Obsidian Energy Ltd (TSX:OBE) has been on my radar for a while, and the biggest I see is around the sustainability of the business going forward. Although OBE seems to be managing its financials well, the market seems extremely bullish on a business which is expected to face some top-line headwind. Its future outlook, which is what investors are buying into,
Firstly, a quick intro on the company – Obsidian Energy Ltd. explores for, develops, and produces oil and natural gas in western Canada. Started in 1979, it operates in Canada and is recently valued at CA$723.91M.
The first thing that struck me about OBE is its declining top-line growth of -30.55% over the past year. A consensus of 5 CA oil, gas and consumable fuels analysts covering the stock indicates the future doesn’t look much better. According to their forecast, OBE’s revenue level is expected to reduce by 6.55% in the next financial year. In addition to this, OBE is currently loss-making, delivering a recent bottom-line of -CA$84.00M. With a declining top-line, moving towards positive earnings becomes harder, which is a concerning issue.
Limiting your downside risk is an important part of investing, and financial health is a key determinant on whether OBE is a risky investment or not. Obsidian Energy’s balance sheet is healthy, with high levels of cash generated from its core operating activities (0.35x debt) able to service its borrowings. Furthermore, OBE’s debt level is at an appropriate 16.57% of equity and has been declining over the past five years from 31.33%. OBE also generates income from lending its cash which, in turn, is able to cover its annual interest payment to its debtors. The company shows the ability to manage its capital requirements well, increasing my conviction of the sustainability of the business going forward.
OBE is now trading at CA$1.49 per share. With 506.23 million shares, that’s a CA$723.91M market cap, which is in-line with its peers based on its industry and adjusted for its asset level. Currently, it’s trading at a fair value, with a PB ratio of 0.35x vs. the industry average of 1.08x.
What initially drew me into OBE was its robust balance sheet. However, after looking at the prospects of the business, I’m not jumping with joy. As above, with my limited resources, I would rather invest in a great business than an average one. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.