Obsidian Energy Ltd (OBE) 2002 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Penn West Petroleum Ltd. third quarter 2002 conference call. At this time, all participants are in a listen-only mode. During the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up questions. If anyone has difficulty hearing the conference, press star zero for operator assistance. This conference is being recorded and will now turn the conference over to Mr. William Andrew, president of Penn West Petroleum. Please go ahead sir.

Thank you. Thank you for your time and interest in Penn West. I think as most of you know and for those of you that don't, Penn West Petroleum is a senior independent oil and gas exploration and production company, headquartered in Calgary, Alberta. Our primary focus is on the Western Canadian Sedimentary Basin, and our area of activity stretches from southeastearn Saskatchewan through to the extreme northeastern part of British Columbia. We are involved in all aspects of conventional oil and gas exploration and production, including heavy oil, light oil, both primary , secondary and tertiary recovery and also shallow gas and deep gas.

With me are Don Rae. Don has been with Penn West for about ten years, 30 years experience in the business. He is our senior vice president of exploration. Dale Miller is our vice president of engineering and operation. Gerry Elms, vice president of finance, Brian Clake handles duties of marketing and investor relations as vice president. Dave Middleton is vice president of production, and Gordon Timm, our vice president of land.

The purpose of this conference call is to review our 2002 third quarter results and give you a little bit of an update on recent activity in Penn West. Following this review, an update we would be pleased to answer any questions. During the presentation, we will use Canadian dollars at a six to one ratio for conversion and six to one ratio of natural gas barrel to oil equivalent. Production volumes are based on Canadian standard and include crown royalty volumes. I sort of feel like I'm reading a Miranda-type document here. I would also like to draw your attention to the note on forward-looking statements at the end of our news release .

Third quarter of 2002 crude oil and natural gas liquid volumes increased by 9%, while our natural gas volumes held steady compared to the third quarter of 2001. During the third quarter of this year, our oil and gas natural liquid volumes averaged 44,300 barrels per day. Natural gas production averaged 336 million cu. feet per day. That's for a total of 100,400 BOE per day, which is a new high for Penn West . Surpassing the 100,000 BOE a day level is an important threshold for Penn West.

As we close in our tenth year of operations, we take pride in our ability to adapt and flourish in a variety business conditions. We continue to pursue a business plan that focused on a balanced approach to growth, primarily concentrated in western Canada . The results reflect lower natural gas prices in the third quarter of 2002 compared to the third quarter 2001. Certainly, compare with the first quarter of this year we are starting to close the gap with last year. Natural gas price declined by 3% from 3.23 per mcf 3.13 per mcf. That's quarter over quarter 2001 versus 2002. For the year , we are forecasting average price 3.75 per mcf.

Oil and natural gas liquids prices were higher in third quart 2002 compared to 2001. Our realized oil and natural gas liquid increased by 5%. That's from 33.64 to 35.22 Canadian per barrel . The strength of crude oil prices we have increased our price forecast for the year to an average of 25.50 U.S. per barrel WTI. That's up a dollar from our original forecast of $24.50 per barrel.

Our operating costs in the third quarter of 2002 averaged 5.96 per BOE . Certainly , I talked about operating costs in the last phone call at the end of the second quarter. We have seen an increase in operating costs primarily due to the increasing proportion of crude oil in our production mix in 2002 over 2001 due to acquisitions we made in the third quarter, primarily oil again, with higher operating costs, and in spite of our efforts that have contained our operating costs.

And in spite of our efforts that have contained our operating costs on gas, on our operating properties we've actually cut the operating costs, somewhat on gas, but we are finding on our non-operating properties we are seeing a fairly significant increase over 2001. So those numbers have all banded together to make our operating costs of 5.96 per barrel per BOE. I would remind the shareholders and listeners that our total cash cost that includes operating costs, interest expenses and G&A remain very, very competitive for the industry in North America .

Cash taxes for the third quarter 2002 totaled $30 million. For the year, we estimating cash taxes will be in the range to 90 to $100 million. That's an increase over what we estimated earlier in the year. That's primarily due to the increased property acquisition component in our capital expenditures for 2002. Due to the increased provision for tax cash taxes, cash flow operations declined from $100 million from $129.9 million from in 2001. Forecasting cash flow in this year will be in the range of 430 to $460 million. That's between 8.10 to 8.65 a share.

Net income for the third quarter 2002 was $31.9 million. That included a provision for $12.2 million for unrealized foreign exchange losses, excluding the unrealized foreign exchange provision, the net income was $44.1 million, or about 82 cents a share . In 2002 we have increased our capital budget . We believe at the end of the year we will probably fall about mid-way between 550 and $600 million. That reflects increased acquisition activity that will be closing in the fourth quarter. With these acquisitions closing and, you know, we assume we are on the road to do that, our exit production rate will be approximately 103,000 barrels per day . Current production rate is 101 BOE per day. That includes 338 million of natural gas and 45,000 barrels per day of liquids to get to the 103 by year end, most of that increase will come on the gas side.

The end of the third quarter this year our bank debt was $624 million. We continue to maintain a strong balance sheet. Our debt to third quarter annualized cash flow is 1.56:1. With our strong balance sheet, you know, the potential still exists for additional acquisition spending.

During the third quarter we drilled a total of 142 wells. We were successful about 89% of the time. Most of the activity was concentrated in the plains area of eastern Alberta and western Saskatchewan. We also completed property acquisitions valued at $44 million in the quarter. All of our natural gas hedges expired at the end of October 2002.

Going forward, Penn West is in a position to benefit from natural gas pricing based on the unhedged position and the 56% production weighting natural gas. Crude oil, we have hedges totaling approximately 20% of our liquid production in the third quarter. There is an average ceiling of 22.40 U.S. per barrel WTI. These hedges reduced our realized price by about $1.86 per barrel in the quarter. Our liquids hedging increased to 29% in the fourth quarter. They are all on collars. The average price is between 21.60 on the floor and 26.10 on the ceiling. They also have 17,500 barrels per day hedged in the first half of 2003. Again, on a collar, and roughly the range is between 23 and $28, again, floor to ceiling. If you want additional details on our hedging and if you have any other items that you need some details on in Penn West, we do have a corporate website. It is www.pennwest.com . Penn West is all one word. We have tables that open our hedging numbers in more detail.

Also, on the power side, we have an average of 35 megawatts per hour hedged for 2003 through 2005 at an average price of 50 dollars per megawatt. Going forward and in the absence of a very large acquisition, we will continue with a modest hedging program aimed at smoothing cash flow, protect our capital spending program. For 2003, we are gearing up for our winter program right now. The primary focus will be on the north. We plan a very aggressive gas drilling program at Wildboy. Wildboy, as many of you know, has turned out to be a top-drawer type property in western Canada. The production is 85 mcf /day. We will drilling sufficient development wells to increase our production by roughly 30 mcf /day as well as working on a very aggressive exploration program ranging through the Mississippian and deep Devonian zones.

I will continue with that type of flavor on the Alberta side of the border. On Hotchkiss and Vista Creek, plan to make production up by around 15 to 20 million cubic feet per day. We have a deep program planned Devonian drilling plan in and around the town of rainbow lake, Alberta. This is on extensive land position we have deep rights both east and west of Rainbow (ph) Lake (ph). We will be aggressively pursuing deep oil, deep light oil in the eastern part of Peace River (ph) Arch (ph) and Dawson area.

We will continue with our development work in the Pembina (ph) area including the work we are doing on coal-bed methane. We plan to do drilling as well in the heavy oil area in southwestern Saskatchewan and in eastern Alberta and another area we are adding in Saskatchewan in the southwestern part will be proving up a very good land position we have there in the shallow gas area. So we are very excited about the first quarter of 2003. We are well underway with our planning. We expect to have the first rig in the field about three to four weeks from today, and gear up with a very large program through the first quarter.

In summary, as I have told many people before, we think that Penn West is a very unique company in many ways. Our balance between natural gas and oil provides us with a lot of flexibility. It provides us with a cushion in times of weak commodity price that may affect one property or another. We have very good reserves, long life reserves. We also have the flexibility to select projects based on both long-term value creation and short-term financial impact. We have demonstrated and are committed to incorporating both technology and invasion in our quest to achieve maximum value out of our properties and maximum value out of the western sedimentary basin.

We think the story is far from over in western Canada. We are very, very committed to items like secondary and tertiary recovery on the oil side to a lot of modern seismic techniques to a lot of the good drilling techniques and fracturing techniques to get more oil and gas out of the pools in western Canada.

We have a strong commitment to the community and environment. Most importantly, we have disciplined to maintain a strong balance sheet. That gives us the financial strength and ability to continue to grow profitably. With, that I will end the formal presentation and ask if you have any questions .

Thank you, sir. One moment, please. Ladies and gentlemen, we will now conduct the question-and-answer session. If you have a question, please press star 1 on your touch tone phone. You will hear a three-tone prompt acknowledging your request. If you would like to decline if the process, press star 2. Use the hand set if using a speaker phone before pressing keys. One moment for the first question. It comes from Kim page from RBC Capital Markets. Please go ahead .

Hi, Kim.

Your line is open, Ms. Page. Please go ahead.

Hi, Bill. Relative to your drilling program this winter, can you quantify -- you mentioned you are going to ramp up activity significantly. Quantify how that is going to vary from, say, year ago Q1. Second, just on the tax guidance, looking into '03, I realize it is dependent on commodity price outlook. Relative to the amount of exploration you are doing, any guidance on how your current tax profile will change in '03?

I will answer the questions regarding the 2003 progress. One is where we see our current tax position in 2003 versus 2002. The second part was related to our northern activity versus 2002. I will answer the second part first. Gerry Elms may jump in. I will try myself.

Basically, we anticipate this year we have done more acquisitions than we, certainly, planned. If you look at our original budget preparation for 2002, we were light on our drilling end through the first quarter as compared with sort of our normal activity. As a result of that, we moved primarily into the acquisition mode through the rest of the year . I think as all of you know, the rules associated with acquisitions are not quite as deep and rich as those associated with drilling. So, for that reason, we do have, you know, higher tax, current tax this year. For next year, we expect it to get back to where we estimated originally for 2002. That would be in the range of 60 to $80 million.

The second part of the question, going into the first quarter of 2002, like a lot of other companies in North America, we were concerned with the fall-out from last September 11th and the tragedy in New York City and in Washington and concerned about the impact that would have on the economy and on prices. For that reason , we cut back on our budget, particularly in the North. This year we plan to be much more aggressive. We plan to add a shallow gas component in the Boyer area. We plan to increase the level of exploration in the North in Wildboy and continue with about the same type of program with Hotchkiss and Vista area. As I talked about the two areas, new exploration areas we are adding in the North, both are in the deep Devonian and one roughly in the Rainbow Lake area , the field itself is more up towards Shaquili (ph) and also on the east side of Rainbow Lake. So both west and east of Rainbow Lake. The second area I talked about was on the eastern part of Peace River Arch. Most analysts are familiar with this field and Dawson field. We have a tremendous around the Dawson field red earth area. We will be drilling for light oil there.

Great. Thanks, Bill.

Ladies and gentlemen, if there are any additional questions at this time, please press star 1. As a reminder, if you are using a speakerphone, lift the hand-set before pressing any keys. Your next comes from Jason Consik (ph) from First Energy Capital Corp. Please go ahead.

Good morning, gentlemen. I was just hoping I could get further color on how your coal bed program is going?

Sure. It is chugging along. As I talked about in the last quarter, we are still learning every day. We are a lot smarter than we were a year ago. We have now got about ten wells that we're working on. We are getting some gas. When I say some gas , the rates are between about 10 mcf and 50 mcf a day . We are kind of all over the map because we are drilling wells and completing wells over a lot of area. So we have got some wells that are producing with minimal amounts of water. We have others that are producing significant amounts of water with the gas. They are all in the de-absorption phase so we expect the rate to decrease significantly as we dry the coal out and as more of the gas is permitted to come to the wellbore.

We plan on continuing, as we said, with the initial phase of the program, which is, roughly, the 20 to 30 wells and completions, and then picks some test areas and get a little bit more aggressive on individual projects. But as we have said before through the last year , we are looking at it as a shallow gas type project. We are pretty modest about the size of the flows that we expect from the wells individually. We are looking at, you know, somewhere between 50 and 100 mcf a day on the final flow rate on average, but because of the shallow depth of the coal is at, because of the infrastructure we have over many of the areas in the plains and central area, we expect that we can do the project economically. In terms of time frame, you know, we should be seeing commercial production within the next couple of years.

Okay. If I could actually ask a couple other unrelated questions. For 2003, have you guys come up with a cap ex target yet, or is it too early?

: It is a little bit too early, but, basically, we will be looking at capital expenditures that would mirror our cash flow for the year. So, roughly, $550 million to $600 million.

Okay. And a final question , not to repeat the second quarter conference call, but in terms of operating expenses , in terms of going forward, should we be looking at holding those at current levels or to ease a bit?

As I said in the second quarter and I'm going to -- I probably have egg on my face now. We have certainly made some strides with regard to the natural gas operating costs internally, and we are pleased with the work we are doing on operating costs on the oil side. You know, barring any large acquisition of the type that we have been doing over the last year or so, which is, you know, generally a more mature-type oil field that we would think would have upside on efficiency and upside on enhanced recovery, those are generally fairly high initial operating costs in the $8 to $11 range. Barring that, we would expect our operating costs to at least stabilize and, you know, more optimistically, we would expect them to come down somewhat. We are a little bit disturbed by the trend on our non-operated properties where we are seeing year-over-year increases of roughly 20%. That's quite high .

Great. Thank you very much. That's all the questions I have .

Your next question comes from Gere Spackluf (ph) from Rain (ph) Cunif (ph) and Company (ph) , please go ahead.

Hi, Bill. A quick couple of questions. Could you remind me about the way in which Kyoto impacted Penn West? I'm not sure exactly how, I guess, it is dependent on the project that's impacted. Over the last year we spent some more than our cash flow and the BOE production was only up 4%. I was just wondering, how should we be thinking about that? Were there any extraordinary expenditures, or were there extraordinary declines, or do you think the rig costs and so on were too high? Maybe tie that into next year. Do you expect to spend cash flow. How much do you think production will grow?

Sure. I will handle the second part of the question first. That was, basically, about our capital expenditures to date and the bang for the buck we are getting. If you look at our spending profile, the profile is much, much weighted towards the last three or four months of the year. We have closed some acquisitions in September and , you know, that doesn't give you as much bang on the production side as, I guess, as it appears because you are not getting a full quarter . Costs are still, you know, quite high in North America and worldwide for services . Certainly in Canada we feel the cost pressure as well.

You know, our declines are very, I think, very good compared with our peer group in North America. Our average gas decline is around 24, 25%. That's not extraordinary. Our oil decline is about 13%. That is well below average. So, basically, the changes that we made were acquisitions which have been timed late in the year, and we are not getting quite as much production out of that as if they had been earlier in the year. The other part is additional money that we put into our land budget for the year and into our seismic budget.

That's a ramp up of activities after a fairly slow first quarter. As I talked about earlier, you know, we really took a very conservative approach in the first quarter of the year. It is a very different sort of production and spending profile than we have had in other years.

The land situation, virtually, with a lot of the industry below us going to income trusts and kind of a lack of effort by some of the U.S. based subs that are in Canada in the last half of the year, on the exploration side we have seen an opportunity to pick up land. We have increased our land budget from our original estimate of about $20 million. We anticipate we will spend somewhere between 40 and $50 million now for 2002. So that has increased somewhat.

In terms of where we're going next year, you know, we feel right now that in order to replace our production, we need somewhere between 300 and $320 million of capital and the rest, you know, would be put into exploration and growth. We believe that we can grow the company between 6 and 8% with a budget of -- as we talked before -- between 550 and $600 million.

The second part is on Kyoto. I guess at a risk of boring you, Kyoto has a very definite impact on all of Canada, on, certainly, the energy industry. It is a disastrous piece of work that the federal government is anticipating. A personal feeling is there is absolutely no need for it, that we're well on the way with the innovation that we have in all the industries in North America with cleaning up the environment. We have made great strides in the last 10 or 15 years to take us, basically, to remove 12 years of growth and take us back to 1990 and then reduce the targets from there is a pretty onerous clamps on the industry.

Personally, from a Penn West point of view, the effect to us is minimal compared to some of the other companies. We do not have an oil sands project. We have a high weighting to natural gas. We don't have a large heavy oil component. That certainly doesn't lessen my degree of rancore with the federal government for even considering bringing this Kyoto ratification forward.

Our use of -- if I'm not mistaken a potential CO2 flood or something --?

We have continued our discussion, and I guess I have to clarify something somewhat on the CO2. We are tremendous believers in the basin and enhanced recovery. We feel as has taken place in the U.S. over the past 10 to 20 years with CO2 being used in about 50 projects down there that are very similar to what we have in the Pemin (ph) area. We believe the CO2 is a natural progression in Western Canada. In all of Western Canada there are two CO2, one in Sescatewan that's operated by Encan (ph) and one at Joffre, Alberta operated by Penn West. We would love to use that technology in a lot of our oil fields.

Kyoto, you know, basically, what Kyoto does is provides a wake-up call to say, you know, we have got a product here that we are putting into the atmosphere that would be a hell of a lot more benefit if we use it to push more oil out of the ground. So, yeah, from that point of view , you know, I suppose we are going to create some sinks for the CO2 in our oil fields.

Will the feds pay you for you that or how does it work?

With the increased oil we're going to get, there is -- certainly, there is funding available, both pro vin shall and federal level, for projects of this type, new technology projects. So there would be some assistance with regard to cost sharing and or royalty relief. The primary benefit is, basically, the one thing we don't have in Canada other than that Joffre and waiver is a secure, good secure source of CO2. Once we have that, we certainly know we can make the other end work, which is to make more money on the existing fields

Thanks .

Your next question comes from Jeff Martin from Peters & Company. Please go ahead.

Hi, Bill. Just a couple quick questions. I was just look fog more details on the acquisitions from the third quarter, and if you could give us your current production right now.

Sure . Our current production is about 101,000 barrels a day. On the gas side about 338 million cubic feet per day and the oils is 44,000, 45,000 BOE per day. The acquisitions themselves, without getting into too much detail, the primary acquisition was the acquisition of most of the interest in the South Swan Hills unit. South Swan Hills unit is on a mithval (ph) flood. We are closing the final part of the transaction today . Production to Penn West of oil, approximately 5,500 barrels of oil per day. There are natural gas liquids as well. So it will be a nice add. Again, it is the acquisition of the type that we have been doing over the past couple of years.

Thanks .

Mr. Andrew, there are no further questions at this time. Please continue.

Okay. If there are no further questions, I would certainly like to thank everyone. My number in Calgary is (403)-777-2502. Bryan Clake, who keeps the corporate model and also helps answer a lot of questions is at (403)-777-2510. If you get any other questions, we would be happy to answer them. I will remind you again of our website at www.pennwest.com. Thank you.

Ladies and gentlemen, there concludes the conference call for today. Thank you for participating. Please disconnect your lines