Baytex Energy Corp (BTE) 2006 Q3 法說會逐字稿

Welcome to the Baytex Energy Trust 2006 third-quarter results conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded Tuesday, November 7th, 2006.

Our speakers for today are Ray Chan, President and CEO; Derek Aylesworth, CFO; and Tony Marino, Chief Operating Officer.

I will now turn the conference over to Derek Aylesworth, Chief Financial Officer. Please go ahead, sir.

Thank you, Alistair. Ladies and gentlemen, while listening, please keep in mind that our remarks in this conference call contain certain forward-looking statements within the meaning of the Securities Acts. We caution that assumptions used in the preparation of such information, although considered reasonable by us at the time of preparation, may prove to be incorrect. Actual results achieved during the forecast period will vary from the information provided herein as a result of numerous known and unknown risks and uncertainties and other factors, many of which are beyond our control. There is no representation by Baytex that actual results achieved during the forecast period will be the same in whole or in part as those forecast.

Thank you, Derek. Ladies and gentlemen, thank you for attending the Baytex third-quarter conference call. The easy thing this quarter is to talk about our Q3 performance, so I will deal with the easy part first.

Overall, we had a good quarter in Q3 2006. With the improved weather, we were able to get back to work and restore our production, albeit taking a little longer than we had planned. Production for the third quarter averaged 34,074 BOEs per day, 3% higher than the previous quarter. Production for the month of October averaged approximately 35,200 BOEs per day, and we anticipate production for the fourth quarter to be in excess of 35,000 BOEs per day, which is our long-stated target heading into 2007.

Financially, our results were impaired by lower gas prices in the third quarter. Baytex received an average gas price of $6.35 per Mcf, which is 5% lower than the second quarter this year, and 24% lower than the price in the same quarter last year. Nevertheless, we reported the highest quarterly cash flow in our history at $71.9 million.

Our distributions after DRIP participations equate to a payout ratio of 49% for the third quarter and 51% for the first nine months of this year. Our total debt continued to decline, and our debt to cash flow ratio based on annualized Q3 cash flow was 1.3 times as of September 30, 2006, with 61% of the outstanding debt in the form of subordinated or convertible term instruments. Our financial position has never been stronger.

Now, onto the not-so-easy issues. I'm sure all of you are aware of the new Tax Fairness Plan for Canadians proposed our federal government on October 31. Needless to say, we're very disappointed and frustrated by this proposal.

Despite explicit commitments not to impose specific taxation of income trust sector during the last federal election, the conservative government went back on its word and did just that. The action was prompted by the recently announced and rumored trust conversions of some of the largest businesses in Canada. While we can understand the government's concerns with regard to these proposed or possible trust conversions, we believe they could be dealt with effectively without phasing out a very efficient segment of the economy and destroying values of the investing public.

There also appears to be a misunderstanding about business models such as Baytex and its impact on the Canadian economy. Minister of Finance Jim Flaherty in his press conference announcing this tax fairness plan stated -- if corporations don't pay their fair share of tax, this tax burden will shift onto the shoulders of hard-working individuals and their families.

This is simply not fair. This statement seems to imply that individual taxpayers broadly suffer as a result of the flowthrough nature of the trust structure, which is simply not true. The reason that those individuals who choose to invest in income trusts are paying more tax is because they are receiving taxable distributions from their investments.

Using the Baytex statistics to further this point, from 1993 to 2003, when we were an E&P corporation, Baytex did not pay $1 of distributions or dividends, nor did we pay any income tax. From September 2003 to September 2006, we paid out an aggregate of $386 million in distributions with approximately 90% of that classified as taxable income. Our government surely benefited alongside our unitholders.

The other criticism offered by the Minister about income trusts is that they do not reinvest to grow their businesses or spend money on research and development; hence, the productivity of our industries is negatively affected.

I'm not qualified to comment on the way other income trusts conduct their businesses. But such criticism is definitely not applicable to the oil and gas royalty trust sector. Again, I will use the Baytex Energy Trust's operating history to illustrate my point.

Since our inception in September 2003, Baytex has invested over $575 million in capital expenditures to generate new production and reserves. Not only do we engage in significant reinvestment activities, we have also become more efficient in our capital spending as we are mandated to distribute a significant portion of our cash flows.

More efficient spending means higher productivity. For instance, last year, we bought a tired old property from a major company, and proceeded to more than double the production in less than one year's time. Next year, we are offset to begin testing the enhanced recovery potential of our property at Seal, the most exciting R&D project we have ever undertaken, including our first ten years under the structure of incorporation.

Baytex is not the only income trust working to advance the productivity of our industry. Some of our peers are industry leaders in oilsands development, in enhanced recovery projects using carbon dioxide injection, and in exploration in various countries around world.

Baytex is a member of the Canadian Association of Income Funds known as CAIF, as well as the newly formed Coalition of Canadian Energy Trusts. We are concerned that -- with the (indiscernible) approach taken by our federal government and the mischaracterization of the business model of energy trusts and its undesirable impact on the Canadian economy.

Action plans have been put together, both by case CAI and our coalition to request the government to take time to consult with us and to implement its decision in a way that does not damage investors values and the Canadian economy. It is our hope that through a due process, the government will gain a clearer understanding of our issues, and that together, we can find solutions that will see Canada's energy trusts continue to contribute to the prosperity of our nation.

Regardless of the outcome of this process, I want to reassure you that Baytex will remain a very competitive participant in the oil and gas industry and a very effective investment vehicle. We have always stressed internally generated organic investment projects, and have always used an E&P approach to manage our business. We have always thought of ourselves as an E&P with a dividend.

With our suite of identified investments, inventory, and long-term development projects, we believe that we are particularly well-positioned to continue to add value for investors, independent of the required corporate structure.

This is the end of our prepared remarks, and thank you for your attention. And we will take any questions you may have right now. Alistair?

(OPERATOR INSTRUCTIONS). [Katherine Sipuliski], Jefferies & Co.

Thank you. I was hoping to touch base with you on your expected production for 2006. I'm kind of modeling north of 34,000 barrels a day on average for the year. Does that sound reasonable?

Yes. We averaged 34,178 for the nine months. And if we can average a little bit over 35, yes, the math would take us to about 34 4, 34 5.

Okay, great. Have you guys budgeted CapEx for 2007?

We're in the process of doing that. In fact, we have a Board meeting in early December called to approve the '07 budget, after which we will be announcing our business plan for '07.

Okay. And in terms of kind of your direct operating costs, have you seen any softening of the rig market? Are you guys finding it easier to get rigs when you need them, where you need them?

There is better availability of rigs. Prices have not responded to the same degree yet. It does seem that service providers are trying to hold the line on rates, perhaps until they see if an actual slowdown of activity will emerge this winter. We do expect there to be some softening of rates as we get the activity drop-off that we're expecting. It just hasn't occurred yet.

But specifically to answer your question about availability -- it has improved.

Cameron Renkas, BMO Capital Markets.

Just hoping you guys could maybe just have a little discussion on your focus of your development spending in Q4 and maybe levels. I'm using about $128 million for the year for capital spending. And that's showing a decline in Q4 down to a 20 million remaining. It seems like where you have been spending for the year, that might a little bit higher -- maybe you could talk about that, and then more, just the focus of where the spending will be.

Cam, we do expect to spend about 20 million in Q4. And the drilling levels that that will support are probably about ten heavy oil wells in our traditional heavy oil area around Lloydminster. There will be about six light oil and gas wells, and there will be quite a bit of recompletion activity. And we should be able to readily fit that level of activity within the $20 million that will take us up to the guidance level of CapEx.

And then, just touch back on the op costs -- inflationary pressures seems to be continuing to push those numbers up. You said that your drilling costs and your service costs may not be coming down at this point yet. But do you see some of the energy in the fuel costs coming down going into Q4 as we've seen energy prices come back a little?

Yes, in fact we do. For the year-to-date '06 levels versus year-to-date '05, fuel prices were up about 11%. And that's one of our largest cost categories, fuel and related categories making up at least a third of our expenses. So that was the biggest contributor to the increase. Fuel prices have come down over the last month or two, and we do expect that we'll get -- we'll claw back a bit of that increase that we've seen in those categories during Q4.

With respect to service prices, it's the same thing as we talked about earlier. It does seem that contractors are trying to hold the line, but probably during the beginning of '07, perhaps a little bit at the end of Q4, we will see some improvement in services prices. And that was the next largest factor after fuel and the increase in OpEx.

And lastly, any new developments on marketing arrangements for Seal?

We are working on things, and there are certain things happening. It's -- at this point in time, there's really not a lot of details or specifics we can divulge. But we certainly hope that by the time we drilled up oil production and in 2007, in the mid part of the year, that we'd be able to market it through a couple more different channels.

Now, would that -- would your Q1 drilling plans change if you haven't gotten to an agreement by that point? Or are you going to drill no matter what in Q1 at Seal?

Well, I think we can carry on without -- I think right now, we have about ten wells in Seal planned for Q1, and the other ten or so for the remainder of the year. So we will probably execute the first half of the program first, and -- because I think we have ways that we are quite sure that we can market the oil effectively and wait for the development to firm up and do the rest.

[Elliot Miller].

Two quick questions. Number one, have you seen or heard any impact on the government's proposal on your lines of credit or availability of lines of credit? And secondly, has the cash flow for the first nine months met your project in terms of the total required for CapEx and distributions?

I'll take the first question -- no impact at all on our lines of credit. I would expect there would be none at least until such time as they are passed into law.

Okay.

In fact, if I can answer that, Elliot, I don't think the corporate structure itself would affect our bank line, [so to speak], because the structure of our bank loan is reserved-based loan. (multiple speakers) It depends on the reserve reported that we have that's coming up for year end '06 which is available, say, at the end of February. And the banking syndicate would base their lending value on that.

So I think if anything, the outlook of commodity prices would have a much bigger impact on the borrowing base than whether you're a corporation or a trust, because I don't think the bank really cares all that much. I'm sorry; the second question is on the --

Cash flow for the first nine months.

Cash flow for the nine months -- I think it probably marginally behind our earlier expectations, mainly because of production-volume-related issues, and also the fact that Q3 gas price is probably softer than we thought it would be. So right now, we're still looking pretty good in terms of total cash in and total cash out between distributions and CapEx, but we were actually hoping for some cash surplus by now.

Okay. Is the difference material?

I wouldn't say they're material. In fact, with the smaller Q4 CapEx program, we should have hopefully a little bit of leftover cash just for Q4 alone. But overall for the whole year, we're probably quite flat in terms of cash in and cash out.

(OPERATOR INSTRUCTIONS). [Roger Sherman], TD Securities.

I just want to follow up on the operating costs. They jumped up sequentially in terms of an absolute dollar, and I was wondering if that was driven by increased maintenance cost -- anything like that was extraordinary, and we could expect that to stay flat in the fourth quarter or come down on an absolute basis?

Roger, the only actually extraordinary expense that we had in Q3 versus the earlier quarter was some turnaround activity that contributed perhaps 5% of the increase that we've seen, but we would not expect to see that turnaround activity repeated in Q4.

For the overall year-to-date analysis, nine months of '06 versus nine months of '05, the drivers -- about half of the increase is fuel, and about 40% of the increase is services prices. Actually, there's a third category that's quite significant also -- property taxes are up significantly, and almost as significant of an increase as we had in the services category.

Of course, if you add all those together, it adds up to over 100% of the increase. But we were able to introduce operating economies into several other cost categories to hold down the overall increase.

We would expect some response in services prices, and if not in Q4, in 2007. And fuel prices have come down. So for that reason, we don't expect to see the same type of increase in Q4 that we've had for Q3 or for the nine-month period.

So on a BOE basis, do you think you'll be more similar to the first half of the year then?

Well, the nine months' number was 8 85 per BOE. And I don't think I'll guide any number that is lower than that.

Yes, I think probably we'll be quite comparable to what we've had on the average for the year so far. We have averaged 8 85 per BOE so far. That's quite close to the guidance that we provided. If you take the product mix and apply it to the individual product OpEx guidance that we provided earlier this year, it will come to 878. So we're pretty close to that. And I would think that we'll be very comparable for your total to what we've seen so far.

(OPERATOR INSTRUCTIONS). There are no further questions at this time.

Thank you, Alistair. Thank you, ladies and gentlemen, for attending our third-quarter conference, and we look forward to reporting our year-end results in the early part of March 2007. Thank you.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.