Baytex Energy Corp (BTE) 2006 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Baytex Energy Trust 2006 fiscal results conference call. [OPERATOR INSTRUCTIONS]. As a reminder this conference is being recorded Tuesday, March 13, 2007. Your speakers for today are Derek Aylesworth, CFO, Anthony Marino, COO, and I would now like to turn the conference over to Ray Chan, President and CEO. Please go ahead, Sir.

Thank you, Todd. Ladies and gentlemen, while listening please keep in mind that our remarks on this conference call contain certain forward-looking statements within the meanings of the Securities Act. A caution that assumption views 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 all or in part as those forecast.

Thank you, Derek. Ladies and gentlemen, thank you for attending our conference call. 2006 was indeed a banner year for Baytex Energy Trust. We delivered best in class performance on both operational and financial fronts, and consequently were rewarded with best in class performance in return to our investors. Baytex subscribes to a self sustaining business model whereby operational focus is principally on internal property development augmented by acquisitions to enhance asset base for long term benefits. During 2006 capital investments totaled $133 million with essentially all amounts spent on exploration and development activities. The results of this program are spectacular. While the spending level was modest at 48% of cash flow, the program maintained production at the same level as 2005 and generated enough reserves to replace 145% of production during the year.

Financing and development costs for the year before future development capital was $7.31 for proved plus probable BOE using a capital investment recycle ratio of 3.7 times. Our reserve life index continues to improve and stood at 11.6 years at the end of 2006. Reserves per trust unit were held constant at 1.8 BOE despite a 3% increase in the diluted number of trust units outstanding.

Out three year capital performance covering the period since the inception of the trust is equally strong with average F&D costs of $7.36 per BOE and a recycle ratio of 3.3 times. These capital efficiency measures are some of the best coded by the oil and gas income trust sector for 2006 and for the 3 year period. Our capital efficiency was led by activities at Celtic, the heavy oil property we purchased in the fourth quarter of 2005. Through recompletions of existing well boards and the drilling of 20 wells, production in this area increased from 2,500 boe/d at year end 2005 to over 4,500 boe/d at year end 2006. We have also identified numerous similar opportunities that will insure Celtic will remain as one of our most active areas for capital investments in the near future.

Significant gains were also experienced at Seal, our large resource heavy oil property in the Peace River Oil Sands region in Alberta. We added two horizontal production wells during the year bringing the total producing well count to 8. And drilled 3 verticals stratigraphic test wells to sample oil and reservoir quality in various walks of our land holdings. The result of our work plus those of the other operators in the same area allow our independent evaluators to increase the reserves recognized at year end 2006 to 13 million BOEs from 4 million BOEs one year ago. We have plans to drill 18 new horizontal production wells and a minimum of 4 stratigraphic test wells in 2007. We also plan to commence the groundwork for a few test enhancement recovery operation which, if successful, will lead to substantial increases in production and reserve recovery rates. We are hopeful that the success we had at Seal in 2006 is only a conservative indication of ultimate potential of this property.

One of the cornerstones of our strategy for financial sustainability is to fund cash distributions and capital expenditures through internally generated cash flow. We are pleased to have accomplished this objective in 2006. With the expiry of the lower priced WTI oil derivative contracts at the end of 2005, combined with the positive outlook on commodity prices, we increased our monthly distributions by 20% from the $0.15 per unit since inception to $0.18 per unit commencing in January 2006.

Total cash distributed, net of a 9% participation in our DRIP plan, amounted to $143 million and represented a conservative payout ratio of 52% for 2006. Total debt of $364 million at year end was 13% lower than one year ago, improving our debt to trailing cash flow ratio to 1.3 from 1.8 a year earlier. No external financings were completed during the year.

Volatility in commodity prices was unabated in 2006 with oil prices and gas prices charting different courses. WTI oil averaged U.S. 66.22 per barrel in the year, a 17% increase over the previous record of U.S. $56.56 back in 2005. The Canadian currency void by held commodity prices also appreciated 7% against the U.S. currency 2006 which partially offset the benefits of high oil price for Canadian producers. Gas prices on the other hand, declined precipitously from record highs in the beginning of the year to average 18% lower than that of 2005.

The advantages of Baytex diversified production mix were apparent as we achieved record cash flow for the year. We are particularly exited about recent and ongoing market developments affecting heavy oil differentials. Wide band differentials averaged 45% of WTI price in the first quarter of 2006, the highest level since the fourth quarter of 2001. However, new pipelines transporting Canadian crude to the U.S. lower Midwest region caused a dramatic reduction in the differentials from April on resulting in an average differential of 29% for the last 9 months of 2006. So far in 2007, differentials have averaged less than 30% despite a traditional lower seasonal demand in winter months. Baytex is confident that this trend of improving pricing for Canadian heavy oil will continue as a large number of pipeline and refining projects are underway to further expand the access for Canadian crude in the U.S. markets.

Baytex began trading as an income trust on the Toronto Stock Exchange in September 2003. We have paid in aggregate $6.36 per unit of cash distributions to our unit holders through the end of 2006. Our unit price has appreciated from $9.87 in the first month of trading to close at $22.28 on December 31, 2006. Total returns since inception were 241%. We also began trading on the New York Stock Exchange on March 27, 2006.

Our total return of 38.7% to unit holders in 2006 compares favorable to a negative 3.7% total return for the TSX S&P Energy Trust Index. As through our two year annualized return of 47.2% compared to 20% for the index and 3 year annualized return of 43.5% compared to 23% for the index. Our rate of return to unit holders rank us as the best performer amongst all oil and gas income trusts for each of the one year, two year, and three year periods ending on year end 2006.

For 2007, our capital budget of $140 million is designed to maintain our production at a 34,000 boe/d level. We are committed to execute our business plan notwithstanding the uncertainty associated with the income trust tax proposal and the recent volatility in commodity prices. If our cash flow is supported by a balanced production mix, continued improvement in the pricing factors affecting heavy oil differentials, a comprehensive hedging program, and a diversified capital structure with excellent liquidity and resources, we are well positioned to fund our capital expenditures and cash distributions internally. Baytex will be a sustainable and successful gas entity regardless of legal structure. Our fundamentals have never been stronger. We look forward to once again delivering best in class performance in the coming year.

This marks the end of our prepared statement and we would like to take your questions at this moment. Todd?

[OPERATOR INSTRUCTIONS]. Our first question comes from the line of Al Cruise, private investor. Please proceed with your question.

First, thank you for taking my call, it's my first ever investor conference call. As a small investor looking to invest in energy income trusts, what would you say are the 4 or 5 key metrics to look at when analyzing companies?

I think I can only speak to the Baytex story and its specificity. Obviously we're an oil and gas income trust, so you have to have a certain personal feeling as to how oil and gas prices are going to behave over the next little while. Us in particular, we are a more oil weighted income trust or producer, so your view of oil price is probably more important than the view on gas price. But, you know, having said that, we do draw a large amount of cash flow from gas production.

But I think that's number one as you view commodity prices. Number two obviously is the government proposed tax on income trusts. We are hearing that there may be a likelihood that the old tax could be included in next Monday's federal budget. So whether it does or not I think would give us some indication as to what that legislation and what form the legislation take ultimately. So that's the second one. And thirdly is I guess the business model that we want as a business entity, we choose to run the trust right from the beginning as a sustainable entity in terms of using our own cash flow to fund both distributions and cap ex. In doing so, obviously our capital program has to be pretty modest and we would not be targeting any high degree of growth. So that's the, I guess the tradeoff between investing in income trusts for new purposes rather than investing in E&T companies for growth purposes.

Okay.

Our next question comes from the line of Katherine Sipuliski from Jeffries and Company. Please go ahead.

Hi. Have you guys given any thought to taking out the 9-5/8 notes in July of this year? Or any thoughts for refinancing those notes?

There are thoughts. We -- obviously the current rate that is being marketed to us is quite a bit lower than 9-5/8. I actually believe it is around the 7.25 to 7.5% range. But that's still several months away from our notes being callable in July, So again, we'll revisit the thought a little closer to the call date and we'll go from there. But at the moment, there is some economic benefit for us to I guess refinance the notes.

Great. And I think you mentioned something happening on Monday regarding the Canadian trust issue. Did I hear that right? Is there something coming up on Monday that we should be keeping on eye on?

Well, what's happening is there is the announcement of the federal budget, our annual budget by the Finance Minister on March 19th. And there has been talk by the Minister's office that he may include the proposed trust tax in the same budget that he is putting in front of the House of Common which obviously is a far and wide range of issues being addressed in the whole budget. So on the other hand, there is a Finance Committee within the House of Commons has recommended that the trust tax proposal be considered as a separate motion. So at the moment, we still just guessing as to what the government will or will not do and we won't know I guess until they deliver the budget in the afternoon of March 19.

Okay, so if we see it in the budget on March 19, it makes it somewhat more certain that the government will go forward with this change?

Well I think it will sort of clarify two things. One is the timing of when this would become law so to speak. And also secondly whether there is any changes compared to what is currently on the table.

Okay, gotcha. Thanks very much.

Our next question comes from the line of Robert Serush, Private Investor.

Congratulations on a great year. I have one question. Do you have any estimate of the oil in place at Seal on your property?

Yeah, the rough estimate of how much oil is in place per section is about 50 million barrels, On certain sections it could be higher That would represent a general average. Of course we have not drilled strat tests over the entire acreage position to quantify it everywhere within that lease block.

How many sections do you own?

We have I think 104.5 net sections of land.

Okay, thank you.

[OPERATOR INSTRUCTIONS] Our next question comes from the line of David Letromil, Private Investor. Please go ahead, Sir.

Thank you. Could you please tell me what is the capital basis for the purpose of calculating the permitted growth under the Harpers Version of Tax Furnace?

The legislative limit is 40% of the value of our equity at the time of the announcement for the first year and 20% addition each year thereafter. Our market to value was about $1.8 billion on October 31, so 40% of that, 360.

I was led to believe --

320 rather. Sorry.

I was led to believe that you could also include debt, long term debt as part of that equation. Is that correct?

That's correct. In aggregate, we can issue the amount of the value of equity equal to the value of our equity on the date of the announcement plus the value of the debt at that time as well.

Okay. Thank you very much.

Our next question comes from the line of Brad Fowler from Fowler Evaluation Services. Please go ahead, Sir.

Could you comment please on the likelihood of favorable continuation of the Frontier relationship after the present contract expires?

We will be conducting our discussions with Frontier in a couple of months here. The contract has run now for the better part of a five year term and obviously because of the differential that I guess being wide during some of those years, it has been a contract in our favor. So at the moment we tried some early discussions and we didn't get to a conclusion with Frontier, so we actually have decided that we would not be holding anymore discussions until a little closer to expiry time which is the spring and summer time of '07. But we will be talking to them. They have been a great partner to us and the differential has behaved quite differently over the last 18 months or so, so we hope we're able to conduct some amenable discussions very soon.

[OPERATOR INSTRUCTIONS] Mr. Chan, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you, Todd. I want to thank everyone for spending time in attending our conference call for fiscal 2006 results. And we look forward to reporting to you again in a couple of months when we hold our first quarter 2007 conference call in May. Thank you again. Bye bye.

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