InPlay Oil Corp.'s Pembina Acquisition: A Catalyst for Dividend Strength Amid Expansion

The energy sector's ongoing consolidation has rarely produced a clearer example of strategic value creation than InPlay Oil Corp.'s $320 million acquisition of Obsidian Energy's Pembina Cardium assets. Completed in April 2025, this deal has transformed InPlay's production profile, financial flexibility, and dividend sustainability—key pillars for investors seeking stability in a volatile commodity landscape. Here's why this acquisition is a win for shareholders.

Production Surge Fuels Immediate Cash Flow Growth

The Pembina assets, which include 10,300 boe/d of light oil and liquids-rich production, have immediately boosted InPlay's output to an estimated 21,500 boe/d, a 135% increase from pre-acquisition levels. Notably, 64% of this production is light crude and NGLs, a higher-margin mix that amplifies revenue per barrel. The wells themselves are outperforming expectations: four new wells drilled by Obsidian achieved 350% above type curves, with one well hitting an initial production rate of 887 boe/d—among the top-performing Cardium wells in Q1 2025.

This operational overperformance has allowed InPlay to slash its 2025 capital budget by 30% to $53–60 million, while maintaining production targets. With a 24% base decline rate—among the lowest in its peer group—the company can reinvest less capital to sustain growth, freeing cash for dividends and debt reduction.

Dividends: Strongly Accretive, Sustainably Funded

The acquisition has directly bolstered InPlay's financial metrics critical to dividend sustainability:

• Adjusted Funds Flow (AFF): Rose to $16.8 million in Q1 2025, with annualized AFF projected to hit $124–133 million—a 10% increase over 2024.
• Free Adjusted Funds Flow (FAFF): Expected to reach $68–76 million, translating to a 35–40% FAFF Yield—up 10x from 2024's midpoint. This metric, which measures cash flow after capital spending, directly underpins dividends.

InPlay's $0.09/share Q1 dividend (a 16% yield at current prices) is comfortably covered by FAFF, with a 3x+ coverage ratio. Even under a $5/bbl drop in WTI, AFF would still cover dividends by 2.5x, thanks to 75% of oil production and 67% of total production hedged for 2025.

Debt Reduction and Balance Sheet Strength

The acquisition's accretive nature is further underscored by its impact on InPlay's leverage:

• Net Debt/EBITDA Ratio: Projected to fall to 1.1x–1.3x by year-end—well below the 2.0x–2.5x comfort zone of most energy peers.
• Debt Paydown: Year-end net debt is expected to drop to $213–221 million, a $39 million improvement from post-acquisition levels, driven by cash proceeds and FAFF generation.

This deleveraging reduces refinancing risks and ensures dividends aren't diverted to service debt.

Hedging: A Shield Against Commodity Volatility

With U.S. tariffs and geopolitical risks clouding the outlook, InPlay's hedging program stands out:

• Crude Oil: 75% of production is protected at an average price of $61.70/bbl—above current WTI prices.
• Natural Gas: 67% of production is hedged at $2.20–$2.80/AECO, insulating margins from price swings.

This strategy ensures FAFF remains stable even if oil prices drop to $60/bbl, a key support level.

Risks and Considerations

• Commodity Prices: While hedging mitigates short-term risk, prolonged sub-$60/bbl oil could strain margins.
• Operational Execution: The success of tie-in projects and new well performance will determine if targets are met.
• Regulatory Uncertainty: U.S. tariffs on Canadian oil could reduce export flexibility, though InPlay's focus on light oil (which commands premiums) softens this blow.

Investment Thesis: Hold for Dividends, Watch for Upside

InPlay's Pembina acquisition has transformed it into a high-yield, low-debt, and capital-efficient producer. With 35–40% FAFF Yield, a 16% dividend yield, and a balance sheet strong enough to weather commodity cycles, the stock offers compelling income potential.

Investment Advice:
- Hold: For income-focused investors, InPlay's dividend is both sustainable and growing.
- Buy: On dips below $6/share, where the stock offers a 16% yield with FAFF coverage intact.
- Avoid: If oil prices fall below $55/bbl for an extended period or hedging positions fail to materialize.

Conclusion

InPlay's Pembina acquisition is a masterclass in value accretion: it boosts production, strengthens liquidity, and secures dividends—all while reducing debt. For investors seeking stability in energy's turbulent seas, InPlay's blend of high yield and operational resilience makes it a standout pick.