Obsidian Energy Ltd (OBE) 2003 Q2 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by. Welcome to Penn West Petroleum Limited second quarter results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session and instructions will be provided at that time for you to queue up for questions. (Caller Instructions). I would like to remind everyone that this call is being recorded. I would now like to turn the call over to to Mr. William Andrew, President of Penn West.

Thank you, operator, and good morning to all of you and thank all of you for your interest in Penn West. Before I get started with the details for the second quarter, let's take a brief opportunity to introduce the management team at Penn West as we've made a couple of changes recently. First of all, Don Rae is our Senior Vice President of Exploration, and Don has been at my side at Penn West for 10 years, providing direction and leadership to our exploration group. Dave Middleton is our Vice President of Production, and in addition to their primary responsibilities, Don and Dave assist me in managing the development of our most important resource, and that is our employees. Gerry Allen is our Vice President of Finance and Corporate Secretary, and Gordon Timm is our Vice President of Land and Regulatory Affairs. Bryan Clarke (ph), who many of you know, is our new Vice President of Corporate Development, and that is a move from marketing for Bryan. He now has primary responsibility for petroleum engineering and new ventures, with particular emphasis on tertiary (ph) recovery, coalbed methane exploration and development, and looking at other opportunities for Penn West. In his position, Bryan will be working with an experienced team of petroleum engineers, geologists and technologists, and Bryan will continue to provide assistance to Penn West and myself with investor relations, so many of you will continue to your past relationship with Bryan.

We have two new additions to the senior management team, and both are long-term Penn West employees. The first -- (indiscernible) Jensen (ph) is our new management of exploitation, and Christian Tang oh is our new manager of marketing. And as such, they will be responsible for very key components of our business, and that is looking after the development, transportation and marketing of our oil and natural gas assets.

The purpose of this conference call is to review our 2003 second quarter results and to provide an update on recent activity at Penn West. Following the review and update, we would be pleased to attempt to answer any questions that you may have regarding Penn West. And due to some of the tax questions that may come up, I may switch over to Gerry Elms or Brian Clake (ph) to assist me on some of the questions. During the presentation, we will use Canadian dollars and a 6-to-1 ratio for conversion of natural gas to barrel of oil equivalent. Production volumes are based on Canadian standard -- from the Canadian standard and include crown royalty volumes.

In the second quarter of 2003, we again achieved record financial results. Cash flow 184 million was an all-time high for the second quarter and reflected both increased production and strong commodity prices. Net income for the quarter was exceptional at $190 million, with net income in the second quarter surpassing net income for all of last year. Net income for the quarter included adjustments for future tax rate reductions, for unrealized foreign exchange gains and for the expensing of stock options. Excluding these adjustments, our results were very solid with net income of 79 million. That represents an increase of 198 percent over the same period in 2002. Most significant adjustments at $99 million in the quarter relates to a reduction in future income tax rates as our industry attempts to catch up to the tax rates that already in place for most other industries in Canada. This is a very positive development, not only for Penn West, but also for the oil and gas business as it relates to future profitability and competitiveness.

We also began to expense stock options in the second quarter of 2003. This resulted in a stock-based compensation charge of $33 million before tax for the quarter, based on a June 30th closing price of 43.50 per share. Future charges will reflect mark-to-market changes on approximately 60 percent of outstanding options. The details and the calculations are provided in the notes on the financial statements within our press release.

The third exceptional item was an unrealized foreign exchange gain of $41 million in the quarter, reflecting the fact that we're benefiting from holding a significant portion of our bank debt in U.S. dollars. Since June of 2002, we've also realized over $8 million in interest savings by taking advantage of lower U.S. interest rates. Our balance sheet continues to reflecting our strong financial position. During the second quarter, our retained earnings surpassed the $1 billion mark for the first time. That demonstrates our financial discipline over the past decade. In the first half of the year, all of our capital expenditures were funded out of cash flow with remaining funds allocated to debt reduction and share repurchase. Since the start of the year, we've reduced our bank debt by $116 million. It currently stands at $482 million. That compares to our current line of credit with our banking syndicate of $770 million. Capital expenditures for the first half of 2003 totaled $334 million. Thus, cash flow exceeded capital expenditures by some $80 million.

One result of strong commodity prices and cash flow has been a very strong and competitive market for property acquisitions. And as has been our normal practice over the past 10 years during times when competition is extremely strong for acquisitions, we usually reduce spending on acquisitions and reallocate the capital to exploration and development prospects. The move to more exploration and development projects brings with it timing risks associated with weather, with equipment availability and with industry activity. We have managed to overcome most of the impact of a very wet second quarter, and as a result of delays in completing some of our early second quarter tie-ins, particularly in the north and in some of our oil in central Alberta, and a very late start on second quarter drilling, we we now expect that our capital program for 2003 will be at the lower end of our range, between $550 and $600 million. And as a result of this, we've also made a minor change to our guidance. We're now looking for average daily production in the range of 103 to 106,000 barrels of oil equivalent per day.

In the second quarter of 2003, we increased crude oil and natural gas liquids volumes by 8 percent. Natural gas volumes remained the same, compared with the second quarter of 2002, primarily as a result of the delay in tying in our northern gas in the second quarter. (indiscernible) natural gas liquids production averaged 45,764 barrels per day, natural gas production averaged almost 343 million cubic feet per day, and that is for a combined total of roughly 103,000 barrels of oil equivalent per day. (indiscernible) natural gas production is 350 million cubic feet per day, and we are slightly behind on our natural gas volumes with the strong prices that we are experiencing have more than compensated for the difference.

Increased liquids production rates and higher commodity prices for natural gas and oil led to higher financial results in the second quarter of 2003 versus the second quarter of 2002. And I will just go back to the production for a second and qualify the gas production. We are slightly behind in our gas numbers, but we are a head right now on our oil and natural gas production numbers for the month of August and late July. So we expect to achieve some balance there on our BOE.

Now back to the quarter. Cash flow from operations in the second quarter of 2003 increased by 59 percent to 184.2 million, or 3.43 per share. That compares to 115.9 million, or 2.18 per share for the second quarter in 2002. This brings our cash flow for the first half of 2003 to 414.3 million. That is a 97 percent increase over the comparable period in 2002. Our operating costs for the second quarter of 2003 averaged 632 per BOE, which is an 11 percent increase over the same period in 2002 and in line with our budget of 640 per BOE. And I think it is important to point out that our power costs in the second quarter of 2002 averaged 76 cents per BOE. Our power costs second quarter of 2003 averaged $1.11. So pretty easy to get the increase in the operating costs, strictly from the power. Our production group is, I believe, doing an exceptional job with the price of the operating costs that we can control.

Natural gas prices increased by 84 percent in the second quarter of 2003 to 647 per MC, and that compares with 351 per mcf for the second quarter of 2002. For the year, we are currently forecasting an average gas price of 630 per mcf. Oil and natural gas liquids prices are also stronger in the second quarter 2003, compared to the second quarter of '02. Our realized oil and natural gas liquids fuel price increase by 9 percent (indiscernible) 31.98 to 34.81 Canadian per barrel. Based on this strength, we've increased our price forecast for the year to an average of $30 U.S. per barrel WTI; that's up from our earlier forecast of 27.50 per barrel. And as a result of the changes, we're now forecasting cash flow for the year in the range of $740-$770 million. Including the non-cash future tax recovery provision of $99 million due to reduction in future federal and provincial tax rates, taxes for the second quarter of 2003 totaled a net recovery of $54 million. That compares to a charge of $35 million for the second quarter of 2002. For the year, we are estimating that cash taxes will be in the range of $60-$80 million, and that represents approximately 10 percent of our pretax cash flow.

As I mentioned earlier, for the first six months of 2003, Penn West funded its capital program entirely from cash flow and used excess funds to pay down debt and purchase shares under the approved normal course issuer bid. This continues our approach over the past years where our growth has been financed primarily from internally generated cash flow. During the second quarter, our drilling was focused on crude oil exploration and development. We drilled 53 net wells in the quarter and had a success rate of 87 percent. Most of the wells were drilled in the plains core (ph) area and the program was evenly balanced between exploration and development drilling.

For the balance of 2003, we will maintain a primary focus on natural gas with conventional heavy oil in the plains. Our efforts at Pembina and in the central area will continue with a focus on light oil and coalbed methane exploration and development. We are also conducting an active exploration program, including land and seismic acquisitions and wildcat drilling spread over a variety of prospects.

Going forward, we're committed to adding more long-life gas reserves to our mix. We fell this can be accomplished by renewing our focus on shallow gas opportunities and by having a greater focus on our coalbed methane potential, and by continuing to work up the enormous potential of our northern area.

As crude oil prices continue to show strength, the company has hedged 15,000 barrels per day of production through a (indiscernible) collar (ph) for the remainder of the year; that's at an average floor price of $25, $26 U.S., WTI at an average ceiling of 29.80 to 31.50 U.S. per barrel WTI. We've also hedged 17,500 barrels per day through the first quarter of 2004, again, on a collar with a floor of 25.30 U.S. by a ceiling of $30.30 U.S. on average.

In terms of natural gas, we have a minor amount of hedged, approximately 14 million cubic feet per day, and (indiscernible) set to expire by the end of October, at which time, we will be unhedged. On the power side, we have an average of 46 MW per hour hedged over the next 3.5 years, that's at prices between $41 and $61 per MW.

If you want additional details on the hedging, our corporate presentation is on our website. The website address is www.pennwest.com. In that presentation, we have tables that (indiscernible) the hedging numbers in much more detail.

Going forward in the absence of a large acquisition, we will continue with a modest hedging program aimed at smoothing cash flows, protecting our capital spending programs. In summation, we are continuing to focus continuing on the qualities that have produced results over the past 10 years, but we're doing that without losing site of the fact that we need to continue to be innovative in finding new resources of oil and natural gas. We believe the key to the future lies in the ingenuity of our staff and the tremendous platform of properties that we've set up that will provide the capital requirements for the next push forward. We continue to have a strong commitment to our community and to the environment, as well as a continued belief in the potential of an oil Canadian oil and gas company that is focused on the western Canadian sedimentary basin. And rest assured, we will continue to have the discipline to maintain a strong balance sheet, giving Penn West the financial strength and ability to continue to grow profitably in the future by the drill bit, by innovation or by acquisition. I thank you for your time and now I would be pleased to attempt to answer any questions that you may have.

(Caller Instructions). John Harelin (ph), Merrill Lynch & Co.

Good morning. Could you address what you are doing in the coalbed, in terms of your activities?

Bottom line is -- we're not doing enough. And we quickly come to that realization, Don and I, over the past couple of months when looking at the activity of some of our competitors in the area. As you know, and as most of you know, we have very large land position, not only in the Pembina area, but also in the plains area that we think has great potential for coalbed methane. We have three wells that we believe can be commercial. The average rate on those wells approaches 100 MC a day per well. Our work in the short-term, and that will be under the primary direction of Bryan Clake (ph), and with the involvement also of the exploration and exploitation groups, will be to complete a number of wells in the Pembina area, in the coal zone, primarily in the Yardley (ph) formation, or the Yardley seams. And our anticipations is to do half a dozen to 10 in the very short-term. We will also be doing recompletions on a number of suspended wells in the plains area, and it is our intention to aggressively kick up the drilling for coalbed methane within the next six months, and that is a big impetus, I think more than anything, into getting Bryan into his new position, is just to have a senior member of the management team with the time to look at these new opportunities, primarily coalbed methane and tertiary (ph) recovery.

One last one for me. You mentioned the escalation of power costs and that you have locked in -- would you try to do more of that?

We are attempting to do that every time we see a little blip in the power. We have been aggressively doing some hedging over the past several months. And I think the numbers I mentioned is the significant component of our lifting (ph) costs, and that is to be expected with the nature of our business. We have a lot of light oil, we have a lot of fields that are electrified, so we will be aggressively pursuing some hedging.

Thank you.

Chris Teel (ph), Tri Stone Capital.

Two things. One is Saskatchewan. Can you comment on drilling activity to date on the shallow program and what the second half looks like?

I can comment on a number of wells, because I'll get slapped by Don Rae if I talk too much about it. We get five rigs operating right now just drilling shallow gas in Saskatchewan. We've drilled a number of wells to date, and we're in the process of completing them. We are very encouraged by what we've seen so far and it is our intention to drill upwards of 30 wells before the end of the year, and then to get much more aggressive next year with the drilling program. And in terms of timing, we're hoping to have our first shallow gas on production in Saskatchewan by around late -- early to late fall of 2004.

2004?

Yes.

Second question. In terms of the disposition program, what are your expectations there, in terms of proceeds; volumetrically, what you would see selling?

We're going to sell about -- roughly 1000 barrels a day. And I'd rather not talk about the proceeds -- I guess I can -- roughly $45 million.

Thanks.

Stephen Calderwood, Raymond James.

Thank you very much. I think you said -- one question about your conference call and one question on update. The first one -- I think you said your cash taxes for 2003 in the range of $60-$80 million, and that is a combination of current taxes and capital taxes, I think. What about 2004? Any guidance for 2004 as to whether or not the cash taxes are going to jump up?

I'll flip you over Gerry Elms, then I'll get back to your second question.

The (indiscernible) does include like 13 million of capital taxes. So you would be looking at 70 or 90 with capital tax included. And we would anticipate the cash tax on this (ph) for 2004 in the 100-120 million range.

That is cash taxes?

Cash taxes not included in the capital.

Not including capital, great.

Probably be another 13 million on the capital the taxes.

Excellent. Thank you. Is there any update on the pilots in the carbon dioxide injection still -- I think two projects to start up towards the end of this year, is that right Bill?

I will send that over to Brian. I can update you but I think Bryan is ---.

We're just actually putting the finishing touches on our application on the first pilot and we will be following up with the second pilot shortly, and we are hoping to get the first pilot started up here towards the end of this year -- into the winter and we will be following up with the second pilot as well. Part of the other activities are there is some royalty incentives that are out there we will be applying for and getting that going in the near-term here.

Alright, great. Thanks.

Thank you.

Bob Lyon (ph), CI Mutual Funds.

Good morning, everybody. Two questions. Number one -- on the change in the CapX program, is there anything outside of the sort of acquisitions disposition changes to the CapX? Anything specifically on the drilling side of note that we should take note of there?

No, Bob. It is really the acquisition side. We find ourselves for the first time in quite a few years on the positive side of acquisitions on our budget. We are showing about a -- roughly a $30 million gain on our acquisition budget, and usually at this time, we've spent somewhere between $100 and $200 million. So we had budgeted on our original budget $90 million. We're quite certain that we're not going to spend that for the rest of the year, unless something extraordinary happens. We have geared up the second half of the program, in terms of development and exploration. We have added roughly 60 extra wells in Pembina for cardium (ph) oil and for shallow gas in Pembina, and we are continuing to add wells daily in the plains, both in southwest Saskatchewan and in eastern Alberta. Next year, the plan is to have a much more level drilling program that would see us basically drilling continuously from the first in January, right through to the end of December with some minor shutdowns in the eastern part of Alberta and southwest Saskatchewan for breakup.

But other than those times, we will be drilling at a much more constant pace. So we just think it is a much better direction to go than to throw a significant portion of you capital into the first quarter of the year in the north where, with the existing level of activity in the business, services are very tight, as are drilling rigs. So we want to balance that over the rest of the year. We are confident we can achieve pretty good growth numbers doing this. The other thing I talked about in the main part of the conference call was, I for one certainly feel that need, and I think the rest of the management team feels the need to start to put some longer-term reserves onto the gas side, and I think that is not only our company, but the whole business. We need to start developing more of the shallow gas, more of the coalbed methane that would give you the type of stability that we have on the oil side of our portfolio.

Okay, that's great. In terms of the acquisitions, you've made it fairly clear that certainly things that are floating around in the market right now aren't maybe in your price band. Can you give us a little bit more color on that? We have heard a lot about the number of packages and size of packages and, boy, what a good acquisition market it is going to be. I certainly haven't seen it. You seem to be showing through your actions that you're not seeing it. Can you give me a little bit more color there?

The main appetite within acquisitions right now is, or our primary mover, are the income trust funds that are purchasing properties. And I think anyone who is aware of the income trust structure knows that it's one of the things that they can do relatively easily is to buy additional production, issue new units and move forward, and they are paying up for those units. In comparison to what we are used to as a conventional oil and gas company, in paying for the units. Companies themselves, we will have to see what happens with the Marathon package in the price that it comes out at. The street is telling us that the price will be very strong for that particular entity. And that will I think give the general public a flavor for where prices are right now. We anticipate that there are going to be some let-up, in terms of the number of properties that come onto the street, major properties, as particular the U.S. companies start to look at their Canadian operations, and also as in the case of Anadarko, look at their worldwide operations. So we do feel that there is going to be opportunities for acquisitions coming from that front. That could very well be six months-plus up the road. In the meantime, we are proceeding with the drill bit (ph).

Great. Just a very quick one to finish off, if I may. Can you tell me again roughly how much electricity you guys use in a year or a quarter?

I will let Dave Middleton talk about that.

We're currently, for Saskatchewan and Alberta, we just have a minor amount in BC, but about 63 MW that we use per hour.

Annually?

That's -- for the first and second quarter, that's what we're using -- 65 first quarter and 63 in the second.

I've got 63 MW hours on average for the year.

Okay, gotcha. Thanks a lot, guys.

(Caller Instructions) Mark Hemm (ph), Orion Securities.

I was wondering if you could comment on your drilling program. Before, you were targeting 500-600 net wells. I was just wondering if that has increased at all?

We will be increasing at -- I would say, in the 600, 600-plus range. Might get to 700. But I guess at the time when we're increasingly, we have to kind of ensure that we can maintain control of what we're doing as well. So we're trying to push it up towards 700. I think we well drill somewhere around that number.

Alright. With respect to free cash flow, based off of your estimates for cash flow for the year and where CapX should come in, that puts you somewhere between 80 to 130 million free cash flow through the second half of '03. Do you have any general split as to how much of that is going to be going to paying down already low bank debt, versus continuation of the issuer bid?

It will continue. The issuer bid calls for us to purchase up to 5 percent of the stock shares outstanding, so it will continue with the regular program purchased on the market on a very regular basis. So I would -- we're not going to stop that effort. The rest would go towards debt reduction.

Alright. So are you buying on a daily by daily type basis, currently?

Yes. Currently, we're not buying because we're on restriction, but as soon as the blackout is lifted here, we'll be buying again.

Alright, thank you.

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

I would like to just thank everyone. If there's any questions, you can phone me at 777-2502 in Calgary. Also Gerry Elms -- 777-2509, or Bryan Clake (ph), who's at 777-2510. For any of you that would like to ask by e-mail, our e-mail address is within the web site; it's www.pennwest.com, and we would certainly be most willing to answer through e-mail as well, as by the phone. And thank you once again for your interest.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your line.

(CONFERENCE CALL CONCLUDED)