Equity Ratios are also good at 1.42 and 0.42.

The Total Return per year is shown below for years of 5 to 23 to the end of 2018. Under the Capital Gain column is the portion of the Total Return attributable to capital gains. Under the Dividend column is the portion of the Total Return attributable to dividends. See chart below.

In the past, this stock came from a company that was an income trust and paid very good distributions. The stock that I held between 1998 and 2010 had a total return of 8.47% per year with a capital loss of 1.96% and dividends of 10.43% per year.

From Years Div. Gth Tot Ret Cap Gain Div.
2013 5 0.00% -41.46% -43.52% 2.06%
2008 10 0.00% -13.19% -27.97% 14.78%
2003 15 0.00% -3.39% -24.00% 27.76%
1998 20 0.00% 44.41% -13.83% 44.72%
1995 23 0.00% 8.82% -16.35% 25.33%

The 5 year low, median, and high median Price/Earnings per Share Ratios are all negative as is the corresponding 10 year ratios. The historical ratios are 5.53, 8.34 and 11.24. The current P/E Ratio is negative at -0.11. So, this test cannot be done.

I get a Graham Price of $2.37 if the EPS was 0.01. I am just trying to get a figure. Since they are not expected to have a profit anytime soon this test cannot be done.

I get a 10 year median Price/Book Value per Share Ratio of 0.65. The current P/B Ratio is 0.05 based on a Book Value of $1,822M, Book Value per Share of $25.02 and a stock price of $1.27. The current ratio is 92% below the 10 year median. This stock price testing suggests that the stock price is relatively cheap.

I cannot do historical median dividend yield test since the company has cancelled its dividends.

The 10 year median Price/Sales (Revenue) Ratio is 1.67. The current P/S Ratio is 0.23 based on 2019 revenue estimate of $3.75 and a stock price of $1.27. The current ratio is 85% below the 10 year ratio. This stock price testing suggests that the stock price is relatively cheap.

Results of stock price testing is that the stock price is probably cheap. Both the P/S Ratio and the P/B Ratio testing shows that the stock price is cheap. The problem with both is the Revenue and Book Value for this stock is declining strongly. Revenue has been declining at 31% per year over the past 5 years and is expected to continue to decline over the next two. The book value has declined 25% per year over the past 5 years. It declined by another 3% in the first quarter of 2019.

Is it a good company at a reasonable price? I never buy resource companies for the long term. Anytime I buy them I keep a close eye on them. I do not think resource stocks are stocks to hold for the long term. This particular company is currently in decline and who knows when that may stop. They just did a consolidation and this is never a good sign.

When I look at analysts’ recommendations, I find Hold (5) and Underperform (4). The consensus would be a Hold. The consensus stock price is $2.61. This implies a total return of 105.51% all from capital gains based on a current stock price of $1.27.

See what analysts are saying at Stock Chase. The worry is about increasing debt. Matt Smith on Motley Fool thinks this is a stock to avoid. A writer on Simply Wall Street says the concern is the ability of this company to move to positive earnings. Elephant Analytics at Seeking Alpha says that investor confidence in the company appears shaky after its reverse split. Joseph McCarthy on The Enterprise Leader says that Raymond James lowered price objective from $3.50 to $2.00 in a recent report.

Obsidian Energy Ltd is an intermediate sized oil and gas producer with strategic assets in Alberta. The company is focused on the development of its light oil Cardium asset. Its web site is here Obsidian Energy Ltd.

The last stock I wrote about was about was Atlantic Power Corp (TSX-ATP, NYSE-AT) ... learn more. The next stock I will write about will be Dorel Industries Inc (TSX-DII.B, OTC-DIIBF) ... learn more on Friday, July 26, 2019 around 5 pm. Tomorrow on my other blog I will write about Income Taxes.... learn more on Thursday, July 25, 2019 around 5 pm.

This blog is meant for educational purposes only and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

See my website for stocks followed and investment notes. I have three blogs. The first talks only about specific stocks and is called Investment Talk. The second one contains information on mostly investing and is called Investing Economics Mostly. My last blog is for my book reviews and it is called Non-Fiction Mostly. Follow me on Twitter or StockTwits. I am on Instagram. Or you can just Google #walktoronto spbrunner8166 to see my pictures.

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