Why Obsidian Energy Stock Gained 120% This Year

What’s next for this top runner after gaining 520% in the last 12 months?

| More on:
Group of industrial workers in a refinery - oil processing equipment and machinery

Image source: Getty Images

What happened?

Energy stocks have been on a roll this year. It seems like they will dwarf last year’s epic ascent in 2022. At least the latest quarterly numbers and current oil and gas prices certainly hint that. One TSX energy stock that has been unstoppable since last year is Obsidian Energy (TSX:OBE)(NYSE:OBE). It is up 520% in the last 12 months and 120% in 2022.

So what?

Obsidian Energy reported its full-year 2021 earnings last week. Its free cash flow almost doubled to $218 million in 2021 relative to 2020. It continued to repay debt with the incremental free cash flow. Its net debt declined from $467 million to $413 million at the end of Q4 2021.

Almost all the oil and gas producers are seeing record profits since the pandemic. However, the bigger reason behind the sentiment change is this crude oil rally has brought their balance sheets in so much superior shape that none of the previous rallies did.

The supply constraints have already been pushing oil prices higher. The Russia-Ukraine tensions have magnified that impact, which recently sent Brent crude oil close to US$106 a barrel.  

High oil prices previously resulted in higher capex plans and, thus, increased production. However, this time, energy producers have been little enthusiastic about increasing their production and more focused on improving their balance sheet strength.

Obsidian Energy’s net debt-to-EBITDA ratio fell below one in the latest reported quarter, while it was close to three in late 2020. The net debt-to-EBITDA ratio is an important metric to analyze energy stocks and implies how many years a company would take to repay its debt.

Obsidian is an $880 million company that produces around 25,000 barrels of oil per day. In the last 12 months, the company reported a net income of $414 million against a loss of $771 million in 2020.

Now what?

Obsidian Energy stock is currently trading close to $11, its four-year-high levels. It is trading 2.5 times its earnings and looks highly discounted. Peer energy stocks are trading at a much higher valuation.

Note that current higher oil prices could notably boost its earnings when it reports Q1 2022. So, higher earnings growth prospects and discounted valuation could continue to push the stock higher.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool has no position in any of the stocks mentioned. Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned.

More on Energy Stocks

Value for money
Energy Stocks

Scared of a Market Rout? Buy These 2 Value Stocks

Investors fearing a market rout can take positions in two value stocks from the top-performing energy sector.

Read more »

oil and natural gas
Energy Stocks

Suncor Energy Stock Could Have More Room to Run

Suncor Energy (TSX:SU)(NYSE:SU) stock is one of many big oil plays that may be too undervalued for its own good.

Read more »

Canadian energy stocks are rising with oil prices
Energy Stocks

3 Energy Stocks I’d Buy in 2022

In 2022, I'm buying energy stocks like Suncor Energy Inc (TSX:SU)(NYSE:SU).

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

Canadian Oil Stocks Are Still Bullish

Suncor Energy Inc (TSX:SU)(NYSE:SU) stock has rallied this year. It may still have further to run.

Read more »

Utility companies can be good stock investments.
Energy Stocks

Time to Buy TransAlta Stock?

Shares of this utility are up significantly in the past year and more gains could be on the way.

Read more »

Natural gas prices are rising, making energy companies a good investment.
Energy Stocks

Bonterra Energy Stock Has Doubled: Is There More Upside in 2022?

It's been one of the best-performing TSX small-cap energy stocks in 2022, yet shares are cheap today.

Read more »

Group of industrial workers in a refinery - oil processing equipment and machinery
Energy Stocks

3 Small-Cap TSX Energy Stocks That Doubled This Year

TSX energy stocks at large have beat broader markets this year. But that's nothing compared to these small caps.

Read more »

Oil pumps against sunset
Energy Stocks

TFSA Wealth: Is Suncor Stock Still a Buy?

Suncor stock still looks cheap. Here's why.

Read more »