Obsidian Energy Ltd (OBE) 2003 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Penn West Petroleum third quarter results conference call. At this time, all participants are in a listen only mode. Following the presentation, we'll conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulties hearing the conference, please press star zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Thursday, November 20, 2003 at 11:00 a.m. eastern time. I will now turn the conference over to Mr. William Andrew, President of Penn West. Please go ahead, sir.

Thank you very much. Good morning and welcome to beautiful snowy Calgary. I would like to thank you for your interest in Penn West today. With me today in Calgary are Don Rae, our Senior Vice President of Exploration; Dave Middleton, our Vice President of Production; Bryan Clake, who is our Vice President of Corporation Development. We've also got Todd Tackiashu, our Treasurer, he's filling in for Gerry Elms, our Vice President of Finance. Gerry took off this morning on a much-delayed and well-deserved holiday. And he'll be back in the office in about a week. And Thayne Jensen, he's the newest member of our executive team; he looks after the exploitation efforts of Penn West.

The purpose of this conference call is to review our 2003 third quarter results and to provide an update on recent activity at Penn West. Following this review and update, we'll be pleased to answer any questions you may have regarding Penn West. Some of the detailed questions if you have them on tax, I'll probably turn over to Todd. And I may ask one of the other fellows to answer a question or two as well. During the presentation, we'll use Canadian dollars, and a six to one conversion ratio for natural gas to barrel to oil equivalent. Production volumes are based on the Canadian standards and they include crown royalty volumes.

In the third quarter of 2003, crude oil and natural gas liquid production on a daily basis increased by 4% over the third quarter of 2002. That's from 44,314 barrels per day average to 46,060 barrels per day average. During the third quarter, average gas production was 340 million cubic feet per day up from about 334 million cubic feet per day in the second quarter of 2002--or in the third quarter of 2002. Higher commodity prices led to significantly higher financial results for the third quarter of 2003 versus the same time period for 2002. Cash flow from operations increased by 104% up to $204.8 million; that's approximately $3.80 per share. That compares with $100.2 million or $1.87 per share in the third quarter last year. This brings our total cash flow, our cumulative cash flow for the nine months ended September 30, 2003 to $619.1 million; that's almost 100% increase over the comparable period in 2002.

Our operating costs for the third quarter of 2003 averaged $659 per barrel of oil equivalent. That's an 11% increase over the same period of 2002. A portion of this increase is attributable to the increase in proportion of crude oil in the company's production mix, and also to increase power consumption. These two factors contributed about 42 cents per barrel, or 67% of the year-over-year change. The other smaller portion, about 20 cents per barrel or about a 5% increase can be attributed to the increasing costs of doing business this year; and basically the trickle down of the outstanding cash flow that the oil and gas companies are receiving, trickling down to the supply end of the business. Natural gas prices increased by 82% in the third quarter of 2003; that's to $5.70 per MCF compared to $3.13 for MCF in third quarter of 2002.

For the year, we're currently forecasting average price of $6.10 per MCF. Oil and natural gas liquids prices were slightly weaker in the third quarter of 2003 compared with the third quarter of 2002. Our realized oil and natural gas liquid fuel prices decreased by 2%, from $35.22 per barrel to $34.60 per barrel. We have increases our price forecast for the year to an average of $30.50US per barrel WTI, up from our earlier forecast of $30 per barrel. We're currently forecasting cash flow for the year in the range of $770 to $780 million. On a per share basis the range is $14.30 to $14.50. Cash taxes for the third quarter of 2003 totaled a recovery of $7 million. That was compared to a charge of $30 million in the third quarter of 2002.

For the year, we're anticipating the cash taxes will be approximately $30 million, which is lower than our previous estimate and represents approximately 4% of our pre-tax cash flow. For 2004, we're now estimating that cash taxes will be approximately $60 million, and that's a reduction from our previous estimate of $100 to $120 million. This reduction in estimated cash taxes is attributable to a number of things. Notably the introduction of a cash election for staff exercising stock options and the related tax deduction generates. Then primarily it is due to the increased spending on exploration and development versus acquisition. We also have some other adjustments. In the nine months ended September 30, 2003, Penn West funded its capital program entirely from it's cash flow; used excess funds to pay down debt and purchase shares under a previously approved bid.

The end of the third quarter of 2003, we have repurchased 893,000 common shares at a cost of $36.2 million; the average was about $40.54 per share. The company has approval to repurchase up to 2.687 million shares for cancellation under the bid, and we're continuing with the program of accumulation of shares. As a result of our strong 2003 cash flows and reduced cash taxes, we declared special cash dividend of $1.50 per common share; and we have instituted a quarterly cash dividend, the first of which will be 12.5 cents per common share. Both of these dividends will be payable on January 2, 2004, to shareholders of record at the close of business on December 15th, 2003. And this dividend program is the continuation of our efforts to increase shareholder value through a wide variety of means. It also recognizes that internally-generated cash flow can finance ongoing growth and reserves and production per share.

Capital expenditures for the first four months of 2003 were $559 million, of which $96 million was property acquisitions and $463 million were exploration and development spending. With an increase in the spending over the same period of 2002, that reflects a planned increase in the net number of wells drilled this year as a result of the strong levels of both commodity prices and cash flow. In terms of number of wells, we're increasing by 50% from our average from 400 wells to approximately 600 wells this year, a little over 600. At the end of the third quarter, our bank debt was $577 million; that compared to an available boring limit of $770 million with our bank syndicate. We maintained a strong balance sheet with a debt to third quarter annualized cash flow ratio of .8 to 1.

During the third quarter, we focused on cardium infill drilling and also our enhanced oil recovery project at Pembina with a gross total of 75 oil wells. Other area of high activity was the eastern plains area where we drilled 82 wells targeting shallow gas and heavy oil. In terms of exploration highlights, we have our first production now from our seal heavy oil plate where we've drilled four horizontal wells as follow-up to the initial discovery round that we did last winter. We are going to continue with further development on the project, and we have made application to the Alberta government for approval on some development project schemes. We've got two of the horizontals on production as we speak today; they've been on for a couple of weeks. Both of are producing in excess of 100 barrels per day of oil; and we expect all four horizontals to be producing by month end.

During the quarter, we were conducting seismic evaluation programs in our Pembina area. As many of you who follow the industry know, there has been a flurry of industry activity in the area on deep desmodium plates and on deeper manville plates; and we do have tremendous land position in the area of not only cardium rights, but deep rights, and we have evaluated seismic and continue to conduct seismic programs. And I anticipate that Don and his people will have several locations on the books here within a few weeks. We continued our aggressive program of land acquisition and exploration in southern Saskatchewan. We've accumulated over 500,000 net acres of exploratory land already this year.

We're targeting not only shallow gas but also and maybe equally importantly, deeper gas and some light medium oil prospects that we see on the acreage that we've acquired; and those would range all the way from the Red River up to the Milk River. So, quite an extensive variety of zones that we'll be looking at in southern Saskatchewan. During the third quarter of 2003, we completed net property acquisitions valued at $90 million; and including some of the undeveloped land I talked about, plus associated seismic. This will be largely offset by property dispositions of approximately $100 million in the fourth quarter. Thus for the year, we're forecasting capital expenditures of $590 million; that's significantly less than the forecasted cash flow of $770 to $780 million. For the balance of 2003, we'll maintain a primary focus on natural gas in the plains and conventional oil in the central area.

Our work is proceeding on the tie in of two shallow gas projects that will add approximately 25 million cubic feet per day of natural gas; and we're working to try to get them on by year end. If not, they'll be on very early in 2004. At Pembina, we continue to focus on an aggressive program aimed at optimizing our extensive oil resource with the forecasted 80 new wells on stream by year end. Those are wells that are currently drilled and either completed or awaiting completion, and tie in. We anticipate that they'll be on by year end. We're also, as I talked about, conducting active exploration program completing land seismic acquisitions, wildcat drilling; and that's spread over a wide variety of prospects. Our work is ongoing as well on our two major research and development areas.

We've initiated a ten well round to further evaluate our resource of coal bed methane. These wells are located in the Pembina and Swan Hills areas primarily. As well as Pembina, we've applied for approval on two CO2 pilot projects and on approval, we anticipate commencing these projects early in 2004. As crude oil prices continue to show strength, the company has hedged 19,600 barrels per day of production for the remainder of the year. With an average floor of $26.50 US WTI an average ceiling of $31.70 US WTI. We've also hedged 22,500 barrels per day through the first half of 2004. The average floor price on that is about $25.50 US WTI and the average ceiling is slightly above $31US WTI. As of the first of November, 2003, we're unhedged on a natural gas production.

On the power side, we have an average of 57 megawatts per hour hedged for the next three years at an average price of $45 per megawatt and we're also pushing our hedges out as far as 2007 and working on that right now. If you want additional details on hedging, our corporate presentation is on our web site which is www.Pennwest.com. And there are tables in there with the hedging numbers in more detail. Going forward in the absence of a large acquisition, we'll continue with a hedging program that is aimed at improving our cash flows and protecting our capital spending; primarily in the first half of the year. In summation, as I said, many times before, we do believe that we're a unique company in many ways. In that we've got a tremendous balance in projects between natural gas and heavy, medium, and light oil. That gives us a cushion in times of weaker commodity prices.

We've also got long life reserves that provide flexibility to select projects, based on not only short-term value but also long-term value creation. And we are very committed to the western Canadian sedimentary basin. We're very committed to the use of technology and innovation to unleash the hydrocarbon potential of the basin and follows with our work primarily on CO2 and on coal bed methane; as well as the work that we're doing on heavy oil. We have a very strong commitment to our community; as well as to the environment. Most importantly, we continue to have the discipline to maintain a strong balance sheet, and that gives us the financial strength and ability to continue to grow profitably. We would be pleased to answer any of your questions.

Thank you. 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'll hear a three tone prompt acknowledging your request and your questions will be polled in the order they're received. If you would like to decline, please press star 2 and please ensure you lift the handset before pressing any keys. One moment please for your first question. Your first question comes from Brian Prokop from Peters & Co.

Couple of quick questions. On the acquisition and divestitures, can you give us more details around those?

In a quick word, not too much detail. We're under confidentiality agreement. Basically, what it involved was the purchase of the entire assets of a corporation in the third quarter. And then the sale of a portion of those assets in the fourth quarter.

Ok.

We retained a portion of the assets, as well as, a large amount of land.

Ok, then I guess -- can you relate that perhaps to some of the tax mitigation you've been able to do with respect to lower forecast on the cash taxes?

The relation I'll do right now and again because of sensitivity around, because of the agreements we signed, there is a component of that in the reduction of our tax forecast for next year.

Ok. Final question, just curious about -- I've been hearing about some First Nation issues up at Boyer. Can you touch on those and what's being done up there?

Sure. And I think those of you that know Penn West, we do a significant amount of work on First Nation's land. We have agreements with a number of the First Nations. One of the ones we have going in Alberta is with the Drip First Nations who are west of Slave Lake and we've got a good program of exploration planned for this year. We also work hand in hand with the Fort Nelson First Nation on our wildlife project as well as the Denata and Boyer area. We are negotiating right now. We're dealing with the Denata and the Boyer area. We have a disagreement with them regarding the traditional lands. And their call for -- basically, what they want is an initial consideration when we're going in to drill wells and pipelines.

We feel that we're living to the letter of the law with regard to consultation and as a result, we have not updated an initial consideration. And we're continuing basically the negotiation process. We've also -- our part of some action that the Denata has taken against both the government of Alberta and the Resource Conservation Board. That's the extent of that. In terms of impact on our program, there is really no impact. We've got other places that we can drill in the interim. It is not as if -- that was the only land we had in western Canada. It impacts approximately 35 of our winter locations so those 35 locations will just fall to other areas; in the event that we can't come to a reasonable resolution in the next month or so.

Ok. Thank you.

Your next question comes from Allen Stepper from Salman Partners.

Bill, could you provide some additional color regarding your operations at Wildboy in the third quarter; what was the production rate, what type of well work was ongoing, if any, as well as looking into 2004. What type of -- wells, number of wells being drilled, increases to production and the like you expect from that area going forward in 2004?

I'll touch on it briefly then I'm going to turn you over to the two key people on our production and operations side and that's Dave Middleton and Thayne Jensen. On an overview, we've been disappointed in what's going on above the ground primarily in Wildboy; not necessarily what's below the ground. We're still very confident on our -- on our reserves and on our play there. We were late getting the production on this year. We had anticipated having it on stream early in May. It ended up coming onstream in June. And we had quite a bit of difficulty with our gas plant. It's a very large gas plant and compression facility up there as well as a massive gas extraction facility. We have -- it is ongoing difficulty not only with our plant but also with the sales line that is operated by pipeline company out of the area. But I'll flip it over to Dave just to talk a little bit about the volumes and the operations. Then Thayne will talk about our plans for the first quarter.

Currently we're in pretty good shape. We've taken all of the bottlenecks out of the plant. This year, we did a major expansion to the plant. It currently can do about 125 million a day. The plant is processing and selling about 90 million a day currently. So, any development that we have planned for 2004 will not require any expansion of the infrastructure, the sales line, or the gas plant.

Going into 2004, we've got approximately 50 wells planned. And about ten are explorations setting up future years, and the 40 development wells is a split about 2/3 on Jean Marie and 1/3 on our Mississippian Point and Debunk. We're looking at adding about 30 to 35 million a day up there as a result of this, as an initial rate.

Did you get that?

Yes. And I have just one additional question regarding coal bed methane and the economics of it. I know some of your competitors in southern Alberta who have announced plans; they have the opportunity with fee simple lands and mineral taxes as opposed to royalties and existing infrastructure. Can you describe kind of preliminary kind of the economic case for CDM on some of your lands?

Sure. We've talked about it before. Bryan usually gives me a kick under the table when I start talking about CDM. My feeling and the feeling of our exploration staff is that our resource of coal bed methane is tremendous in the company. We don't tend to be very good flag wavers at Penn West and hence we don't tend to make a lot of noise about what we're working on. Basically, we believe that we can find hole sinks that will produce gas at rates of between 50 and 100 MCF a day, that we can make it work. And to make it work requires that we drill the wells for reasonable prices. We can also make it work because we have an extensive infrastructure over most of our major coal bed areas and that includes at Pembina at Swan Hills and through the plains area.

The comment with regard to fee simple lands, I guess it is a fair one but I think you have to temper it with the fact that on gas wells that are producing between 50 and 100, 100 MCF a day in the province of Alberta, there is extremely low crown royalty. It is a very minor component in the cost -- or the net of the natural gas. Basically, we focus on the capital side and we feel that we can strongly contribute to the net back on the operating side because of the infrastructure that we have over our coal seams in Alberta.

Great. Thank you very much.

Your next question comes from Dan Farb from Highfields Capital. Please go ahead.

Hi, guys.

Hi, Dan. I know I should have returned your call yesterday.

Don't worry. I just had a quick one for you. I think this dividend you guys have declared is a step in the right direction, but my question is does this mean -- does this change your thinking with regard to potential trust conversion? Over the short to intermediate term?

You and I have had a few conversations but I'll share them a little bit if you don't mind, Dan.

Sure.

Dan and I have certainly talked over the last while; his company is a big shareholder of Penn West. Their concern is continued value creation in the company. Certainly, one of the options we've talked about is trust conversion. And when we look at Penn West as you tend to at a company at a board level and at a management level in the company, we look primarily at where we're going; and what we have in the company. Our feeling -- our current feeling -- that feeling hasn't changed over the past year; is that we have tremendous opportunities at Penn West for growth. We have very, very good land position.

We have over five and a half million net acres of land; and on a per barrel basis, I think that you'll see that that ranks probably at the top of any of the companies that are operating in this space. So we feel that we have certainly the land and the prospects available for conventional oil and gas operations. Secondly, we do believe, and we're strong believers, in the CO2 and the potential for enhanced recovery. We have taken a very measured approach to accumulate as much light oil as we could accumulate. When companies were acquiring gas reserves and gas production, we were acquiring light oil production. That was done with the aim of implementing technology. Implementing infill drilling to try to get more light oil out of the ground.

We do believe there is a tremendous resource there. We do believe that this basin is basically underworked in relation to some of the other more mature basins in the world on light oil. We're also committed to coal bed methane. And we think that this is going to be a tremendous resource in western Canada. So, in the near term, we're going to go ahead as an exploration company and a development company. We've initiated a dividend program and I'll not talk about the special dividend that was more related to 2003 strong cash flow. But going forward, we've initiated a dividend program and that puts us on a -- on an equal footing with a lot of the senior producers in North America who have dividend programs, so we wanted to not differentiate so much with the other seniors.

Ok.

And basically, that's where we're at. The trust for us at the present time is not as appealing as going forward.

I guess the only comment or question I would have would be sort of by my math, and I've shared it and talked to a bunch of guys who own the stock and on the sell side, is that you could get a valuation of between $60 to $70 today if you converted to an income trust; and I guess the question is do you think that present value of these future initiatives will be greater than the $60 to $70. If you agree with those numbers that you can get today as a trust.

Certainly much higher than $60. When you look at the potential for CO2 alone, we discount it to the current day. We see an evaluation on the CO 2 somewhere in the range of $5 to $10 per share; maybe more. The CDM, tough to tie a number to that one right now, but certainly it's got some tremendous value to the company; as well as ongoing exploration, I think that's what people forget about all the time. We've got some great research and development projects. I've got a pretty darn good exploration Senior Vice President, Don Rae, has found a lot of oil and gas for the shareholders of Penn West; and I'm confident that we'll continue to do the same thing on our land base.

The $60 to $70 a share, I think you have to take into account a few things, too, is you know, what is the appetite if a company the size of Penn West was to convert it to a trust. Is there an appetite for $4 billion worth of units or $4.5 billion worth of units in the trust market in Canada; I don't know. You also have to ask yourself who's going to run the trust; and those are some of the things that come up. But overlying it all is the fact that we believe, and the board of directors of Penn West believe, that there is more upside in going forward as an exploration and development company presently.

Thanks, guys.

Thank you.

Ladies and gentlemen, if there are any additional questions at this time, please press star 1. As a reminder if you're using a speakerphone, please press the handset before pressing any keys. Your next question is from Alistair Toward from Research Capital.

Good morning. I was wondering the change in the tax was quite significant. Can you speak to some of the changes and assumptions with regards to capital expenditures both in amount and also in where they're going, for example, how much is going to ease and the like?

Sure. I'm going to flip this over to Todd and if he puts his hand up, I'll jump back in.

Ok. We were initially thinking we would be doing $90 to $100 million this year in acquisitions. Looking like that number will be around zero and what we've done is we've essentially reparlayed that capital into drilling for the most part. Of which we're forecasting that about 40% will be exploratory in nature. And we're also stepping up our seismic programs, which makes an immediate impact on the tax, and then there is a small impact from the acquisitions that Bill talked about earlier. And we're expecting that the stock based compensation is going to be about a $13 million deduction in the current tax year for us.

Thank you very much.

Ok.

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

I would like to thank everybody and as I have said in the past, if there are any further questions, we're in the office. My number is 777-2502 in Calgary. Bryan Clake would be happy to talk to any of you as well. He's at area code 403-777-2510. We do -- you can get us via our website as well. Our e-mail addresses are on the quarterly disclosure. We would be pleased, if you had a question in writing, we would be pleased to attempt to answer that today. Thank you very much for your interest in the company.

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