EX-99.3

EX-99.3 4 d775303dex993.htm EX-99.3 EX-99.3

Exhibit 99.3

Obsidian Energy Ltd.

Consolidated Balance Sheets


(CAD millions, unaudited)	Note		June 30, 2019			December 31, 2018
Assets
Current
Cash			$	-		$	2
Accounts receivable				60			53
Risk management		10		1			9
Other				12			12
Lease receivable		4		9			-
Assets held for sale		5		99			-
				181			76
Non-current
Lease receivable		4		31			-
Property, plant and equipment		6		2,278			2,574
				2,309			2,574
Total assets			$	2,490		$	2,650

Liabilities and Shareholders’ Equity
Current
Bank overdraft			$	1		$	2
Accounts payable and accrued liabilities				68			143
Current portion of long-term debt		7		434			17
Current portion of lease liabilities		8		30			-
Current portion of provisions		9		19			28
Liabilities related to assets held for sale		5		20			-
				572			190
Non-current
Long-term debt		7		44			402
Lease liabilities		8		95			-
Provisions		9		114			186
Other non-current liabilities				4			4
				829			782
Shareholders’ equity
Shareholders’ capital		11		2,186			2,185
Other reserves		13		100			99
Deficit				(625	)		(416	)
				1,661			1,868
Total liabilities and shareholders’ equity			$	2,490		$	2,650

See accompanying notes to the unaudited interim consolidated financial statements.

Commitments and contingencies (Note 14)


OBSIDIAN ENERGY SECOND QUARTER 2019		INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1

Obsidian Energy Ltd.

Consolidated Statements of Income (Loss)


	Three months ended June 30							Six months ended June 30
(CAD millions, except per share amounts, unaudited)	Note	2019			2018			2019			2018

Oil and natural gas sales and other income	12	$	109		$	122		$	212		$	238
Royalties			(7	)		(11	)		(14	)		(18	)
			102			111			198			220

Risk management gain (loss)	10		1			(50	)		(17	)		(82	)
			103			61			181			138

Expenses
Operating			34			41			70			83
Transportation			8			8			15			17
General and administrative			6			6			11			12
Restructuring			2			15			3			16
Share-based compensation	13		1			3			2			5
Depletion, depreciation, impairment and accretion	6,9		201			73			270			146
Gain on provisions	9		(2	)		(2	)		(2	)		(3	)
Foreign exchange loss (gain)	7		(1	)		2			(3	)		5
Financing	7,8		10			5			19			10
Other			6			6			12			8
			265			157			397			299
Income (loss) before taxes			(162	)		(96	)		(216	)		(161	)

Deferred tax expense (recovery)			-			-			-			-

Net and comprehensive income (loss)		$	(162	)	$	(96	)	$	(216	)	$	(161	)

Net income (loss) per share
Basic		$	(2.22	)	$	(1.33	)	$	(2.97	)	$	(2.23	)
Diluted		$	(2.22	)	$	(1.33	)	$	(2.97	)	$	(2.23	)
Weighted average shares outstanding (millions)
Basic	11		73.0			72.3			72.8			72.2
Diluted	11		73.0			72.3			72.8			72.2

See accompanying notes to the unaudited interim consolidated financial statements.


OBSIDIAN ENERGY SECOND QUARTER 2019		INTERIM CONSOLIDATED FINANCIAL STATEMENTS 2

Obsidian Energy Ltd.

Consolidated Statements of Cash Flows


	Three months ended June 30								Six months ended June 30
(CAD millions, unaudited)	Note		2019			2018			2019			2018

Operating activities
Net income (loss)			$	(162	)	$	(96	)	$	(216	)	$	(161	)
Other income				-			-			(1	)		-
Depletion, depreciation, impairment and accretion		6,9		201			73			270			146
Provisions		9		(2	)		(2	)		(2	)		(3	)
Financing		7,8		2			-			4			-
Share-based compensation		13		1			2			2			4
Unrealized risk management loss (gain)		10		(6	)		32			8			52
Unrealized foreign exchange loss (gain)		7		(4	)		(6	)		(6	)		(3	)
Restructuring				-			8			-			8
Other				1			-			1			-
Decommissioning expenditures		9		(1	)		(1	)		(3	)		(3	)
Onerous office lease settlements		9		(1	)		(4	)		(2	)		(9	)
Change in non-cash working capital				(32	)		(26	)		(59	)		6
				(3	)		(20	)		(4	)		37
Investing activities
Capital expenditures				(8	)		(26	)		(42	)		(86	)
Property dispositions (acquisitions), net		6		-			9			11			9
Change in non-cash working capital				(6	)		(9	)		(19	)		(10	)
				(14	)		(26	)		(50	)		(87	)
Financing activities
Lease receivable receipts		4		2			-			5			-
Lease liabilities settlements		8		(10	)		-			(15	)		-
Increase (decrease) in long-term debt		7		38			68			79			73
Repayments of senior notes		7		(17	)		(32	)		(17	)		(32	)
Realized foreign exchange loss on repayments		7		3			8			3			8
Issue of equity compensation plans		13		-			1			-			-
				16			45			55			49

Change in cash and cash equivalents				(1	)		(1	)		1			(1	)
Cash and cash equivalents, beginning of period				2			2			-			2
Cash and cash equivalents, end of period			$	1		$	1		$	1		$	1

Cash and cash equivalents includes cash and bank overdraft

See accompanying notes to the unaudited interim consolidated financial statements.


OBSIDIAN ENERGY SECOND QUARTER 2019		INTERIM CONSOLIDATED FINANCIAL STATEMENTS 3

Obsidian Energy Ltd.

Statements of Changes in Shareholders’ Equity


(CAD millions, unaudited)	Note		Shareholders’ Capital		Other Reserves			Deficit			Total

Balance at January 1, 2019		3	$	2,185	$	99		$	(409	)	$	1,875
Net and comprehensive loss				-		-			(216	)		(216	)
Share-based compensation		13		-		2			-			2
Issued on exercised equity plans		13		1		(1	)		-			-
Balance at June 30, 2019			$	2,186	$	100		$	(625	)	$	1,661


(CAD millions, unaudited)	Note		Shareholders’ Capital		Other Reserves			Deficit			Total

Balance at January 1, 2018			$	2,181	$	96		$	(111	)	$	2,166
Net and comprehensive loss				-		-			(161	)		(161	)
Share-based compensation		13		-		4			-			4
Issued on exercised equity plans		13		2		(2	)		-			-
Balance at June 30, 2018			$	2,183	$	98		$	(272	)	$	2,009

See accompanying notes to the unaudited interim consolidated financial statements.


OBSIDIAN ENERGY SECOND QUARTER 2019		INTERIM CONSOLIDATED FINANCIAL STATEMENTS 4

Notes to the Unaudited Consolidated Financial Statements

(All tabular amounts are in CAD millions except numbers of common shares, per share amounts,

percentages and various figures in Note 10)

1. Structure of Obsidian Energy

Obsidian Energy Ltd. (“Obsidian Energy” or the “Company”) is an exploration and production company and is governed by the laws of the Province of Alberta, Canada. The Company operates in one segment, to explore for, develop and hold interests in oil and natural gas properties and related production infrastructure in the Western Canada Sedimentary Basin directly and through investments in securities of subsidiaries holding such interests. Obsidian Energy’s portfolio of assets is managed at an enterprise level, rather than by separate operating segments or business units. The Company assesses its financial performance at the enterprise level and resource allocation decisions are made on a project basis across its portfolio of assets, without regard to the geographic location of projects. Obsidian Energy owns the petroleum and natural gas assets or 100 percent of the equity, directly or indirectly, of the entities that carry on the remainder of the oil and natural gas business of Obsidian Energy, except for an unincorporated joint arrangement (the “Peace River Oil Partnership”) in which Obsidian Energy’s wholly owned subsidiaries hold a 55 percent interest.

2. Basis of presentation and statement of compliance

a) Basis of Presentation

The interim consolidated financial statements include the accounts of Obsidian Energy, its wholly owned subsidiaries and its proportionate interest in partnerships. Results from acquired properties are included in the Company’s reported results subsequent to the closing date and results from properties sold are included until the closing date.

All intercompany balances, transactions, income and expenses are eliminated on consolidation.

Certain comparative figures have been reclassified to correspond with current period presentation.

b) Statement of Compliance

These unaudited condensed interim consolidated financial statements (“interim consolidated financial statements”) are prepared in compliance with IAS 34 “Interim Financial Reporting” and accordingly do not contain all of the disclosures included in Obsidian Energy’s annual audited consolidated financial statements.

The interim consolidated financial statements were prepared using the same accounting policies, critical accounting judgments and key estimates as in the annual consolidated financial statements as at and for the year ended December 31, 2018 with the exception of IFRS 16 – Leases as outlined below.

All tabular amounts are in millions of Canadian dollars, except numbers of common shares, per share amounts, percentages and other figures as noted.

The interim consolidated financial statements were approved for issuance by the Board of Directors on August 13, 2019.


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 5

3. Significant accounting policies

a)	Adoption of IFRS 16 - Leases

Obsidian Energy applied IFRS 16 with an initial adoption date of January 1, 2019, resulting in a change to its accounting policy for lease contracts as detailed below. The Company applied IFRS 16 using the modified retrospective approach under which the cumulative effect of initial application is recognized in retained earnings at January 1, 2019. As a result, comparative information has not been restated and continues to be reported under IAS 17 and IFRIC 4.

As a lessee, the Company previously classified leases as operating or finance leases based on its assessment of whether the lease transferred significantly all of the risks and rewards incidental to ownership of the underlying asset to the Company. Under IFRS 16, the Company recognizes right-of-use assets in property, plant and equipment and lease liabilities for most leases.

At transition, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Company’s incremental borrowing rate as at January 1, 2019. Right-of-use assets are measured at an amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments.

i) Practical expedients

The Company used the following practical expedients when applying IFRS 16 to leases previously classified as operating leases under IAS 17:

Applied a single discount rate to a portfolio of leases with similar characteristics;

Applied the exemption to not recognize right-of-use assets and liabilities for leases with less than 12 months of lease term;

Applied the exemption to not recognize leases of low value assets on the consolidated balance sheet. Payments for these leases will be disclosed in the notes to the consolidated financial statements; and

Placed reliance on the Company’s previous assessment of onerous contracts under IAS 37 immediately before the date of initial application as an alternative to performing an impairment assessment.

ii) January 1, 2019 impact

The impacts of the adoption of IFRS 16 as at January 1, 2019 are as follows:


	Notes		As reported at December 31, 2018		Adjustments			Balance on adoption as at January 1, 2019
Assets
Current portion of lease receivable		b)	$	-	$	9		$	9
Long-term portion of lease receivable		b)		-		34			34
Property, plant and equipment		a)		-		37			37

Liabilities and Shareholders’ Equity
Current portion of lease liability		c)		-		30			30
Current portion of provisions		d)		16		(12	)		4
Long-term portion of lease liability		c)		-		106			106
Long-term portion of provisions		d)		69		(51	)		18
Deficit		d)	$	416	$	(7	)	$	409

Right-of-use assets

The Company measured its right-of-use assets at the amount equal to the lease liability less any amount previously recorded as onerous contact provision under IAS 37. There was no impact to retained earnings upon adoption.


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 6

Sublease contracts

The Company analyzed the classification of sublease contracts previously classified as operating leases under IAS 17. The Company determined that certain subleases met the requirements of finance leases under IFRS 16. These are recorded as Lease receivable.

Lease liabilities

The Company recorded lease liabilities on contracts previously classified as operating leases under IAS 17. The lease liabilities were measured at the present value of the remaining lease payments, discounted using the Company’s incremental borrowing rate at January 1, 2019. The incremental borrowing rate used in the calculation was 6.0 percent.

Onerous contract provisions

For the Company’s office lease provision, the Company applied the practical expedient to use its previous assessment under IAS 37 for onerous contracts. This resulted in a reduction of $63 million to the Company’s office lease provision that was classified as an onerous contract and a reduction in deficit of $7 million.

iii) Reconciliation of commitments to lease liability

The following table reconciles the Company’s commitments at December 31, 2018 to the Company’s lease liabilities as at January 1, 2019:


	Total
Long-term debt	$	419
Transportation		41
Power infrastructure		9
Interest obligations		27
Office lease		201
Decommissioning liability		129
Total at December 31, 2018	$	826
Commitments that do not contain a lease		(607	)
Office Lease - Non-Lease Components		(66	)
Operating lease under IAS 17		9
Discounting impact		(26	)
Lease liabilities as at January 1, 2019	$	136


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 7

b)	Policy applicable after January 1, 2019

On transition to IFRS 16 and at inception of entering into a contract, the Company assesses whether a contract is, or contains a lease. A contract is, or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract conveys the right to control the use of an identified asset, the Company considers the following:

the contract involves the use of an identified asset;

the Company has the right to obtain substantially all of the economic benefits from the use of the asset throughout the period of use; and

the Company has the right to direct the use of the asset, which occurs if either;

the Company has the right to operate the asset; or

the Company designed the asset in a way that predetermines how and for what purpose it will be used.

Obsidian Energy recognizes a right-of-use asset and a lease liability at the commencement date of the lease. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date.

The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The estimated useful life of right-of-use assets are determined based on the length of the lease.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the Company’s incremental borrowing rate. The consideration used to measure the lease liability includes all fixed or variable lease payments under the arrangement. Subsequently, the lease liability is measured at amortized cost using the effective interest method and is re-measured when there is a change in the future lease payments.

In-scope leases

Upon adoption of IFRS 16, the Company identified certain office leases, transportation commitments, vehicle leases and surface leases in-scope under the standard.

Office lease commitments pertain to total leased office space. A portion of this office space has been sub-leased to other parties to minimize the Company’s net exposure under the leases;

Transportation commitments related to costs for future pipeline access;

Vehicle leases relate to commitments for usage of vehicles; and

Surface leases allow access to land at a natural gas or oil treatment facility and beyond.

Obsidian Energy has elected not to recognize right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets, which include information technology equipment and field equipment. The Company recognizes the lease payments associated with these leases as an expense on a straight-line basis over the lease term.


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 8

4. Lease receivable

Lease receivable relates to the lease component of sub-leased office space. Total lease receivable included in the consolidated balance sheet is as follows:


	Six months ended June, 2019
Balance, beginning of period	$	43
Additions		1
Finance income		1
Lease payments received		(5	)
Balance, end of period	$	40

Current portion	$	9
Long-term portion	$	31

The following table sets out a maturity analysis of lease payments, showing the undiscounted lease payments to be received after the reporting date:


	As at June 30, 2019
2019	$	4
2020		9
2021		9
2022		9
2023		8
thereafter		9
Total undiscounted payments	$	48
Unearned finance income		(8	)
Lease receivable	$	40

5. Assets and liabilities held for sale

Assets and liabilities classified as held for sale consisted of the following:


	As at June 30, 2019
Assets held for sale
Cash	$	2
Accounts receivable		3
Property, plant and equipment		94
	$	99
Liabilities related to assets held for sale
Accounts payable and accrued liabilities	$	8
Decommissioning liability		12
	$	20

During the second quarter of 2019, as a result of entering into a definitive sale agreement for the Company’s interest in the Peace River Oil Partnership (“PROP”), the Company classified these as assets held for sale at June 30, 2019. The transaction is anticipated to close in August 2019.

At June 30, 2019, these assets were recorded at the lower of fair value less costs to sell and their carrying amount, resulting in a PP&E impairment loss of $130 million. The impairment expense has been recorded as additional depletion, depreciation, impairment and accretion expense on the Consolidated Statements of Income (Loss).


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 9

6. Property, plant and equipment (“PP&E”)

Oil and Gas assets, Facilities, Turnarounds


Cost	Six months ended June 30, 2019			Year ended December 31, 2018
Balance, beginning of period	$	10,776		$	10,636
Capital expenditures		42			168
Acquisitions		-			1
Dispositions		(52	)		(10	)
Transfers to asset held for sale		(427	)		-
Net decommissioning dispositions		(5	)		(19	)
Balance, end of period	$	10,334		$	10,776

Accumulated depletion and depreciation	Six months ended June 30, 2019			Year ended December 31, 2018
Balance, beginning of period	$	8,202		$	7,817
Depletion and depreciation		130			288
Impairments		130			107
Transfers to asset held for sale		(333	)		-
Dispositions		(41	)		(10	)
Balance, end of period	$	8,088		$	8,202

				As at
Net book value	June 30, 2019			December 31, 2018
Total	$	2,246		$	2,574

Right-of-use assets

The following table includes a break-down of the categories for right-of-use assets:


Cost							Six months ended June 30, 2019
		Office		Transportation		Vehicle		Surface		Total
Balance, January 1, 2019	$	15	$	17	$	3	$	2	$	37
Additions		-		-		-		-		-
Balance, June 30, 2019	$	15	$	17	$	3	$	2	$	37

Accumulated amortization							Six months ended June 30, 2019
		Office		Transportation		Vehicle		Surface		Total
Balance, January 1, 2019	$	-	$	-	$	-	$	-	$	-
Amortization		1		3		1		-		5
Balance, June 30, 2019	$	1	$	3	$	1	$	-	$	5


			As at
Net book value	June 30, 2019		December 31, 2018
Total	$	32	$	-


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 10

Total

Total PP&E including Oil and Gas assets, Facilities, Turnarounds and Right-of-use assets is as follows:


			As at
PP&E	June 30, 2019		December 31, 2018
Oil and Gas assets, Facilities, Turnarounds	$	2,246	$	2,574
Right-of-use assets		32		-
Total	$	2,278	$	2,574

7. Long-term debt


			As at
	June 30, 2019		December 31, 2018
Bankers’ acceptances and prime rate loans	$	416	$	337

Senior secured notes – 2007 Notes 5.90%, US$5 million, matured May 31, 2019		-		6
Senior secured notes – 2008 Notes 6.40%, US$4 million, maturing May 29, 2020		5		6
Senior secured notes – 2009 Notes 9.32%, US$8 million, matured May 5, 2019		-		11
Senior secured notes – 2010 Q1 Notes 5.85%, US$10 million, maturing March 16, 2020		13		13
Senior secured notes – 2010 Q4 Notes 4.88%, US$13 million, maturing December 2, 2020		17		18
4.98%, US$6 million, maturing December 2, 2022		8		8
5.23%, US$2 million, maturing December 2, 2025		3		3
Senior secured notes – 2011 Q4 Notes 4.79%, US$12 million, maturing November 30, 2021		16		17
Total long-term debt	$	478	$	419
Current portion	$	434	$	17
Long-term portion	$	44	$	402

During the second quarter of 2019 the Company paid senior note maturities totaling $17 million (US$13 million).

Additional information on Obsidian Energy’s senior secured notes was as follows:


			As at
	June 30, 2019		December 31, 2018
Weighted average remaining life (years)		2.0		2.0
Weighted average interest rate ⁽¹⁾		5.7%		5.8%

(1)	Under current covenant amendments, that remain in effect until January 1, 2020, the Company’s average interest rate temporarily increased by 50 bps.


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 11

The Company has a reserve-based syndicated credit facility which is subject to a semi-annual borrowing base redetermination typically in May and November of each year. At June 30, 2019, the term out period of the credit facility was May 31, 2020 which has resulted in the outstanding amount presented as a current liability.

Subsequent to June 30, 2019, the Company reached an agreement with its lenders whereby the underlying borrowing base of the syndicated credit facility and the amount available to be drawn under the syndicated credit facility remain at $550 million and $460 million, respectively. The revolving period ends on February 28, 2020 with revolving period reconfirmation dates on November 19, 2019 and January 20, 2020. Under the agreement the term-out period ends November 30, 2020. Additionally, upon close of the Company’s disposition of its interest in PROP, the amount available under the syndicated credit facility will be reduced to $420 million.

Drawings on the Company’s bank facility are subject to fluctuations in short-term money market rates as they are generally held as short-term borrowings. As at June 30, 2019, 87 percent (December 31, 2018 – 80 percent) of Obsidian Energy’s long-term debt instruments were exposed to changes in short-term interest rates.

At June 30, 2019, letters of credit totaling $7 million were outstanding (December 31, 2018 – $7 million) that reduce the amount otherwise available to be drawn on the syndicated credit facility.

Financing expense consists of the following:


	Three months ended June 30				Six months ended June 30
	2019		2018		2019		2018
Interest on long-term-debt	$	8	$	5	$	15	$	10
Unwinding discount on lease liabilities		2		-		4		-
Financing	$	10	$	5	$	19	$	10

Obsidian Energy records unrealized foreign exchange gains or losses on its senior notes as amounts are translated into Canadian dollars at the rate of exchange in effect at the balance sheet date. Realized foreign exchange gains or losses are recorded upon repayment of senior notes upon their maturity. The split between realized and unrealized foreign exchange is as follows:


	Three months ended June 30						Six months ended June 30
	2019			2018			2019			2018
Realized foreign exchange loss	$	3		$	8		$	3		$	8
Unrealized foreign exchange gain		(4	)		(6	)		(6	)		(3	)
Foreign exchange loss (gain)	$	(1	)	$	2		$	(3	)	$	5

The Company is subject to certain financial covenants under its senior notes and syndicated credit facility. These types of financial covenants are typical for senior lending arrangements and include Senior debt and Total debt to Adjusted EBITDA and Senior debt and Total debt to capitalization, as more specifically defined in the applicable lending agreements. At June 30, 2019, the Company was in compliance with all of its financial covenants under such lending agreements.


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 12

In the first quarter of 2019, due to the impact of widening crude oil differentials in the fourth quarter of 2018, the Company entered into amending agreements with holders of its senior notes to temporarily amend its financial covenants for all quarters in 2019. Senior debt to Adjusted EBITDA and Total debt to Adjusted EBITDA will be reset during this period and calculated on a rolling basis starting on January 1, 2019. The maximum for both ratios will be less than or equal to 4.25:1 in 2019, decreasing to 3:1 from January 1, 2020 onwards for Senior debt to Adjusted EBITDA and 4:1 from January 1, 2020 onwards for Total debt to Adjusted EBITDA (which were the maximum ratios required prior to entering into the amending agreements). As part of the amending agreements, the Company agreed to pay an additional 50 bps if the covenant is less than or equal to 3.00:1, 100 bps if the covenant is greater than 3.00:1 and less than or equal to 4.00:1 and 125 bps if the covenant is greater than 4.00:1 and less than or equal to 4.25:1.

8. Lease liabilities

Total lease liabilities included in the consolidated balance sheet are as follows:


	Six months ended June 30, 2019
Balance, beginning of period	$	136
Unwinding of discount on lease liabilities		4
Lease payments		(15	)
Balance, end of period	$	125

Current portion	$	30
Long-term portion	$	95

The following table sets out a maturity analysis of lease payments, disclosing the undiscounted balance after June 30, 2019:


	2019		2020		2021		2022		2023		Thereafter		Total
Office	$	11	$	22	$	22	$	22	$	22	$	25	$	124
Transportation		3		5		4		3		-		-		15
Vehicle		1		1		1		1		-		-		4
Surface		-		-		-		-		-		5		5
Total	$	15	$	28	$	27	$	26	$	22	$	30	$	148

Amounts recognized in Consolidated Statements of Income (Loss) and Consolidated Statements of Cash Flows

For the six months ended June 30, 2019, the Company recorded $1 million of income from sub-leases related to its right-of-use assets. Expenses related to short-term leases and leases of low-value assets were insignificant during the period.

9. Provisions


	June 30, 2019		December 31, 2018
Decommissioning liability	$	113	$	129
Office lease provision		20		85
Total	$	133	$	214

Current portion	$	19	$	28
Long-term portion		114		186
Total	$	133	$	214


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 13

Decommissioning liability

The decommissioning liability was determined by applying an inflation factor of 2.0 percent (December 31, 2018 - 2.0 percent) and the inflated amount was discounted using a credit-adjusted rate of 6.5 percent (December 31, 2018 – 6.5 percent) over the expected useful life of the underlying assets, currently extending over 50 years into the future. The total decommissioning liability on an undiscounted, uninflated basis was $0.8 billion (December 31, 2018 - $0.8 billion).

Changes to the decommissioning liability were as follows:


	Six months ended June 30, 2019			Year ended December 31, 2018
Balance, beginning of period	$	129		$	147
Net liabilities added (disposed) ⁽¹⁾		(3	)		4
Increase (decrease) due to changes in estimates		(2	)		(23	)
Liabilities settled		(3	)		(9	)
Transfer to liabilities related to assets held for sale		(12	)		-
Accretion charges		4			10
Balance, end of period	$	113		$	129

Current portion	$	15		$	12
Long-term portion	$	98		$	117

(1)	Includes additions from drilling activity, facility capital spending and disposals related to net property dispositions.

Office lease provision

The office lease provision represents the net present value of non-lease components on future office lease payments. These payments are reduced by recoveries under current sub-lease agreements that were recognized as non-lease components. The office lease provision was determined by applying a credit-adjusted discount rate of 6.0 percent (December 31, 2018 – 6.5 percent) over the remaining life of the lease contracts, extending into 2025.

Changes to the office lease provision were as follows:


	Six months ended June 30, 2019			Year ended December 31, 2018
Balance, beginning of period (Note 3)	$	22		$	101
Net additions (dispositions)		1			(5	)
Increase (decrease) due to changes in estimates		(2	)		(1	)
Cash settlements		(2	)		(16	)
Accretion charges		1			6
Balance, end of period	$	20		$	85

Current portion	$	4		$	16
Long-term portion	$	16		$	69


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 14

10. Risk management

Financial instruments consist of cash and cash equivalents, accounts receivable, fair values of derivative financial instruments, accounts payable and accrued liabilities and long-term debt. At June 30, 2019, except for the senior notes described in Note 7 with a carrying value of $62 million (December 31, 2018 – $82 million) and a fair value of $58 million (December 31, 2018 - $77 million), the fair values of these financial instruments approximate their carrying amounts due to the short-term maturity of the instruments, the mark to market values recorded for the financial instruments and the market rate of interest applicable to the syndicated credit facility.

The fair values of all outstanding financial, commodity, interest rate and foreign exchange contracts are reflected on the balance sheet with the changes during the period recorded in income as unrealized gains or losses.

At June 30, 2019 and December 31, 2018, the only asset or liability measured at fair value on a recurring basis was the risk management asset and liability, which was valued based on “Level 2 inputs” being quoted prices in markets that are not active or based on prices that are observable for the asset or liability.

The following table reconciles the changes in the fair value of financial instruments outstanding:


Risk management asset (liability)	Six months ended June 30, 2019			Year ended December 31, 2018
Balance, beginning of period	$	9		$	(50	)
Unrealized gain (loss) on financial instruments:
Commodity collars and swaps		(8	)		43
Foreign exchange forwards		-			(2	)
Cross currency swaps		-			18
Total fair value, end of period	$	1		$	9

				As at
Total fair value consists of the following:	June 30, 2019			December 31, 2018
Current asset portion	$	1		$	9
Current liability portion		-			-
Non-current asset portion		-			-
Non-current liability portion		-			-
Total fair value	$	1		$	9

Obsidian Energy had the following financial instruments outstanding as at June 30, 2019. Fair values are determined using external counterparty information, which is compared to observable market data. The Company limits its credit risk by executing counterparty risk procedures which include transacting only with institutions within its syndicated credit facility or companies with high credit ratings and by obtaining financial security in certain circumstances.

Notional
volume

Remaining

term

Pricing

Fair value

(millions)

Crude Oil

WTI Swaps

1,650 bbl/d

Q3 2019

81.29/bbl

WTI Swaps

450 bbl/d

Q4 2019

83.39/bbl

WTI Swaps

250 bbl/d

Jul/19 – Dec /19

80.91/bbl

Total

Based on June 30, 2019 pricing, a $1.00 change in the price per barrel of liquids of WTI would have changed pre-tax unrealized risk management by $nil.


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 15

Subsequent to June 30, 2019, the Company entered into a number of crude oil swaps, resulting in the following additional current positions:


Reference price	Notional volume	Term	Pricing
CAD$	750 bbl/d	Q3 2019	$77.97/bbl
CAD$	1,250 bbl/d	Q4 2019	$77.35/bbl

The components of risk management on the Consolidated Statements of Income (Loss) are as follows:


	Three months ended June 30						Six months ended June 30
	2019			2018			2019			2018
Realized
Settlement of commodity contracts	$	(5	)	$	(18	)	$	(9	)	$	(30	)
Total realized gain (loss)	$	(5	)	$	(18	)	$	(9	)	$	(30	)

Unrealized
Commodity contracts	$	6		$	(30	)	$	(8	)	$	(48	)
Foreign exchange contracts		-			(1	)		-			(5	)
Cross-currency swaps		-			(1	)		-			1
Total unrealized gain (loss)		6			(32	)		(8	)		(52	)
Risk management gain (loss)	$	1		$	(50	)	$	(17	)	$	(82	)

Market risks

Obsidian Energy is exposed to normal market risks inherent in the oil and natural gas business, including, but not limited to, commodity price risk, foreign currency rate risk, credit risk, interest rate risk and liquidity risk. The Company seeks to mitigate these risks through various business processes and management controls and from time to time by using financial instruments.

There have been no significant changes to these risks from those discussed in the Company’s annual audited consolidated financial statements.


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 16

11. Shareholders’ equity

Effective June 5, 2019, the Company consolidated its common shares on the basis of seven old common shares outstanding for one new common share. All figures in the interim consolidated financial statements have been updated to reflect the 7:1 consolidation. Additionally, the number of units or options and the per unit or option prices under the Restricted and Performance Share Unit plan (“RPSU plan”), Stock Option Plan, Deferred Share Unit (“DSU”) plan and Performance Share Unit (“PSU”) plan have been updated accordingly.

i) Issued


Shareholders’ capital	Common Shares		Amount

Balance, December 31, 2017		72,048,713	$	2,181

Issued on exercise of equity compensation plans ⁽¹⁾		425,006		4

Balance, December 31, 2018		72,473,719	$	2,185

Issued on exercise of equity compensation plans ⁽¹⁾		509,757		1

Balance, June 30, 2019		72,983,476	$	2,186

(1)	Upon exercise of equity awards, the net benefit is recorded as a reduction of other reserves and an increase to shareholders’ capital.

ii) Earnings per share - Basic and Diluted

The weighted average number of shares used to calculate per share amounts was as follows:

Three months ended

June 30

Six months ended

June 30

Average shares outstanding (millions)

2019

2018

2019

2018

Basic and Diluted

73.0

72.3

72.8

72.2

For both the second quarter of 2019 and for the first six months of 2019, 0.2 million common shares (2018 – 0.4 million) that are issuable under the Stock Option Plan (“Option Plan”) were excluded in calculating the weighted average number of diluted shares outstanding as they were considered anti-dilutive.

12. Revenue

The Company’s significant revenue streams consist of the following:


	Three months ended June 30				Six months ended June 30
	2019		2018		2019		2018
Crude Oil	$	98	$	101	$	182	$	189
NGL		3		9		7		18
Natural gas		6		9		18		25
Production revenues		107		119		207		232
Processing fees		2		3		4		6
Financing income		-		-		1		-
Oil and natural gas sales and other income	$	109	$	122	$	212	$	238


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 17

13. Share-based compensation

Restricted and Performance Share Unit plan (“RPSU plan”)

Obsidian Energy has an RPSU plan whereby employees receive consideration that fluctuates based on the Company’s share price on the TSX. Since March 2016, consideration can be in the form of cash or shares purchased on the open market therefore all grants subsequent to March 2016 are accounted for based on the equity method. In June 2017, the shareholders approved amendments to the RPSU plan such that shares provided under the plan can either be purchased on the open market or issued from treasury.


RPSU plan (number of shares equivalent)	Six months ended June 30, 2019			Year ended December 31, 2018
Outstanding, beginning of period		1,235,202			1,199,625
Granted		971,916			915,173
Vested		(546,694	)		(514,591	)
Forfeited		(90,893	)		(365,005	)
Outstanding, end of period		1,569,531			1,235,202

Outstanding units – liability method		-			4,119
Outstanding units – equity method		1,569,531			1,231,083
Total		1,569,531			1,235,202

The fair value of the RPSU plan units granted under the equity method used the following weighted average assumptions:


	Six months ended June 30
	2019		2018
Average fair value of units granted (per unit)	$	2.77	$	8.61
Expected life of units (years)		3.0		3.0
Expected forfeiture rate		1.0%		6.0%

Performance Share Unit (“PSU”) plan under the RPSU plan

Since June 2017, issuances of performance share units are made under the RPSU plan. The PSU plan under the RPSU allows Obsidian Energy to grant PSUs to employees of the Company. The PSU obligation is classified as a liability due to the cash settlement feature and could be settled in cash or shares.


PSU awards (number of shares equivalent)	Six months ended June 30, 2019			Year ended December 31, 2018
Outstanding, beginning of period		163,129			-
Granted		144,211			163,129
Vested		(22,929	)		-
Forfeited		(77,525	)		-
Outstanding, end of period		206,886			163,129

The liability associated with the PSU’s under the RPSU plan was insignificant at both June 30, 2019 and December 31, 2018.


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 18

Stock Option Plan

Obsidian Energy has an Option Plan that allows the Company to issue options to acquire common shares to officers, employees and other service providers. Beginning in 2017, all future grants of options were suspended under the Option Plan.


	Six months ended June 30, 2019					Year ended December 31, 2018
Options	Number of Options			Weighted Average Exercise Price		Number of Options			Weighted Average Exercise Price
Outstanding, beginning of period		287,996		$	25.35		523,225		$	32.20
Exercised		-			-		(22,139	)		8.40
Forfeited		(68,058	)		64.15		(213,090	)		43.89

Outstanding, end of period		219,938		$	13.32		287,996		$	25.34

Exercisable, end of period		188,649		$	14.09		207,257		$	31.29

Deferred Share Unit (“DSU”) plan

The DSU plan allows the Company to grant DSUs in lieu of cash fees to non-employee directors providing a right to receive, upon retirement, a cash payment based on the volume-weighted-average trading price of the common shares on the TSX. At June 30, 2019, 369,131 DSUs (December 31, 2018 – 189,122) were outstanding and $1 million was recorded as a current liability (December 31, 2018 – $1 million).

Performance Share Unit (“PSU”) plan

Prior to June 2017, issuances of performance share units were made under the PSU plan. The PSU obligation is classified as a liability due to the cash settlement feature.


PSU awards (number of shares equivalent)	Six months ended June 30, 2019			Year ended December 31, 2018
Outstanding, beginning of period		118,686			219,857
Vested		(88,027	)		(60,600	)
Forfeited		-			(40,571	)
Outstanding, end of period		30,659			118,686

The liability associated with the PSU’s was insignificant at both June 30, 2019 and December 31, 2018.

Share-based compensation

Share-based compensation is based on the fair value of the options and units at the time of grant under the Option Plan and RPSU plan (equity method), which is amortized over the remaining vesting period on a graded vesting schedule. Share-based compensation under the RPSU plan (liability method), DSU plan and PSU plan is based on the fair value of the awards outstanding at the reporting date and is amortized based on a graded vesting schedule. Share-based compensation consisted of the following:


	Six months ended June 30
	2019		2018
RPSU plan – equity method	$	2	$	4
PSU plan		-		1
Share-based compensation	$	2	$	5


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 19

The share price used in the fair value calculation of the RPSU plan (liability method), PSU plan and DSU plan obligations at June 30, 2019 was $1.56 per share (2018 – $10.43). Share-based compensation expense related to the Option Plan, RPSU liability method, PSU and DSU were insignificant in 2019.

Employee retirement savings plan

Obsidian Energy has an employee retirement savings plan (the “savings plan”) for the benefit of all employees. Under the savings plan, beginning on January 1, 2019 employees may elect to contribute up to 10 percent of their salary and Obsidian Energy matches these contributions at a rate of $1.00 for each $1.00 of employee contribution (2018 - $1.25 for each $1.00 of employee contribution). Both the employee’s and Obsidian Energy’s contributions are used to acquire Obsidian Energy common shares or are placed in low-risk investments. Common shares are purchased in the open market at prevailing market prices.

14. Commitments and contingencies

The Company is involved in various litigation and claims in the normal course of business and records provisions for claims as required.


OBSIDIAN ENERGY SECOND QUARTER 2019		NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS 20