We don't believe Obsidian's assets are fake or destined for failure - though we do believe that in an attempt to gain capital markets relevancy, and garner recognition for their Peace River position as a company differentiator, Obsidian has set growth targets that neither the price environment, nor the local geology support. It's abundantly clear what happens to your equity if you don't have a growth engine, and while Obsidian's legacy Cardium position is one of the better ones, boasting stronger margins than peers, and certainly more inventory – the fact remains without the Peace River growth, Obsidian would be destined for the same irrelevancy as peers like Bonterra, InPlay, and Yangarra - companies simply seen as speculation on the price of the commodity, rather than viable long term businesses. Multiples for Cardium pure-plays have remained depressed, both going into COVID, and on the other side. Upstream valuations have bifurcated – E&Ps with inventory and growth prospects trading at a premium, and E&Ps in legacy plays with few remaining levers to improve F&D costs trading at a material discount to peers, and to historical valuations. These stocks remain optically cheap, though have few paths to really generate meaningful value for shareholders on a flat commodity price deck – Obsidian is trying to escape this fate.

Somewhere in the grand plan to return to their former glory (and possibly induce a sale), we believe Obsidian has become too ambitious, overestimating their ability to grow - and focusing on short-term capital-market effects, rather than simply executing on their plan. For example, Obsidian has continually press released "peak rates", which are a poor litmus for well deliverability and durable value creation. Absent from any disclosures are the cumulative production results, which show notable underperformance compared to type curve expectations. Overpromising and underdelivering and/or unfunded development plans have been strict no-no's in the equity markets. As gas prices have tightened, with no infrastructure partner in sight, equally ambitious Montney peer Crew has underperformed both Kelt and ARC - though Obsidian is different - they've promised PROP development entirely funded with Cardium cashflow. It's the Spartan Delta model - one that works incredibly well if you can successfully grow the secondary asset. But, they can’t. For Obsidian, growth will not come as easy, or as lucrative as the company may imply, and as capital markets begin to realize and price in that Obsidian at its core is still a Cardium company, the stock may struggle. Management has made it clear their desire to pivot to a heavy oil weighted asset base, though our work shows that their PROP inventory simply cannot support the speed, or magnitude, of Obsidian's desired transition to said asset base weight. We don't believe that production from Peace River is unfeasible, quite the opposite - careful development, in the right commodity price tape, and with thoughtful cost control makes it a competitive and appealing asset in the portfolio, though rushing development to meet lofty targets dilutes the returns on development expenditures and the duration of the asset's inventory. We believe these issues were entirely in Obsidian's control - and a more cautious approach, integrating learnings along the way, would ultimately yield more value for shareholders and net Obsidian better capital markets recognition for the asset. 

When they fail to meet their imposing production and cashflow targets, we think the street will have no choice but to heavily risk the PROP growth, and investors already shy on the name, will have no choice but revert to grouping Obsidian with their Cardium pure-play peers. Ultimately, we view Obsidian as having manufactured their own struggles - marketing what we believe are closer to exploration efforts in the Peace River, as development efforts. If Obsidian fails to execute flawlessly, markets should slowly reprice the Peace River assets as exploration lands, rather than the development project that Obsidian is masquerading as. 

We take issue to their Bluesky reservoir at Peace River. It’s plagued with vertical permeability baffles and isn’t nearly as ‘clean’ as the much higher quality Clearwater sandstone to the east. Throughout the Peace River area, gross pay thickness correlates poorly with EUR, with individual Bluesky sequences (i.e. between the shale intervals) much more important to consider. Obsidian’s Bluesky is likely to underperform management’s stated type curve. While there will be pockets of success and consistency, the broader reservoir at the PROP is not homogenous, and as discussed, can change drastically even within a square kilometer. Though we see Obsidian high grading their current drills, they are licensing wells that are for all intents are purposes, offsets, and do nothing to derisk the broader Walrus field, where they claim to have 163 locations. We disagree, they don’t have that many geologically viable locations. 

We think Obsidian should slow-roll themselves, aiming to retain growth flexibility and limit full-cycle CAPEX, further improving project economics by not focusing on corporate volumes. With a paced development, even with actual performance, the asset can still grow at a 15% CAGR through 2027 and exit the 3yr plan at a respectable 10,000BOE/d while still retaining upside to Clearwater (and Spirit River) growth, which we are far less negative on. The low-multiple doldrums are painful, though making the flashy short-term decision instead of the correct long term decision, has been punished in this market multiple times over the past few years. While these promises deliver short term share price boosts, they end up as net negatives if not fulfilled. We don't believe it's an unreasonable statement to say, that Obsidian growing faster than Spur, the pioneer of the Clearwater and a company with indisputably better lands, may be overly ambitious. If Obsidian is unable to meet their own growth targets, the associated fallback will be attributable to their own indulgence - and entirely avoidable. Obsidian does not have the quality of inventory needed to ramp to 50MBOE/d in 3-years, nor the depth of inventory to sustain volumes at that level. As such, we believe Obsidian will underperform their peers, and don’t offer potential equity owners a compelling value proposition as they’ll fail to deliver on growth promises.