Baytex Energy Corp (BTE) 2007 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Baytex Energy Trust 2007 second quarter 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).

A rebroadcast of today's conference will be available beginning today through August 22, 2007. To access the rebroadcast, please press--please dial 1-800-558-5253 and enter reservation number 21343957. As a reminder, this conference is being recorded Wednesday, August 8, 2007.

I'd like to turn the conference call over to Derek Aylesworth. Please go ahead.

Thank you, Allana.

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 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 numerous 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.

Ladies and gentlemen, thank you very much for joining us today. We are very pleased to report the progress we achieved during the second quarter. Although our cash flow for the second quarter wasn't as high as we would have liked, we believe we have made substantial improvement in the long-term fundamentals to the Baytex story and we will look back to this Q2 of 2007 as a successful building block for our future.

Of course, the most positive development in the quarter was the completion of the asset acquisition of Pembina , Lindberg and the other exploration areas. We have consistently indicated that we are looking for additional light oil and natural gas assets to compliment and balance the vast potential in our heavy oil asset base.

We are delighted that this acquisition not only brings us light oil natural gas BOEs that generate immediate accretion on all fronts, by that, I mean accretion in production per unit, reserves per unit, cash flow per unit and that adds net value per unit. It also brings us a large suite of exploration and development opportunities on some very high-quality assets.

The crown jewel amongst all of the properties we acquired is definitely the assets at Pembina. This (inaudible) has become one of the most exciting projects in the Western Canadian Sedimentary Basin in the last few years. Through this acquisition, Baytex has secured a number of prolific light oil natural gas wells, ownership in crucial infrastructures and a large number of high potential exploration and development opportunities. We believe that the quality of this inventory will improve the future capital efficiency in the replacement of production reserves in our conventional oil and gas operations.

We believe there is a second way to add value with the Pembina properties. In the past, the absence of cooperation among participants in this area has held back the performance of everyone's assets. We believe that together with the other operators in the area we are making substantive progress towards cooperative reservoir management that would lead to improved operating consistency, higher up time and more predictable production and cash flow.

Almost lost in the excitement of Pembina is our newly acquired heavy oil properties at Lindberg. Although it is relatively minor at about 1,000 barrels a day, and we only acquire an average of 22% non-operated interest, these assets actually fit our corporate income trust operating model quite nicely. With this multi-zone low-risk developmental lature, capital requirement to maintain production has been very modest in the recent years. So, it fits our sustainability objectives perfectly.

Besides this important transaction, the operating results at our sealed project also gave us something to cheer about in the second quarter. We drilled complete and put onstream nine new horizontal producing wells near the end of Q1, which more than doubled the number of producing wells in this area to 17.

After the usual initial cleanup period, these new wells responded very well and collectively reached our expectation of an average initial production rate of 150 barrels per day per well. These results support our decision to execute our second half capital program in the area as earlier planned, which includes the drilling of eight horizontal producers.

One of these new wells will be equipped with thermal casing and liner and will be used as our first (inaudible) 16 pilot test scheduled to commence early next year as long as we can get the required permits in place. We are satisfied with the progress at [Seal] to date and will continue with our methodical approach to develop this asset for the long-term benefits of our company.

Now turning to the operating and financial results of the second quarter, as expected, production was down 2% quarter-over-quarter. This is normal to operations due to (inaudible) effecting trucking and hauling and other types of oil (inaudible) services. In fact, in both 2006 and 2005, Q2 production was 6% below that of Q1.

Cash flow for the quarter was 9% below that of Q1. In addition to the 2% lower production, the other main driver was an average realized gas price that was 6% below the previous quarter. This is largely due to the expiration of higher price contract in place for the winter months ended on March 31st.

Operating and transportation expenses were a combined $3.3 million over those of the first quarter. Weather-related operating inefficiencies were most responsible for this increase. In general, service inflation seems to be abating, especially in capital items such as (inaudible) work, however, the decrease in prices for CapEx related items comes sooner and is more pronounced than for OpEx related items. The CapEx items are usually more discretionary and a market for OpEx related services is more constant. We are making a concerted effort to translate the weakest services environment into lower OpEx as well as CapEx.

Looking ahead to the second half of 2007, we are forecasting a slightly more active E&D program. We are essentially maintaining our earlier CapEx guidance at $150 million to $155 million for the year, with $71 million already spent in the first half.

From a production standpoint with benefits of the acquisition for the full quarter, we're expecting Q3 production to average between 38,000 and 38,500 BOEs per day. Projected cash flow for Q3 is the more difficult task given the substantial volatility in the commodity market, however, we are confident that we will show significant improvement in cash flow over Q3. Utilizing current prices, we can see cash flow in the $70 million to $75 million range, which would be an improvement of 30% to 40% from the cash flow in the second quarter.

Ladies and gentlemen, this marks the end of our prepared remarks. I thank you for your attention and we're now open for questions. Allana?

(OPERATOR INSTRUCTIONS)

Our first question comes from the line of [Jeff Wellwording] from UBS Financial Services. Please proceed.

Thank you, guys. Had a quick question on the whole tax code change for Canada that is going to impact a lot of the trusts in 2011, and there was a note on your press release about reserves you're starting to hold back between now and then. Can you comment on that, and sort of what the impact will be over the next say three to four years, and how it will impact, if in fact, the laws stay as is and if this tax change is enacted in 2011?

Is this Jeff?

Yes, Jeff.

Jeff, it's Ray Chan, hi. I just wanted to clarify the question on us holding back reserves because of the tax exchange.

Well, there was a comment that talked about--maybe not so much holding back, but is there anything you guys are doing on a quarter-to-quarter basis right now in terms of the tax impact that could that will hit the trusts, all of the Canadian income trusts, started in 2011? Just a general question in that and are you guys doing anything from a finance standpoint or accounting standpoint between now and then?

Okay, I guess a quick answer would be no, because obviously we are not obligated to alter the corporate structure until 2011, as you stated. So at the moment we are managing the Baytex entity under the income trust model. Our objective, our mandate is to deliver basically consistent return, minimize dilution to our unit holders and paid out the assigned distributions as you see at the present time, and until we make a decision at the timing in the form of the change, I do believe it is another transaction that will change our metrics. That is the target of our operating model and financial model is to keep where we are on a constant basis until we address the change in the tax law.

Sure.

And when we have to address the tax changes, then we obviously have to determine the growth targets or dividend payout, whether there should be any and the amount and so on so forth, but we do believe there is a lot of time between now and then.

Okay, but I guess the general question is there's nothing that you guys had to do to report or comply with Generally Accepted Accounting Principles in Canada to meet or satisfy any of that between now and then. Is that correct?

The only thing that you did see in our financials, Jeff, was provision in our future income tax.

Yes.

Provision for our recovery of tax shelter that was at a trust level. It was not recorded. It was a pretty minor amount, about $0.5 million.

Okay. That--that might have been the item that I--that I had seen, but it doesn't sound like there's anything substantial that you guys are going to do or have to do between now and then.

No. That's correct.

Okay, all right, thank you.

Our next question comes from the line of [Corey Wren] from Pico Company. Please proceed with your question.

Hi, this is Corey. I had a question, Ray, around the natural gas market. I noticed interviewing the Precision Drilling quarterly report, they talked a little bit about extremely low utilization of equipment this last quarter, like the lowest in a decade, and they attributed a lot of that to natural gas market. I was wondering if you had any comments about what that looks like to you going forward? What's going to change the pricing for natural gas up there?

Corey, thanks for [attaining] the call. Obviously everything and natural gas is no different, in fact, probably (inaudible) more volatility in North America than most other commodities. It goes up and down and we are at a trough of the cycle right now, so to speak, and that's why we feel that this is the perfect time to do the kind of things we are doing, and i.e. is to acquired assets that maybe other people are not keen on because of the outlook in prices.

Obviously North American natural gas is a fairly tight supply/demand dynamics in the whole commodity and, therefore, the reduced utilization reported by the drillers are very real in the sense that if there are not enough wells drilled during any period of time to replace declines then you can hopefully look forward to an upcycle in the pricing because of the simple supply and demand equation.

What kind of lag would you think you'd see in that, Ray?

I'm sorry?

What kind of lag would you see--when would it catch up? I mean we've got liquified natural gas coming in now and things like that.

Yes, I don't think the (inaudible) plays a huge part in the supply situation for North American gas, but definitely we are quite weather-dependent in terms of the supply/demand equation and we do have weather, whether it is hurricanes in the summer months, or later summer months, I guess, because we're already into August, we're not seeing a lot of that, and we get cold weather sooner than later in the winter months, then I would think that the response of natural gas price would be more accelerated.

So, a related question as far as would that be where you're seeing the inflation and the service costs dropping, in the drilling side?

Yes, that is probably the category that has the greatest reduction so far. We--and it's why we're able to actually have a little bit higher development levels than we had a year ago at a little bit lower total CapEx spending.

As Ray mentioned earlier, in some of the other categories some of them have dropped, but the drilling is really the first to respond and a lof the OpEx items have a much more constant level of utilization because that production has to continue and wells still have to be prepared--have to be repaired. The CapEx related spending is much more discretionary and it's those CapEx related items, drilling to a lesser extent, pressure-pumping, well-logging, services like that we see the greatest reductions.

Okay, well thank you guys.

Thanks, Corey.

(OPERATOR INSTRUCTIONS)

Our next question comes from--just a moment, please--from [Coley Ramachandran] from State Street Global. Go ahead with your question, please.

Thank you very much. I just have a quick question. In prior calls you discussed some of the higher coupon debt that you're currently carrying. Any thoughts on what you plan to do with the debt? It seems with the Company's profile it's certainly higher than what you should be able to borrow in the current market.

Definitely you're referring to our 9 5/8 bond that auto-matures in 2010, actually the first call date we just passed it on July 15 of this year. So, we have the flexibility. Now to look at the refinancing, the 9 5/8, (inaudible) I'm sure you're aware of the current situation with the corporate debt market almost worldwide, definitely North American-wide.

At the moment, I'm not really sure the environment is conducive and positive enough for us to contemplate a refinancing issue, but we will continue to monitor market. There is an opportunity to lower our borrowing cost on a go-forward basis, but we do have to pay 4.8% half coupon as a take out premium on the whole bond.

So, there is a bit of a economic calculation there as to when would you break even, so to speak, in terms of replacing the old coupon with the new coupon, but we're looking at that and this is definitely dictated by market conditions.

So, that's something that if the market conditions improve over the next six or seven months or so, that's definitely something that you'd be looking at--looking into as you--as you mentioned in the past?

Yes, we can consider, although I guess as to--as time goes on, the next call date is July 15 of 2008 and our take-out premium is reduced by 50%. So, again, economic decision and you will see that if you wait long enough, so to speak, you might as well wait to the next call date so you don't have to pay as much take-out premium.

Yes, that makes sense. Thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS)

There are no further questions at this time. I will now turn the call back over to you. Please continue with your presentation or closing remarks.

Thank you, Allana. Thanks, ladies and gentlemen, for joining us for our Q2 conference call. We look forward to reporting to you our Q3 results in November. Goodbye.

Ladies and gentlemen, that concludes the conference call for today. A rebroadcast of today's conference will be available beginning today through August 22, 2007. To access the rebroadcast, please dial 1-800-558-5253 and enter reservation number 21343957. We thank you for your participation, and we ask that you please disconnect your line.