Baytex Energy Corp (BTE) 2010 Q1 法說會逐字稿

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

I would now like to turn the meeting over to Mr. Derek Aylesworth, CFO. Mr. Aylesworth, please go ahead.

Thank you, Jeanette. Ladies and gentlemen, while listening, 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 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 contained in the press release issued today regarding forward-looking statements and the material factors that could cause actual results to differ materially from the conclusion, forecast or projections 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. Unless otherwise noted, all amounts are stated in Canadian dollars. I'll now turn the call over to Tony Marino, Baytex's President and Chief Executive Officer.

Thank you for participating in our conference call today to discuss our first quarter 2010 results. I'll start with our operational discussion, Derek will follow with our financial results and I'll make summary comments before opening the conference to your questions.

Our operating results in the first quarter continued to be very strong. We achieved quarterly production of over 43,400 boe per day in Q1 above our guidance range of 42,500 to 43,000 boe per day and the highest in the history of Baytex Energy Trust. Comparing the first quarter of this year to last year, oil equivalent production increased approximately 3,700 boe per day, a 9% increase. Oil production increased 11% and gas production 3% over this period, reflecting both organic development and our Southwest Saskatchewan acquisition last year. Comparing the first quarter of this year to the fourth quarter of last year, oil equivalent production increased approximately 700 boe per day, a 2% increase which was solely the result of organic growth during the quarter.

Our E&D CapEx in the first quarter was CAD57 million, just under one-quarter of our budgeted E&D CapEx of CAD235 million for 2010. To put this in perspective, we produced organic growth while reinvesting only 53% of our funds from operations into organic activities.

As Derek will discuss later, heavy oil pricing continued to be relatively strong continuing the new structural regime for heavy oil that has been in place since the end of 2007. In the first quarter, market prices for the Hardisty heavy marker, which represents the value of raw heavy oil delivered to Hardisty, Alberta, averaged around CAD67 per barrel. To take advantage of this pricing we participated in 29 heavy oil producing wells during the first quarter including 24 in Lloydminster and five in Seal.

Production at Seal remained very strong in Q1 averaging 7300 barrels per day, about a 15% increase over Q4 levels. All five of the wells we drilled were multi-laterals with a total of 34 laterals drilled. Average initial 30-day rate was about 400 barrels per day per well. For full year 2010 we plan to drill about 70 wells in Lloydminster and 20 wells in Seal.

Turning to light oil development, we advanced several of our light oil resource plays in the quarter. In the Bakken/Three Forks in North Dakota we participated in three wells in Q1in which we had a three-eighths interest. Two of these wells have been completed using multi-stage hydraulically fractured completions and are on production, bringing our total to five Baytex-operated wells with sufficient history to establish a reliable 30 day initial rate. Based on this 30 day convention, we believe our model using an initial rate of 300 barrels of oil per day per well remains valid.

One of these wells was the second Three Forks horizontal completion in a single section or square mile of land. We drilled this well to test the effectiveness of infill drilling on our lands. The infill well averaged approximately 450 barrels of oil per day during its peak 30-day period, nearly double the initial rate from the original well in that section, which was drilled and completed in 2008. We are continuing our Three Forks drilling with an estimated 15 to 20 gross wells to be drilled during 2010 generally at a three-eighths working interest.

In our Viking light oil resource play in Southeast Alberta, we drilled one unstimulated multi-lateral well in Q1, which had a 30-day initial rate averaging approximately 100 barrels of oil per day. Our average to date in this play is a 30-day initial rate of approximately 130 barrels of oil per day per well.

We drilled three wells in our Viking play in Southwest Saskatchewan in the first quarter, all single lateral horizontal wells using multi-stage fracs. One well has been on production for over 30 days and averaged over 160 barrels a day for that initial 30-day period. We plan to drill a total of about 15 wells on our two Viking plays during 2010.

So as we went to the end of the first quarter, we announced the acquisition of a small private corporation with assets in the Lloydminster area. Cash consideration, net of working capital surplus, is estimated at CAD40.9 million. Production is approximately 900 barrels per day of heavy oil. Undeveloped acreage is 32,100 net acres. The assets can generally be very readily integrated into our existing Lloydminster infrastructure. We expect to close around the end of May.

We see numerous development opportunities on the acquired assets and will make some investments on them this year. Nonetheless these investments will represent minor substitutions in our capital program for 2010 and we are maintaining our original E&D CapEx guidance of CAD235 million for 2010. We are increasing our 2010 production guidance by 500 boe per day to 44,000 boe per day because of the acquisition. I'll now turn the conference over to Derek to discuss our Q1 financial highlights.

Thank you, Tony. During the first quarter of 2010 we generated funds from operations of CAD107.5 million, an increase of 10% over the prior quarter and 81% over the first quarter of 2009. These results were driven by increasing sales volumes and by continued improvement in heavy oil pricing. With our averaged realized heavy oil price in the quarter of CAD62 per barrel, representing an increase of 8% over the prior quarter and 83% over the first quarter of 2009.

During the first quarter heavy oil differentials averaged just under 12% of WTI. Recently differentials have widened driven by third party refinery turn arounds and the weaker shoulder demand season for refined products. We expect differentials to narrow again in the near future at the completion of this turn around season. It is worth highlighting that even with this turn around season, differentials have continued to be significantly tighter than historic pricing discounts, further demonstrating a fundamental positive shift for the heavy oil markets.

Our balance sheet continues to be strong with total monetary debt of CAD464 million at the end of the quarter. This debt level represents a debt to 12-month trailing funds from operations flow of 1.2 times, leaving us with just over CAD200 million of available undrawn credit facilities. This financial strength also leaves us well positioned should the current financial concerns in Europe spread more broadly.

We continue to work toward a planned conversion forward the current trust structure to a corporate legal form and expect to have this conversion completed before the end of 2010. In the absence of a significant decline in commodity prices, we expect to maintain our current distribution level as a dividend upon conversion to a Corporation. I'll now ask Tony to provide his concluding remarks.

Thank you, Derek. Over the past couple of weeks, we've experienced a great deal of volatility in commodity prices. In particular there has been a dramatic pull back in oil prices as a result of the European sovereign debt crisis. We do not pretend to be macro economic forecasters, but we do believe that economic activity and oil demand are firming in North America along with the economic and energy demand growth that was already occurring in the [nonOSUP] countries.

There are three ways in which we've attempted to take advantage of and also to partially insulate Baytex from this macro economic back drop. First, we have consciously positioned Baytex to be very oil weighted. And that positioning is illustrated by the increase in both our heavy and light oil production in Q1 while our natural gas production decreased. Converted on a 6 to 1 thermal equivalency basis, our production mix was more than 78% oil in Q1 and 88% of our revenue came from oil.

Second, as Derek pointed out, our relatively under leveraged financial structure leaves us in good shape to ride out capital markets crises as evidenced by our ample liquidity and our 12% ratio of debt to enterprise value. Third, we have also hedged a significant percentage of each of our commodity exposures for the remainder of 2010. In the case of WTI, we are 45% hedged with swaps and collars that are in line with current market prices. In the case of natural gas, 37% of our exposure for the rest of 2010 is hedged well over current market prices.

With respect to forex, 35% of our US dollar currency exposure is forward sold at levels that are well above current market prices. And finally 55% of our heavy oil differential exposure for the remainder of this year is hedged at attractive levels. These hedges limit our exposure to the current financial turmoil and allow us to confidently go about the business of developing our heavy oil and light oil resource plays.

These risk management measures coupled with our strong operational results and the future commodity pricing implied in the forward strip for WTI, also mean that we expect to be able to fund our E&D CapEx and distributions for 2010 out of internally generated funds from operations. Because our E&D program provides for approximately 5% organic production growth this year, we believe that our approach represents a sustainable growth and income model. We are honored that the capital markets have rewarded this model with a total equity return of 18% in the first quarter of 2010, assuming reinvestment of distributions. This return was among the highest in the energy trust sector and continues the strong equity market returns we achieved in 2009.

As Derek indicated it is our intent to convert toward a corporate legal structure towards the end of 2010. Upon conversion, we will be executing the same growth and income model. We believe we may receive even broader capital markets acceptance as a Corporation and that the capital discipline we learned as a trust will serve us well as we compete against a new corporate peer group. Ladies and gentlemen, thank you for your attention. We are open for your questions.

(Operator Instructions) Our first question is from Roger Serin from TD Securities. Please go ahead.

Good afternoon, Tony this one's probably for you. I'm wondering if you can give us some more color on your Southwest Saskatchewan activity, it was at pretty high rate when we look at current wells, certainly there's nothing close to that that we have public data on. That completion reservoir and what do you expect that the Viking wells that you've talked about drilling will be in Southwest Saskatchewan for the balance of the year?

Roger, thank you; that's a very good question. The Viking well that we drilled and completed in Southwest Sask, produced about 160 barrels a day during the first month of production. And as far as we know as well that does appear to be the highest rate well drilled in this tight Viking play to date.

There are probably two main reasons that it's achieved higher rates. The first is we probably have a little bit better permeability in that particular area than over the bulk of the play. The well is located outside of the old field boundaries in what we would view as the tight halo beyond the existing field limits. But nonetheless the reservoir facies was probably a little bit higher quality there and I think that contributed to the rate.

Secondly, we did complete that well with 12 frac stages along the roughly mile long horizontal and that was a higher number of fracs than we had in our first completion. I think in our first well we effectively pumped, this well from 2008, we effectively pumped five stages and I believe that the initial rate on that well was around 70 barrels of oil a day.

In some of the surrounding wells going forward, we probably will achieve I think some pretty good rates. Hopefully the improved completion would portend higher rates than we had previously expected in the play. I think prior to this completion, we've generally expected about 70 barrel a day initial rates. It'll take a number of completions I think to prove it out but over time we would hope that we could move up a little bit above that 70 barrel a day level in terms of average results.

Okay one follow up, Tony, yes; was this open hole or cased hole?

It was a lined well, of course, but it was not cemented. We had packers for isolation.

Thanks very much.

Thank you.

Thank you. (Operator Instructions) Our next question from Gordon Tait from BMO Capital Markets. Please go ahead.

Good afternoon. I was wondering if oil prices were to get back in the $80 plus range, I don't know where that is relative to your budget but I presume pretty strong, what would prevent you-- is there anything that would prevent you from accelerating the development, your thermal development at Seal moving that forward?

Gord, thank you for that question. The timeline on Seal thermal will largely be driven by regulatory approval. So I don't think that an oil price increase would accelerate Seal thermal. I would expect that still to occur in the second half of 2011 and the goal would be to have it on production by the end of that year. In general, an oil price movement in that range would probably not affect our overall spending budget for this year.

All right. And then secondly I was just wondering if you could put-- shed a little more color on the agreement you entered into to acquire some private structures. It sounds like it was-- it'll bring down what your-- give you some extra tax pools or something. Is that-- can you give us a little more color on that and whether you can-- you see some other opportunities to do that again?

Yes, Gord it's, Derek. I'll answer that. I think as we described in the release, we did acquired a number of private entities for a total consideration of about CAD37 million. For confidentiality reasons all that we're really currently prepared to disclose is already in the release. If, in the future, there is material information that would help folks understand the nature of those transactions, we will disclose it at an appropriate time in the future.

Okay. Thanks.

Thank you. We have no further questions at this time. I would like to turn the meeting back over to Mr. Aylesworth. Please go ahead.

Thanks, very much, for joining us. We'll talk to you again at the next conference call. Thanks very much, bye-bye.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.