埃尼石油 (E) 2005 Q4 法說會逐字稿

This is the Telepartner's conference call at 1400 hours on Tuesday, March 21, 2006. The chairperson today is Mr. Rick Anderson.

Good morning. My name is Richard Anderson; I am the Chief Executive Officer of First Calgary and I do welcome you to this First Calgary teleconference call. We are taking this opportunity on the announcing of the results for the year ended December 31, 2005 to discuss the evolution of First Calgary from a pure exploration company to a full cycle exploration and production company.

With me today is Mr. Martin Layzell, formerly First Calgary's VP of Exploration and now First Calgary's Senior Vice President Algeria Country Manager; Mr. Shane O'Leary, First Calgary's Chief Operating Officer. Mr. O'Leary joined First Calgary in January having prior experience with EnCana, BP, and Amoco; and Mr. John van der Welle, First Calgary's Finance Director. John joined us in January as well, with prior experience and Premier, Hardy Oil, and Enterprise. Martin and John are both located in First Calgary's new London office, while Shane and I are located in Calgary.

The agenda for today will be for me to hand it over to our Senior Vice President Algeria Country Manager Mr. Martin Layzell to update you on our operational activities; then Mr. O'Leary, our operating officer, will explain where we are in regards to bringing our reserves on production; and John van der Welle will then talk about where the Company is financially and what our financing options are going forward.

A little background to set the stage before I do hand it over to them. First Calgary is quite a unique company. We have been operating for nine years in our present form and have targeted Algeria as our country of choice. We have negotiated and hold two concessions 100% as a foreign company. We have established reserves proven and probable of 4 TCF equivalent and proven, probable, and possible of 13 TCF equivalent. Or to put it into oil equivalent, 670 million barrels of oil and 2.2 billion barrels of oil. These reserves have been assessed by DeGolyer and MacNaughton, First Calgary's independent engineers.

This unprecedented exploration success has put the Company in a class of its own and has moved the Company to a new phase in its development. It has required the strengthening of the management team, as evidenced by some of the people with me today, and also the addition to the depth of the company's staff. We are very pleased with the engineering, geological, and geophysical people we have been able to attract to our company recently.

First Calgary's go-forward strategy is quite simple -- continue to strengthen the reserves, which we are doing with an aggressive drilling and completion program, and bring these reserves on production through a staged commercialization program. We are pleased with our progress to date. Let me now hand it over to Martin Layzell, our Senior VP Algeria Country Manager, to give you an overview on the operational activities.

Thank you, Rick. I'm going to give a brief summary of FCP's operations in Algeria on Blocks 405b and 406a and to start with a summary of our activity to date, proceed with a review of our current operations, and then present an overview of our plans for 2006. I think firstly with 405b, and I may refer to the maps which are available on our website from time to time, but try and refrain from linking my comments to them. 405b was signed in December 2001. We've completed four years of the five-year exploration phase. We've done three rounds of seismic acquisition on this Block and it is now 100% covered with 3-D seismic data.

A total of 13 wells have been drilled and cased to date on block 405. This includes MLE-1, which came with the Block. There now six wells on the MLE field, this is in the eastern part of Block 405b and on the map it's shown in pink. To the West and immediately adjacent to the MLE field, FCP has drilled seven wells on a very large hydrocarbon charge structural complex. The multiple fields and discoveries of gas and liquids in this area are now being grouped into the central field area. This area is comprised of a number of different fields and structures, all linked in together and, as I said, immediately adjacent to MLE.

The success rate for drilling so far on block 405b is 100%. During much of 2005 the drilling activity was reduced. However, detailed geological and reservoir studies continued on the vast data volume that had been collected throughout the drilling program. Our [D&D] team was also strengthened at this time to be able to handle this work and the future drilling and activity. We shouldn't forget the construction side, that on Block 405b alone we now have more than 100 km of prepared roads for future activity.

The result of all this activity of course is the very large reserve space. On block 405b, as of the end of 2005, the proved undeveloped reserves, as reported by D&M, DeGolyer and MacNaughton, is in excess of 1 TCF equivalent. The 2p proved improbable, is almost 4 trillion cubic feet equivalent and the 3p is in excess of 12 trillion cubic feet equivalent.

The reserve pictures remained broadly unchanged from 2004 to 2005. This is of course due to the limited drilling that took place on 405b last year. I will remind you that at this point that we are targeting a significant increase in the 2p reserve throughout 2006 operations, which I will review now.

The map on the website shows the current operations that we've been working on, the wells for the first quarter of 2006. This has included the drilling of exploration and appraisal wells, completions and testing. In addition to that, we have a program under way to stimulate production from certain zones that have been recognized as hydrocarbon charged but that are not able to flow conventionally. These are the tight reservoirs.

This program primarily involves artificially inducing fractures into the selective formations called a frac program. Such programs are commonplace in the oil industry and similar basin settings around the world and have an excellent record of success worldwide. It is very early days yet in this program, but with success it has the potential to contribute significantly to the 2p reserve space.

The way our wells are tested, from the deepest zones to the shallowest, means that once we've completed the frac we can then go on and test the remaining uphill zones, the shallower zones. So as we work our way across Block 405b in the first quarter of this year we've been working on MLE-6, MZLN-1, MZLS-1, and LEW-1 fracturing various zones in there and also testing -- getting ready to test shallower zones. Any successful flows coming out of this would, of course, be incremental to the reported test results so far.

As we ramp up activity in 2006, FCP will be adding two further drilling rigs -- GWDC rig or drilling company and one from Schlumberger. These rigs will be used to drill seven wells initially across Block 405. These seven wells are not exhausted by any means. There are still large areas of unproven structures, areas that will require further appraisal, and lots of upside potential. The first exploration well to be drilled by the new GWDC rig will be the ZER-1 well, scheduled to spud within the next two weeks or so in the northwest part of Block 405.

I'd like to turn my attention to Block 406. There's been significant activity on Block 406 in 2005. We completed a seismic program, particularly over the southeast part of the Block. The survey focused on the southeast part of the Block in the area of ZCH-1, which is a gas and condensate discovery drilled in 2004. Based on that, we picked two further drilling locations. These are the last two commitment wells to be drilled under the Rhourde Yacoub contract. ZCHW-1 was drilled in April 2005. Initial review indicates it's some hydrocarbon zones, but due to mechanical problems the well was abandoned without testing.

The final well under the exploration contract was RTN-1 and that was drilled in late summer 2005. No hydrocarbon shows were seen on [logs] and the well was abandoned in September. Since that time, an appraisal area of 112 square kilometers has been defined around ZCH-1, an extension of nine months has been agreed to with Sonatrach, the state oil company. That takes us through to August 10, 2006 and we have drilled ZCH-2 and tested that well in the early part of 2006.

We're still analyzing the testing results from ZCH-2. The initial indications are that there has been one drilling of hydrocarbons, but it appears that that pool is separate from ZCH-1 discovery. At the present time we're in discussions with Sonatrach on how best to proceed with Block 406a. But it should be said that the area is not without hydrocarbon potential. The 406a reserve amounts to in excess of 930 Bcf equivalents of gas on a gross basis 3p. But I should point out that the 406a reserves estimates by D&M represent about 7% of the total corporate reserve between the two blocks.

Finally, I just want to mention -- recap the Drilling Timeline for 2006. As I mentioned, we have three rigs under way or very soon will be starting work, seven wells planned, and the next exploration well will be ZDR in the northwest corner of the Block, starting drilling within the next week or two. It's an ambitious program. So far it's going on time and we have a busy program between now and the end of the exploration phase, which is December 29th of this year. Beyond that date, there's a two-year appraisal phase which will no doubt see considerable activity as well.

At this point I'd like to hand it over to a Shane O'Leary who's going to talk about the MLE development program and commercialization.

Thanks, Martin. I'd just like to highlight some of the progress being made towards commercializing of the MLE field, which is really the first phase of development on the 405 Block. This is the area, as Martin described, on the eastern side of the field where our six appraisal wells have defined the field. I should point out that the central area, where we're also having considerable exploration and appraisal success, will be the subject of a later phase development and a different exploitation license.

(technical difficulty) the development that's contemplated is an initial 350 million cubic feet a day gas plant with a gas sales rate of about 300 MMCF a day. This will also be accompanied by about 40,000 barrels of liquid split about evenly between LPG, condensates and oil. The conceptual study that's been done by Petrofac identified that we should be able to tie-in to some of the other development going on in the Berkine Basin, specifically the El Merk development, and Anadarko development, and tie-in the oil, condensate and LPG to some of this infrastructure, thereby significantly reducing the cost. The big tie-in infrastructure investment that we'll need to make in addition to the plant is a 24 inch 153 km tie-in to Gassi Touil. The entire development will cost about $700 million gross.

A big major step towards moving down the path of development is staffing and I'm pleased to report today that since coming on board in January I've been able to add four key engineering staff to our team in Calgary, a key facilities engineer, a chief reservoir engineer, a very senior gas marketer with a lot of international gas experience, as well as an operations coordinator. And this staffing will be -- the increasing in staff will be an ongoing thing, but we do have at least the critical mass now to really move forward into the front-end engineering and design [phase].

The Calgary office staff will complement the 40 some-odd people that we have in the Hassi office that has now successfully drilled over 15 wells. We have added additional drilling supervisors and testing supervisors as we ramp up from one rig to three rigs, but overall this has been a very effective (technical difficulty) in the field and we've every little turnover and they continue to operate at a very high level.

There's a number of contractual steps that we need to go through to obtain an exploitation license. We've accomplished several of them already. The key area that we're focusing on right now is the Final Discovery Report and the feasibility study. These two reports really define the reserves to be developed, the conceptual development plan, number of wells, completion plan, and also outline the gas sales agreement that will be worked out with ourselves and Sonatrach. Once these reports are completed, there will be a Sonatrach approval process before everything is submitted to the ministry of energy and mines for the actual exploitation license approval, which is really the declaration of commerciality.

In the first quarter we made significant progress towards the -- meeting some of these contractual obligations for commerciality. The Final Discovery Report was tabled with Sonatrach on February 28th. We've had several discussions with Sonatrach on gas sale agreements and I'll give you more detail about that in a minute. We have an analysis being conducted by a consulting group here in London called gas strategies that's looking at net backs to Algeria from various sales points around the world including North America LNG, European LNG, and also pipeline gas into Europe.

We've had meetings with Sonatrach's transportation group concerning the in-country infrastructure capacity to handle our volumes and the feedback we're getting is toward the MLE volumes, those volumes can be absorbed within the planned expansions and so there's no concerns there. Sonatrach has provided us with a draft -- joint operating agreement for the formation of a joint operating body.

All development work in Algeria is run through these joint operating bodies and it's encouraging to see that Sonatrach has taken the initiative to actually table this with us and they've already appointed a general manager for the operating body that will be conducting the engineering for our development. And I think that shows that they're very interested in moving quickly with this development. Also key in the first quarter was the recruitment efforts and that will be an ongoing thing.

In terms of the timeline, the first production, we are targeting the second half of 2009. In order to meet that schedule we will have to award the EPC contract in the first quarter of 2007, which means we really need to do the front engineering feed work in the second half of 2006. We recognize that we may need to actually do the feed work before we have all of the ministry and Sonatrach approvals. We've discussed that with Sonatrach and they agree that we should go ahead and do that. So we probably will start quite a bit of engineering work before the exploitation permit is awarded.

I should point out that this -- the schedule that I've just outlined is really dependent on all of these financings being in place, development financing by first quarter of 2007. John van der Welle will address that in a few minutes. And of course, obtaining all of the approvals from the Algerian government.

Now with respect to gas sales, there are two options under our contract for selling gas. One option is to form a joint marketing company with Sonatrach -- that company would be located most likely in Europe. We would staff it with a group of gas marketers and they would sell the gas directly to an end buyer such as a utility or an industrial consumer.

The second option is to contract with Sonatrach to market our interest in the gas, effectively selling the gas directly to Sonatrach. We have indicated that our preference would be to follow the second option to sell the gas to Sonatrach directly. They would then act as an aggregator and then meet all the other commitments they have under their existing gas sales agreements with the European and LNG buyers. Sonatrach has also indicated that it's their preference and that is the basis on which we will move forward in our gas negotiations which we expect to really commence at the beginning of April.

Next steps are 2Q activities. We're really focused on completing the Final Discovery Report. Beginning the gas sales negotiations with Sonatrach, which we're planning for early April, we're going to evaluate the net back data we get from gas strategies; that will begin this week. We'll begin the process of interviewing feed contractors and we will also meet with the general manager of the joint operating company that's been appointed by Sonatrach to discuss feed and the contractor selection process.

Let me just perhaps end on sort of a macro view of the gas market situation for Algeria. If you look at the supply and demand going forward, there seems to be quite a large gap opening up around the 2009/2010 timeframe whereby the supply is not meeting demand from all sources into the European gas trading arena. So we think this represents a very good opportunity for Algeria to expand its export sales. I think the Algerian government and Sonatrach recognize this and, of course, our project coming on-stream in that 2009/2010 timeframe fits in very nicely with the opportunity to grow the market from Algeria.

I'll now turn it over to John van der Welle who's going to discuss finance.

Thank you, Shane. Hello, everybody. I am (indiscernible) Finance Director end Chief Financial Officer. I joined the Company in January of this year. This is a results presentation, but in actual fact the financial numbers in terms of the earnings and so on are probably of less interest than some other financial aspects in the go-forward position for the Company. So I will be relatively brief today on the financial numbers and talk more about two subjects, one being the valuation, independent valuation prepared for the Company, and secondly, on where we are in terms of our financing plan going forward.

So talking about the valuation first, for people in Europe this is unusual to have a public valuation published every year, but it is a Canadian stock exchange, Toronto stock exchange requirement for companies like ourselves. And Martin has already mentioned the reserves which are reported on by international engineers DeGolyer and MacNaughton. They also publish for us or we publish their report on our valuation as of the end of last year. Now this is conducted on various prime cases, but the case I'm going to look at is the [flat] oil price case, which we've disclosed in the results announcement earlier today using the price that prevailed for Brent crude at the end of 2005, of some $58 per barrel or thereabouts.

Now, that price is a significant increase from the price at the end of 2004, when the last published valuation was referenced to, which price is $40 per barrel. Now we have a variety of different reserve cases, proved, proved and probable, and proved, probable, possible, which provide a variety of different valuations for the Company. If one looks at the proved and probable case, we can see that the valuation has gone up roughly 28% year-on-year as a result predominantly of this higher oil price assumption. That number is quoted at 8% real discount rate, so quite a high discount rate for a valuation of this type. And it gives a valuation of approximately $1.9 billion US, which in share price terms is in excess of today's current share price. On a 10% basis, again a very substantial increase of some 24% or so, and giving a valuation on the 10% real discount range of $1.6 billion US, again a very significant increase.

I would like to point out that these values are derived very much, the majority part, from Block 405b, which is the block on which the MLE development is planned, which Shane offered some thoughts on it in his remarks a moment ago. These values also exclude exploration upside and the value accretion that will occur when we get the first stage of the development underway. And so I think in summary on valuation, the point I'd like to leave you with is that these values provide a very solid backing, asset backing for the Company and its shares based on today's reserves as reported upon independently by the reporting firm DeGolyer and MacNaughton.

Moving on to my second subject, which is really the funding plan for the Company going forward, firstly dealing with the -- the only financial number of any particular interest on a prospective basis from the results just reported. As of the 31st of December last year we had cash of $108 million or working capital after deducting net creditors of some $93 million available to fund our programs in the current year. And we have, as we've heard, a seven well drilling program which is currently underway approved with our partner, Sonatrach. And that drilling program is estimated to cost us approximately $80 million including all associated testing and completions and so on.

So we're funded for that development program. But of course the real issue as we look forward is in relation to the development go-ahead. And Shane has talked about the timeline and our plans to crystallize our development go-ahead around the MLE area. And it is no secret that the Company will need additional funds in order to progress with the development. And as we've reported previously in quarterly statements for 2005 and repeated again in the current set of results today, we are looking at a variety of sources ranging from project finance, equity, and other potential sources for that funding with the objective of FCP managing this project and financing it in a straightforward project finance basis to develop the project and retain all the upside for its shareholder base.

So the requirement for capital expenditure for us, the MLE development we see as being a cost of approximately US$650 million to our 75% share of the project, which of course is stated after the assumed back in of Sonatrach, our partner, which would then take a 25% planning interest in the project. Over time the funding requirement would extend beyond that number if we're successful with the other areas of the Block, as we hope we will be. Then our requirement to fund could go to in excess of $1 billion, approaching $2 billion off a very bigger reserves case as the Block, as I say, is fully developed over time.

Now taking a step back and echoing one of Shane's comments, Algeria is a country that's very well placed to supply a greater share of the growing market for gas in the European marketplace which, as I'm sure you all know, the marketplace has become quite concerned about diversifying its sources of supply away from certain other dominant suppliers.

Now in terms of funding, the situation of the reserves, the quality of the project that we've got, which has a very high liquids content which makes it very attractive economically, and given the state of the project finance market right now, which is looking very strongly at opportunities to build out its investments in 2006, it puts us in a very good position. And I've been very encouraged in the three months or so that I've been at the Company with my first conversations with commercial banks in the project finance market arena and also we will be talking to other agencies such as the export credit agencies and some of the other multinational agencies as to who are interested in supporting big energy infrastructure projects of this nature.

So I think my message on this front is whilst it's early days today, we clearly are working very hard to put together the financing plan -- the most appropriate financing plan to expedite the timeline that Shane has discussed. And I am very confident from my conversations and my preliminary work so far that we are going to have a lot of interest in very well to project finance our investment here. And we also know of course that our partner Sonatrach is very keen to see this develop, so we're working very hard with them in this area.

So to summarize my comments on the valuation, a very solid foundation in this updated external set of numbers that we've received which have significantly increased year-on-year. And secondly, on the financing side, early days, but very confident about our ability to leverage up this project and fund it in an appropriate way which will maximize returns to shareholders. Thank you.

Thank you, John. This Richard Anderson again. And if you would let me summarize things please. I think you have to agree that First Calgary has established reserves world-class in size in a country that is ideally situated to take advantage of the growing world demand for energy. Algeria ranks seventh in the world in natural gas reserves and forth in exports, over 60 billion cubic meters per year. It provides 30% of the natural gas to Europe and is the second largest exporter of LNG's in the world, supplying LNG's to Europe, the U.S., and Korea.

Our strategy of strengthening and commercializing the reserves, we will have three weeks operating on Block 405b early April, the initial drilling results of which are very encouraging from the first rig. Testing and completion operations are ongoing on a number of wells, again results of which are very encouraging. On the commercialization, our stage development plan has been submitted and gas sales discussions are ongoing. Management and staff, senior levels of management have been added. Staffing levels are being added to.

We are extremely pleased with the progress we're making on both these fronts. Regarding production targets, we think our timelines are realistic. A lot of negative publicity and commentary was generated last year as a result of the review process the Company went through. We have learned from this and we understand the market has taken a bit of a 'show me' attitude and we do intend to do just that.

On that, I would conclude this presentation and I do thank you for your attention and I would now open the lines to any questions that any of you may have of us.

(OPERATOR INSTRUCTIONS). Toby Pierce.

Toby Pierce from Tristone Capital in Calgary. Just wondering how much of your reserve value is assigned to the MLE Block, your 2p reserve value.

It's 30 to 35%, something like that. On whether it's a 2p or a 3p basis it's about the same proportion obviously.

All right. And with the MLE alone, is that sufficient to move forward with? Can you make your decision based on just the MLE pool or will you need other pools to make your decision to go forward?

The MLE economics are very robust. About half of our revenues actually come from liquids, which definitely enhance the overall budget economics. So we make the decision to go forward with MLE knowing that its backstopped by a considerable reserve to the west as well, which, by the way, as we move west it gets richer in liquid. And so we're very confident that moving forward in this phased fashion will result in a very economic initial project.

Thanks very much.

(OPERATOR INSTRUCTIONS). Anna Raff.

My name is Anna Raff; I'm in New York with Dow Jones Newswires. I have a question about the realization of the gas. You said you would pursue a second option in which Sonatrach would market the gas on your behalf. Can you tell me a little bit about how they would usually price? Would that be priced off some kind of benchmark? Would it be like comparative fuels? Is it just kind of flat-out price that you [can list] together? I just wanted a little bit more guidance.

The actual price -- this is Shane O'Leary -- the actual price will be the subject of a negotiation. Sonatrach is a major supplier of gas both into the European theater as well as an LNG supplier to both Europe and the United States. So they have a very mixed bag of net backs. We have a study going on ourselves to look at the range of net backs that are possible in Algeria so that we can determine if the negotiated price we get from Sonatrach is a fair one. That will help us in our negotiations, but there is quite a range of value in net backs from the sales from Algeria.

Thank you.

(OPERATOR INSTRUCTIONS). Fred [Tresker].

My location is Houston. What have the results been from the testing of the well that you just completed?

Are you referring to the LES-3 well?

Yes.

The testing is currently ongoing right now. We have not press released that to date. What I will say is, though, that we're very encouraged by the results so far.

But you can't say what the flow rate has been or --?

No, we'd prefer to rather than release intermediate results in a testing operation is complete the testing and then we agree with Sonatrach that we see the numbers the same way and then we put out our press release at that time. But things are proceeding well and, as I said, we're very encouraged so far.

Thank you.

(OPERATOR INSTRUCTIONS). Nathan [Konek].

I'm from Calgary Alberta and the question is on the, A, December 13th press release you guys had suggested that in February you guys would be spudding your ZER-1 well. In March '06 your MZLN-2 well and GSME-1 well. Now on your current thing you guys are saying you'll be spudding two wells April 6th and I'm just wondering why there's a delay in the drilling of the wells.

There's no real delay. We haven't yet spudded ZDR. But as I mentioned, we're on schedule for spudding that. As you correctly pointed out, we said we would spud it in March and that's still the expectation. That's with the GWDC rig. The other well, GSME, is with the DMM rig and there's been a little bit of engineering work that's been needed on that rig. It's not been drilling in the same basin that we're going to be using it for, but there's no serious delays anticipated there either, though.

Okay, thank you.

(OPERATOR INSTRUCTIONS). There are no further questions, sir. Please continue with any other points you wish to raise.

All right, thank you. This is Richard Anderson. I guess we will end this call then, but I do thank everyone for one for dialing in. On that note we'll say goodbye. Thank you.

That concludes your replay for today.