Baytex Energy Corp (BTE) 2009 Q1 法說會逐字稿

Good afternoon ladies and gentlemen. Welcome to the Baytex Energy first quarter results conference call. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Mr. Derek Aylesworth, Chief Financial Officer -- CFO. Please go ahead Mr. Aylesworth.

Thank you Alisa.

While listening to this conference call, please keep in mind that some of our remarks will contain 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.

I will now turn the call over to Tony Marino, Baytex's President and Chief Executive Officer.

Thank you for phoning in to our conference call to discuss our first quarter 2009 results. I will start with our operational discussion. Derek will follow with our financial results, and then I will make some summary comments before opening the conference to your questions.

The first quarter was another strong operating quarter. We produced proximately 39,800 BOE per day, very close to our guidance of 40,000 BOE per day.

Capital spending in the quarter was $48 million, which is about 30% of our annual budget for 2009.

When we originally established our CapEx budget, we planned to spend between 35% and 40% in Q1. For several reasons we reduced capital spending below that level.

First, in view of the uncertainty associated with both financing and commodity prices at the beginning of this year, we reduced both CapEx and distributions.

Second, we decided that it was advantageous to defer some drilling until after breakup to take advantage of the contango and the forward curve for oil, which was also consistent with our own market view for oil prices.

Third, given that natural gas prices are currently much lower than the gas prices we have experienced in recent years, we scaled back on gas drilling.

For the remainder of the year we intend to complete our previously announced $160 million capital program, which will entail a higher proportion of spending in the final three quarters than we had intended in our original budget.

Production by product was also in line with our earlier guidance. Production of light oil was approximately 7,100 barrels per day, and gas production was approximately 55 million cubic feet per day. This light oil and gas production was aided by strong performance from the Burmis properties we acquired last year, which produced approximately 3,600 BOE per day, on track with the forecast we made prior to the acquisition.

We completed a gas pipeline to serve the Ferrier/O'Chiese area in March and tied in several light oil and gas wells in April, which will help us maintain our production rates in the second quarter.

Our heavy oil production performance continued to be strong with production averaging about 23,400 barrels per day in the first quarter. Heavy oil production was reduced by approximately 400 barrels per day because we delayed well servicing on certain higher cost wells, particularly at the beginning of the year when oil prices were at their lowest.

Despite the decline in prices for WTI from last year's highs, heavy oil pricing as of today remains relatively strong due to significantly narrower heavy oil differentials, which Derek will discuss in more detail later in the call.

With current market prices for heavy oil in excess of CAD50 per barrel at the wellhead in the Lloydminster area, heavy oil drilling projects continue to have recycle ratios in excess of 3, making them among the strongest projects in the North American oil and gas industry.

Production results at Seal were once again very encouraging. We continued our record of 100% horizontal producer drilling success and recorded a production average of approximately 4,250 barrels of oil per day at Seal in the first quarter.

Current production from Seal is approximately 4,700 barrels of oil per day following completion of four new horizontal producers.

Seal drilling remains highly economic at current oil prices with recycle ratios that are even higher than those in the Lloyd area. However, as we have pointed out before, we did scale back the first quarter Seal drilling program from the level we originally planned. The Seal wells have very high initial rates, and we felt it was unwise to ramp production rates up significantly while oil prices were low. The increase in oil prices predicted by the forward curve earlier this year has materialized, and consequently after breakup we plan to resume the more aggressive drilling program at Seal that we had originally planned.

The Seal wells that we did drill were quite successful. We drilled three triple lateral, horizontal producers in our current development area in Harmon Valley and achieved initial rates averaging 275 barrels of oil per day per well. We also drilled a successful 180-barrel-per-day duel lateral well in our new West Harman Valley area, extending production about six miles southwest of Harman Valley.

We further expanded our Seal infrastructure by installing a water disposal well to reduce hauling costs and third-party disposal fees.

Finally, with respect to Seal, we also drilled two stratigraphic tests during the first quarter to set up additional long-term drilling opportunities.

In our North Dakota project we completed a 260 square mile 3-D seismic survey that we believe will help us high-grade our Bakken-Three Forks drilling and may also identify conventional prospects above and below the Bakken. We plan to resume Bakken-Three Forks drilling in Q3.

In February we announced that we had reduced our planned 2009 capital budget to $160 million. We are maintaining our CapEx guidance at this level, and we are also maintaining production guidance at 40,000 BOE per day, flat by quarter for the year.

I will now turn the conference over to Derek to discuss our Q1 financial highlights.

During the first quarter of 2009, Baytex generated operating cash flow of $59.4 million, roughly in line with our results in the fourth quarter of 2008. Our results were bolstered by a realized $25 million gain on financial instruments largely related to a series of WTI collars on 4,000 barrels per day with an average floor price of $100 per barrel. The benefit of these contracts largely offset the first-quarter decline in commodity prices, and they continue to represent a valuable financial asset for the Trust. With the continuing improvement in commodity prices which began late in the first quarter, the financial outlook for the balance of 2009 is much more positive.

The WTI price during the first quarter averaged $42.98 per barrel, which was a 26% decrease from the fourth quarter of 2008.

Significantly for Baytex, in spite of the decline in this underlying index price, our realized heavy oil pricing was less impacted as heavy oil differentials averaged just 22% of WTI in Q1 as compared to 34% in Q4. The impact of third-party investment in heavy oil refining and transportation infrastructure coupled with weaker than inspected output from major oil sands projects has created a very positive pricing environment for Canadian heavy oil.

It is our expectation that infrastructure will continue to develop more quickly than supply for at least the next several years. The market seems to agree with this view as so far in Q2 heavy oil differentials have averaged less than 15%. If the current WTI strip and differential forecasts are realized, the full 2009 year heavy oil wellhead average price would be just under CAD50 per barrel, an increase of more than 40% from the Q1 average.

The positive pricing outlook for the medium term was further confirmed with a series of concurrent forward contracts which we entered into in early Q2 which will deliver a Hardisty heavy oil price of CAD55.26 on 1,925 barrels per day for the full 2010 year. This 2010 price would be the second best annual average Canadian heavy oil price ever achieved, surpassed only by the 2008 year.

At the end of the quarter, Baytex had total monetary debt of $561.9 million. Subsequent to the end of the quarter, we completed a BOT deal equity financing, issuing 7.9 million trust units for net proceeds of $109 million.

Also we increased our revolving credit facility by $30 million to $515 million. We believe that this increase in bank line achieved in the midst of a credit contraction in the general economy represents a vote of confidence by our lending syndicate and a validation of our sustainable business volume.

The enhanced liquidity position resulting from these two transactions leaves us in a very strong balance sheet position with a high degree of financial flexibility as we navigate through the current recessionary environment.

I will now ask Tony to provide his concluding remarks.

Thank you Derek.

The industry environment today is brighter than it was at our last conference call in March. One of the main reasons is that oil prices have firmed considerably and heavy oil continues to be very strong in relation to light oil. There are even recent signs that the market for natural gas may be improving. In addition, the rate of general economic decline may be abating, creating hope that economic recovery may begin before the end of this year. Consequently, as an industry we have at least some reason to believe that the worst of this cycle may be behind us.

Specifically for Baytex, the signs are even more positive. We have significantly improved our liquidity position since we last spoke. In the first quarter we took two unpleasant but necessary steps to keep our cash outlays in line with our cash inflow by reducing our distribution and CapEx program. Based on commodity strip pricing, we can now self fund our cash distributions of CapEx. This is consistent with our guiding philosophy of the sustainability as a trust.

Moreover, we took two significant financing steps since the end of the first quarter.

The equity issuance and the increase to our credit facilities leave us in a strong position to execute our business plan, to develop our long-term oil resource projects, and to maintain a conservative and flexible balance sheet.

We know that there could well be setbacks ahead on the path to general economic recovery, but we believe we have put the financing in place to weather near-term economic setbacks and the projects in place to be successful as a growth and income company through future economic cycles.

Even in this first quarter, which for a time was as dark a period as we have seen for many years, we advanced our Seal project through a significant extensional test and through infrastructure expansion. We remain very much an oil-weighted company in a world which we believe will need oil reserves that can be brought to market at a reasonable cost.

Ladies and gentlemen, thank you for your attention. We are open for your questions.

(Operator Instructions). Gordon Tait, BMO Capital Markets.

Tony, I was wondering what -- you talked about the initial production rates, the IP rates of these wells at Seal. What did they eventually trend down to after sort of 12 months being on production?

The rates that we -- Gordon, as you said, the rates that we quote our initial rates, usually about the average for the first month of production. In the West Harmon Valley area where we have long-term history (technical difficulty) guide, we would often see declines over the first year of about 40% from the initial production levels, and it's a hyperbolic decline, and by that I mean that the rate of decline decreases in every year thereafter, and ultimately these wells are going to get down to quite low decline rates, probably single-digit rates. For the West Harmon well that we quoted, we don't really have enough history to -- I guess to say that they are going to follow the same decline path.

And then, given your pretty high IP rates, at say a $50 or $60 oil price, how long does it take you to get payout on those wells?

They pay out pretty quickly. Typical payouts are in the range of probably actually six months or so.

That's at what sort of an oil price? At $55? Or $60? Or --?

That would actually be at around current prices, which -- that's about $50 in the Lloyd area. We get the same price minus transport in the Seal production.

There are no further questions registered at this time. I would now like to turn the meeting over to Mr. Anthony Marino.

Thank you very much. And thank you for your participation in our conference call. We look forward to talking again at the end of our -- when we release our second-quarter results.

Thank you. The conference is now over. Please disconnect your lines at this time. Thank you for your participation.