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Obsidian Energy Ltd. said it’s exploring "strategic alternatives” after a key asset sale fell through, but environmental liabilities and a heavy debt load will make it challenging for the struggling Calgary oil producer to find a buyer.

Obsidian, which was formerly known as Penn West Petroleum Ltd., has been quietly shopping itself around for several years, said Jeremy McCrea, an analyst at Raymond James Ltd. Tuesday’s announcement indicates that a buyer has yet to materialize, and the company is now ratcheting up its efforts by advertising to a broader audience.

“Given the company’s history and remaining assets and liabilities, it will be difficult for it to find a buyer in the current market,” Mr. McCrea said.

Obsidian, once among Canada’s largest oil and gas producers, has downsized dramatically in recent years by selling off assets. Meanwhile, its share price on the Toronto Stock Exchange has tumbled from a high of $92.75 on July 22, 2013, to a closing price of $1.40 on Tuesday. The most dramatic decline took place between June and December of 2014, when, amid the collapse in oil prices, Obsidian’s shares dropped more than 70 per cent.

While much of the late 2014 dip can be attributed to slumping energy prices, it also came as the company announced it had undertaken an internal review into accounting irregularities. In 2017, the U.S. Securities and Exchange Commission charged the company and three of its former employees for their roles in an alleged accounting fraud, causing the company’s shares to drop more than 10 per cent. Obsidian paid US$8.5-million in 2017 to settle the charges.

The strategic review comes after Obsidian had to terminate a deal last month to sell its 55-per-cent stake in the Peace River Oil Partnership, a heavy oil project in Northern Alberta, to Highwood Oil Co. Ltd. The deal required the consent of Obsidian partner China Investment Corp., a sovereign wealth fund created by the Chinese government in 2007, but it wasn’t obtained.

Obsidian reported net debt of $478-million as of June 30, and had negative cash flow from operations in the first half of 2019.

Cody Kwong, an analyst at GMP FirstEnergy, said would-be buyers are likely to be more interested in snapping up certain assets rather than the entire company.

“I think the Cardium will certainly be the belle of the ball,” said Mr. Kwong, referring to light-oil wells that the company owns in central Alberta’s Cardium formation. But, he added, it’s unclear whether selling those assets will be enough to cover liabilities such as the company’s debt load and the costs of cleaning up abandoned wells.

Obsidian didn’t respond to a request for comment.

Earlier this year, the Supreme Court of Canada ruled that environmental obligations trump paying back creditors in the case of an energy company’s insolvency or bankruptcy.

Many of Obsidian’s wells are from the 1980s, when environmental laws were looser, which means clean-up costs may be higher than anticipated, according to Mr. McCrea. “Anybody who’s looking to buy this company may just say, ‘I’m not willing to take on all that liability,' " he said.

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