Baytex Energy Corp (BTE) 2008 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Baytex Energy Trust 2008 second quarter results conference call. (OPERATOR INSTRUCTIONS.) As a reminder, this conference call is being recorded August 12th, 2008.

I would now like to turn the conference call over to Derek Aylesworth, the CFO. Please proceed, sir.

Thank you, Brian.

Ladies and gentlemen, while listening to this conference call, please keep in mind that some of our remarks will contain certain forward-looking statements within the meaning of applicable securities laws.

We caution that the 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.

We refer you to the advisory regarding forward-looking statements in our press release issued today for additional information about the assumptions used in the preparation of the forward-looking statements, and the material factors that could cause actual results to differ materially from the conclusion, forecast, or projection in the forward-looking statements.

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.

Ladies and gentlemen, we are very pleased to report our 2008 second quarter results. I'll let Tony and Derek provide a review on the operations and financial results, I will provide my summary comments, and we will then be open for questions. And here's (inaudible) Tony Marino.

Thank you, Ray.

Our operating results continued to be strong in the second quarter. We achieved an average production level of about 38,200 BOE per day in Q2, up slightly from Q1 levels. This basically flat quarter-to-quarter production performance resulted primarily from two offsetting factors. We added the Burmis volumes in early June, but that production increase was offset by production shut-ins for scheduled turnaround activities in four of our light oil and gas fields.

In addition, we recorded modest levels of production losses due to road restrictions during breakup. These hauling restrictions typically result in the second quarter being our lowest production quarter of each year.

Strong production performance continues in each of our key assets. For the Pembina and Lindbergh assets we acquired a year ago, we averaged approximately 5,500 BOE per day in the first half of 2008, which is quite a bit above the properties' 4,500 BOE per day production level prior to Baytex assuming operations.

The Burmis properties are producing at about 3,900 BOE per day, up from approximately 3,650 BOE per day at the time of our announcement of the acquisition.

Our heavy oil production performance was also quite strong, averaging about 22,900 barrels per day in the second quarter, up over 500 barrels per day from Q1, despite the normal curtailment during spring breakup.

Development results at Seal were once again very encouraging. We continued our record of 100% drilling success by drilling 10 successful horizontal producers in the first quarter of this year. With those wells on production, Seal averaged approximately 3,850 barrels per day in the second quarter, up from 2,500 barrels per day in the first quarter.

We also successfully executed the injection phase of our thermal pilot in the second quarter, and are now in the production phase of the cyclic steam process. We will disclose production results when we believe we have a conclusive determination of the viability of the cyclic steam process.

As Derek will discuss in more detail in a few minutes, the increase in heavy oil production occurred at a time of significantly improving heavy oil prices. The average price for our heavy oil increased by 32% quarter-over-quarter to nearly CAD 79.00 per barrel in the second quarter.

Seal wellhead pricing was particularly strong, recording a 43% increase, going from CAD 46.00 per barrel in Q1 to CAD 66.00 per barrel in the second quarter. For the remainder of 2008, we expect production to be near the upper end of our previous guidance, or about 41,000 BOE per day.

We're also reiterating our E&D CapEx guidance of CAD 170 million for 2008. In the second half we will continue our Seal coal primary drilling with 9 new wells, and we'll drill 25 to 30 more wells in our traditional heavy oil area around Lloydminster.

We also plan to step up our light oil and gas activities, drilling approximately 10 light oil and gas wells, including several on the Burmis properties.

Our inventory of development opportunities stands at an all time high, and we will continue to select investment projects that maintain our historical low F&D costs and high recycle ratios while putting seed money into projects that hold long-term promise such as Seal thermal development.

I'll now turn the conference over to Derek to discuss our second quarter financial results.

Thank you, Tony. We are very pleased to report quarterly cash flow of CAD 125.2 million, the highest level in the history of the Trust. The commodity price environment in Q2 was again a key driver of these results.

Average WTI prices in Q1 of -- in Q2 of CAD 123.98 per barrel was up 24% from Q1. Heavy oil prices continued to improve, with the pricing differential for Western Canadian heavy averaging only 18% of WTI in the second quarter.

The culmination of the increasing benchmark WTI and decreasing differential generated a corporate average heavy oil wellhead price of CAD 78.92 per barrel in Q2, an increase of 30% over the first quarter.

The outlook for continued heavy oil pricing strength remains very positive, both in the near term, with July and August differentials coming in below Q2 averages, and over the longer term, with continued third party investment in heavy oil refining and transportation capacity.

Commodity price improvement was not restricted to liquids, however, with our wellhead natural gas pricing averaging CAD 9.92 per Mcf in the quarter, or 25% higher than the previous quarter.

The increased cash flow resulting from this pricing environment has further improved our balance sheet, and has given us the opportunity to directly share the benefit of robust prices with our unitholders.

During the second quarter, we reduced our net monetary debt by CAD 22 million to CAD 414 million, which translates to a 0.8 times debt-to-cash flow ration based on annualized Q2 results.

Concurrent with the closing of the Burmis acquisition, and considering the overall financial strength of Baytex's core business, we were able to increase our syndicated credit facilities to CAD 485 million. With our debt levels low on both an absolute and relative basis, Baytex's balance sheet is stronger and more flexible than at any other time in our history.

Effective for the distribution in respect of June operations, we had increased our monthly distribution by 25% to CAD 0.25 per unit per month, our second distribution increase this year and our third as a Trust against no reductions.

While this increase was significant, we believe the level of increase was also conservative. The increased distribution level does not rely on the current commodity prices.

Assuming our current levels of CapEx and production guidance and DRIP participation, we will be self-funding of our distributions and capital program at a WTI price of CAD 95.00 a barrel and a wellhead gas price of CAD 8.00 an Mcf. Thus far in the third quarter, commodity prices have been extremely volatile and have trended away from the highs seen in late Q2 and early Q3.

We believe that, with the enhanced production profile which comes to us with the Burmis acquisition, our conservative distribution policy and our expanded balance sheet, we are well positioned to manage our business through this period of volatility and to be in a position to take advantage of opportunities which may present themselves to enhance our portfolio.

I will now turn the conference over to Ray for concluding comments.

Thank you Derek and Tony.

Ladies and gentlemen, we are very pleased to report record results again for this second quarter of 2008. Unfortunately, with the recent pullback in commodity prices, we are not sure if the market would care to appreciate a focus on these results. However, during these volatility conditions, Baytex's operating strategy of emphasizing sustainability demonstrated merit.

As our production is three-quarters weighted towards oil, let me use oil to explain my point here. As an income trust, our operating philosophy has always been to maintain our base production and reserves with a modest, but efficient exploration and development program, and distribute the remaining cash flow to our unitholders on a consistent and reliable basis.

WTI oil price averaged US $110.94 in the first six months of this year, a 53% increase over the 2007 average of US $72.31. Obviously, the resulting cash flow was significantly higher than the base rate going into 2008.

We choose to maintain our original capital budget and only adjust it modestly to reflect the increase in our base operations by the Burmis acquisition. We also choose to share the benefit of higher commodity prices with our unitholders directly by increasing our distribution twice in the first half of this year, and by a total of 39% from CAD 0.15 per unit in the beginning of this year to the current CAD 0.25. We remain disciplined in our operating and financial practices as illustrated by these second quarter results.

As Derek mentioned earlier, even with the increased distributions and the assumption of the incremental debt from Burmis, our total monetary debt at the end of the second quarter was still CAD 22 million less than 90 days ago.

Our current capital spending and distributions are well within cash flow generated under today's commodity prices. Anchored by a strong and flexible balance sheet, we are well positioned to manage our business through these volatile times.

Together with continued progress and improving our asset base with projects such as the Seal development and the Burmis acquisition, we are confident that Baytex will continue to deliver sustainable and superior returns to our stakeholders.

Thank you for your attention and we are please to take questions at this time. Brian?

(OPERATOR INSTRUCTIONS.) And our first question comes from the line of [Vance Shaw]. Please proceed with your question.

Hi. Yes, this is Vance Shaw from Credit Suisse. How are you guys?

Good, thank you.

A question for you on derivatives. I saw that you had a realized loss of CAD 25 million in your derivatives book. And I assume that those were sort of so-called costless collars you were doing, so you were short a call option and got called out or something, or -- could you describe--?

--Yes, that's exactly right, Vance. We have a series of costless collars in place for '08 and for '09. For '08, 6,000 a barrels a day collared. And with the WTI price being above the ceiling of those collars, we realized a loss of about CAD 25 million.

Okay. So, realized means that you basically -- you were exercised out of those positions, or you just decided to sort of pay yourself out of them?

No. That means that the 6,000 barrels a day we settle up every month end. So, what was realized was three months worth of that contract.

Oh, I see. Okay. So then, those three months are still outstanding. I guess since the price of oil's come down, it's become a little less painful then, since the end of June.

A little less painful on the derivatives side, yes.

Yes. I got you. I got you. Now, do you have to post margin or do you guys not post margin under your agreements?

No, we don't.

Okay. Thank you very much.

(OPERATOR INSTRUCTIONS.) And our next question comes from the line of Peter Lee. Please proceed with your question.

Yes. Hi. Just wondering if you guys anticipate going forward to come to the market with any financing transactions in the near future, either with your current callable bonds or other -- thinking about other capital raises?

For financing transactions, we usually have to look at the whole balance sheet and decide what to do there. And also, a lot of it, what we have done in the past is acquisition or transaction-driven. So, at this point in time, it's difficult to -- I guess to project whether we'll be successful in any of such activities.

As far as the higher bonds are concerned, and they have been callable since July of last year, so we continue to monitor market. As you know, the credit side of the things have tightened up quite a bit earlier and has seemed to open up back again for issuers such as Baytex in the energy area. So, we're looking at that and we have the next little while to consider refinancing of that bond.

And with the refinancing -- I understand the capital raises are transaction driven. With the refinancing of the bond and looking at the Company's whole capital structure, how are you guys thinking about the refinancing beyond -- is there any consideration beyond just the current credit market volatility? Thank you.

We're going to look at the -- I guess the support of the market at this level. We have CAD 180 million that is coming due in July of 2010. And currently, I think that size or type of refinancing issues are definitely possible. But as I said, we'll probably take a little bit more time to see how the market is performing over the next little while.

By waiting actually the last 12 months, the take-out premium, so to speak, of the bond has gone down from roughly 4.8% down to 2.4%. And at the same time, the Canadian dollar has actually weakened towards the US dollar over the last 12-month period. So, I think we actually are pretty fortunate in having waited this last little while. And we'll just discuss the situation further with our advisors in this area and we'll make a decision accordingly.

Great. Thank you.

Next question, Brian.

Our next question comes from the line of Corey Wrenn. Please proceed with your question, Corey.

Yes. Thank you. I had a question in regard to the -- towards the end of your press release you talk about the impact of commodity price changes. The 10% drop would be roughly a CAD 44.3 million reduction in your unrealized losses on your hedges -- or your derivatives. I was wondering, at today's prices, what do those look like? Obviously, we've had some drop, a significant drop and--.

Yes. To be honest, Corey, I haven't got a current mark-to-market for you, but--.

Okay. Okay.

Given the -- compared to June 30th when the oil price have corrected, I think a bit more than CAD 20.00. So, I guess you can almost pro rata calculate at that versus our CAD 80.00 call price for 2008.

Okay.

And our 2009 call price are pretty high, so I don't think those would have much of any mark-to-market values.

Have you done any hedging out any further than 2009 yet?

No, we haven't.

Okay. Going forward, you've got a little bit over -- a little less than 2.5 years into the point when the Trust will have to -- I don't know, when you lose your tax advantage status. Have you had any thoughts about what you're going to do at that point, or -- as far as the structure of the -- as a Company?

Well, we all -- definitely, we have lots of thoughts, Corey. However, at this point in time, I'm not really sure how accurate we can forecast what the world is like 2.5 years from now. I guess, if you think back -- all of our thoughts back on a (inaudible) of 2006 compared to now, I'm sure the situation has changed a lot.

So, we definitely want to continue to manage Baytex as an oil and gas business, and thereby practicing our operating and financial decisions on a prudent basis. And at the end of the day, whether we remain as a Trust post-2010 or convert ourselves into a different form, I think the business fundamentals will support our decision properly.

Okay. Alright. Thank you.

Thanks, Corey.

(OPERATOR INSTRUCTIONS.) And there are -- excuse me. Our next question comes from the line of [Robert Dirosch]. Please proceed with your question.

Hi. What does the projected takeaway capacity for the oil pipelines look like versus oil production in Canada over the next year?

That's a farther -- rather I guess general far-reaching question, and I'm not really sure I can provide you with a very accurate number of barrels per day type of analysis at this point in time. I'm sure that you have read or heard about the expansion plans of some major pipelines over the last two to three months.

At this point in time, we can only gauge the supply and the demand dynamics by the movement of the oil price, as well as the changes in the heavy oil differentials for -- that are more important to Baytex. And in that situation, we actually are seeing very good development on the part of being a producer like Baytex because the -- as Derek said earlier, the differentials for both July and August are well below the second quarter levels.

And so, as far as we can see into the rest of this year, heavy oil differentials should be well below historical averages. And that can only come from fundamental supply/demand dynamics within the producing and refining sector.

So beyond that, I think as far as how the barrels and the pipeline's going to line up, I think industry organizations such as DeKalb and Enbridge and so on would have better general studies in that regard. And I think that I would definitely refer you to some of their publications.

Okay. Thank you.

There are no further questions at this time. I will check one more time. (OPERATOR INSTRUCTIONS.) And there are no further questions at this time. I'll now turn the conference call over -- back to you for closing remarks.

Thank you, Brian. And thanks again, ladies and gentlemen, for your participation in our conference call for the second quarter. And we look forward to speaking with you again in 90 days' time. Goodbye.

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