Obsidian Energy Ltd (OBE) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Penn West Petroleum, Ltd. first-quarter results conference call. At this time participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session, instructions will be provided at that time for you to queue up for questions. If anyone has any difficulty hearing the conference, press star zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded on Thursday, May 13, 2004 at 11 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. And thanks to everybody that is listening either on the telephone conference call or on the webcast.

I am joined here today in Calgary with my management team. Our Penn West two Senior Vice Presidents, one is Don Rae, he is the Senior Vice President of Exploration and our recently appointed Senior Vice President of Production, Dave Middleton. Also in the room are Thane Jensen, Vice President of Exploitation; Bryan Clake, Vice President of Corporate Development; Gerry Elms, Vice President of Finance and Investor Relations.

And we are pleased to have join us our newest officer and that's Phil Reist. He joined the Company in the middle of the first quarter from Petro Vera as Controller and Vice President. His 20-plus-years experience in the industry as a chartered accountant, most recently as Vice President of Finance with Petro Vera. And Phil is reporting to me and adds depth to the Finance and Accounting Department of Penn West and to our system of controls and balances.

The purpose of this conference call is to review our 2004 first-quarter results and to provide an update on recent activities at Penn West. Following this review, I will be pleased to answer any questions that you might have pertaining to the results of operations.

As all of you are aware, we are currently in the process of reviewing strategic alternatives. The process is moving forward in a timely manner to provide our shareholders with the information necessary to review the alternatives and to determine the future course of Penn West. And I trust you will also understand the need for confidentiality during this process, not only to protect the integrity of the process, but to protect the employees of Penn West. For that reason, and I will emphasize it again at the end of the call, it is my intention not to get into any more detail on the strategic review process.

In 2004, Penn West adopted several new industry-accepted accounting policies and they are outlined in Note 2 of the consolidated financial statements. In order to provide comparative figures to 2002 and '03, we have restated certain of our 2003 figures to reflect the recently adopted policy. So it is merely a restatement to reflect what is currently accepted accounting practice.

During the presentation, we use Canadian dollars and a 6-to-1 ratio for conversions to barrels of oil equivalent. In the first quarter, we focused on an active capital program, drilling a total of 180 net wells, with a resulting 75 net natural gas wells and 86 net oil wells. Our overall success rate was in the high 80% range. We successfully closed an acquisition in our Plains Core Area. That added approximately 10,000 BOE per day to our production base, and that included 7,000 barrels per day of conventional heavy oil, at 18 mcf per day of natural gas.

During the first quarter of 2004, production of crude oil and natural gas liquids averaged 51,245 barrels per day. That's an increase of 10.4% over average production of 46,422 barrels per day in the first quarter of 2003. And during the first quarter our liquid stream was74% light oil and natural gas liquids, 26% conventional heavy oil. Again, I will refer you to the accounting statements where we have broken down the absolute volumes of light product and heavy product.

Production of natural gas averaged 312 mcf per day in the first quarter of 2004. That compares to an average gas production of 328 mcf per day in the first quarter of 2003. And that represents an overall decline of 4.9% in gas production over Q1 '03. Barrels of oil equivalent basis production in the first quarter 2004 averaged 103,238 barrels per day, an increase of 2.1% over average production of 101,126 barrels per day in the first quarter of '03.

I will walk through that in a little more detail, and I will basically tell you how we arrived at that number. Starting at the average for Q4, and looking at the builds that we have in Q1 and I will get to where we are today so you have an understanding of how we have been employing our capital. Q4 our gas production was 314 mcf per day, our oil production was 47,100 barrels per day. On a BOE bases that's 99,400 BOE per day.

Our current declines in gas production are about 24% per year. Current declines in oil production are about 14% per year. But roughly our decline on the corporate world is 19% per year. Thus, our expected base case for gas without any expenditure was about 295 million of gas and about 45,500 barrels of oil.

During the first quarter and effective February 1, we added Petro Vera, 7,000 barrels per day, the impact on the quarter from that acquisition was 4,500 barrels. We added 18 mcf of gas per day on that acquisition, the impact of that was 12 mcf per day. So including Petro Vera, that takes our base production for the quarter to 50,000 barrels per day and our gas to about 312. It gives us about 102,000 BOE per day.

We are ahead of that base. We added volumes as you can see on the oil side, primarily those were tie-ins of wells that were remaining from the fourth quarter. Our gas volumes would have been up other than the fact that we had a plant explosion at Wildboy that cost us about 4 mcf a day of gas for the quarter. And also I think the rest of the industry has been impacted as well, but believe it or not, we had some cold weather early in the first quarter of the year.

Our current production is 111,000 barrels a day, that consists with 336 mcf per day of gas, 56,000 barrels a day of oil and natural gas liquids. Again, if you look at the straight base and incorporate the declines, our expectation on the base with Petro Vera at this point in time is 295 mcf a day. So we are about 41 or 42 mcf per day over our base, and that represents adds from the drill bit in Q1 and also from a little bit of tie-in on the Q4 stuff last year.

On the oil side, currently at 56,000 ace plus Petro Vera expectation was around 50,000 barrels a day, a hair over 50. That gives us adds of 5,500 to 6,000 barrels per day, primarily from Q1 drilling, and a little bit of tie-in on the Q4. So right now, we're ahead of budget on volumes, and we are bang on capital. So we feel that we've had a pretty strong quarter, exploration and development and optimization-wise.

During the first quarter 2004, commodity prices were lower than those experienced in the first quarter of '03. Natural gas prices averaged 641 per mcf in the first quarter of 2004, that's down 16% from an average price realized of 765 in the first quarter of '03. Light oil natural gas liquids price averaged $36.75 per barrel in the first quarter, that's down 12% from the average price of about $41.9 realized in the first quarter of '03. Eventual heavy oil price were also lower in the first quarter of '04 compared to the same period last year averaging $30.81 per barrel, that's down 22% from $39.47 per barrel realized in the first quarter of 2003.

The weaker commodity prices in the first quarter impacted our revenues. Thus, our revenues decreased 13% of $399 million in 2003 to $346 million in the first quarter of 2004. Operating costs in the first quarter increased 22% to 765 per barrel of oil equivalent compared to 625 per barrel of oil equivalent in the first quarter of 2003. The increase was attributable primarily to a change in our proportional mix.

We have increased the amount of crude oil in our production mix to 50% from 46% for the same period of 2003, oil is the more costly product to produce. And that's impacted our operating cost. It also reflects somewhat the experience that we had in Wildboy with the plant explosion, and the impact of some of the cold weather.

Our net back for the first quarter of 2004 were $22.12 per barrel of oil equivalent, that's a 24% decrease over the first quarter of 2003. Part of the net back was due to lower prices for natural gas and crude oil. Part of it was the slight increase in operating cost. And also, the strength of the Canadian dollar had an impact in the decrease.

Cash flow from operations in the first quarter of 2004 was $181.2 million or $3.32 per share diluted. This compares to cash flow of $230.1 million before 20 per share diluted which we achieved in the first quarter of 2003. Year-over-year the decrease in cash flow per share is 21%. And we have gone over the reasoning behind that.

Net income for the first quarter of 2004 was $60.9 million or $1.11 per share diluted. That compares with $136.3 million or $2.49 per share for the same period in 2003. Year-over-year decrease in net income per share is 55%. Cash taxes in the first quarter of 2004 were $10 million. That compares with $18 million in the first quarter of 2003. That's a decrease of 44%. For 2004 we're estimating the cash taxes will be between $20 million and $40 million, and that's the expectation at the current time.

Capital expenditures for the first quarter of 2004 totaled $448 million, that includes $214 million spent on conventional exploration and development activity. $234 million spent on acquisitions. Same period in 2003, capital expenditures were $251 million, $246 million spent on exploration and development and $5 million on acquisitions.

The end of the first quarter of 2004, our bank debt was $737 million, that's an increase of $193 million from the bank debt of $544 million at the end of the first quarter of '03. So you can see that we absorbed the $234 million acquisition of Petro Vera and that was the primary bump in our bank debt. This also includes the special dividend of $1.50 per share which we paid to the shareholders in January.

For 2004, our capital spending is currently targeted at $600 million to $700 million. The capital program includes conventional exploration and development, optimization, and continued efforts Coalbed Methane exploration and enhanced recovery technology. Based on commodity prices of $30 U.S. per barrel WTI and $5.80 mcf of natural gas, for plantgate we're forecasting cash flow of $640 million to $670 million in 2004.

Using the current forward strip, we feel there is an opportunity for cash flow to come in around $800 million. We are continuing to review our budget light of the strong forward price strip and we have an excellent inventory development project that can be added. As we do fund our capital program primarily through internally generated cash flow, we expect that we would bump our capital budget if the strength of crude oil prices and gas prices remains into the near future. So we would make a decision on that a little later this quarter.

In terms of hedges on average, we have $92 mcf per day of natural gas hedged through the third quarter of 2004 with an average floor price of $5.19 per mcf and a ceiling of 748 per mcf and basically those hedges are flat, so we are generally inside the collar on that hedge. On the power side, we have an average 60 megawatt of power hedged over the next three years at an average price of just under $46 per megawatt and again on that hedge, it is about a break-even situation.

The one hedge that we've had some problems with in the first quarter is crude oil hedge. We have hedged approximately 47% of our liquids production in the third quarter of 2004. The average price collars range from a floor of $25.50 U.S. per barrel WTI up to a ceiling of $35.80 U.S. per barrel WTI and I think as anyone knows we are outside of that collar.

The reason for the collar was quite simple, financial management and control, looking at the acquisition that we made and basically to lock in our numbers for the year. If you want additional details, our corporate presentation is on our website at www.pennwest.com. We have tables in there that outline our hedging numbers and forecasts in much more detail than I can provide on this conference call.

Going forward, we are continuing to focus our exploration and development opportunities available in our core areas to enhance shareholder value and provide profitable growth. We are progressing in our efforts to advance our methane program and our Coalbed Methane program and our carbon dioxide miscible flood pilot program and this will provide for, we believe, outstanding growth opportunities in the future.

In March, the Board of Directors initiated a review of strategic alternatives to determine the best direction for optimizing shareholder value. This process is ongoing, and it is expected to be completed in the summer. As a result of this review, the Company cancelled its annual meeting of shareholders originally scheduled for May 11, 2004. A new meeting date will be set as we proceed further into the strategic alternative review.

Over the past 11 years, we've provided our shareholders with consistent growth in value. We believe that the quality and depth of assets of Penn West put our shareholders in a position of strength when reviewing strategic alternatives, and your management and also the Directors of Penn West are committed to the strategic alternative review process and to maximizing shareholder value.

I will be pleased to answer any questions and please note the detailed information regarding the strategic alternative review process will not be provided, as we believe that a high level of confidentiality is required to maintain the integrity of the process. I would be happy to answer some questions.

Thank you, sir. Ladies and gentlemen, we will now conduct the question-and-answer section. If you have a question, please press star one on your touch-tone phone. You will hear a three-tone prompt acknowledging your request and your questions will be polled in the order they are received. Please be sure you lift the handset if you are using a speaker phone before pressing any keys. One moment please for your first question. Your first questions from John McKeeler from CAM Fund Management. Please go ahead.

Good morning. Bill, we are very sensitive to your lack of interest in disclosing confidential information pertaining to the process. We were just wondering if we could ask a question more so regarding framework or process related to it. I wonder if you have established a independent committee of the Board, and whether you have retained independent financial advisors in that.

Trust you will understand it's not a lack of interest in the process that I have. The answer is the answer that I gave earlier. The review process is proceeding. It's proceeding at what we think is a very good pace, and we will have answers for our shareholders in short order. And other than that, I do not intend to get into the details.

Okay. So you just can't say if you have retained financial advisors and if not, why not?

Not going to get into the details.

Okay. Thank you.

Thank you.

Your next question comes from Stephen Calderwood from Raymond James Ltd. Please go ahead.

Good morning, Bill. I would like to ask one question on your operating cost. One question on your capital cost and it's related to the production adds, so I may have a two-part question to ask. Will you explain -- first of all, your operating cost -- you explained why they are [inaudible] to the production mix and a lot of other reasons I heard you list off some reasons, but one of them was the structural change in your production mix. Can you give us any guidance on what you expect your OP cost to be going forward maybe for the rest of 2004?

I'll turn that over to my -- who best to answer than the VP of Production. Dave Middleton will take a rip at that.

Yeah, if you take a look at our costs to a year ago, you can see that we have had a significant increase. If you take a look at the cost compared to what we had in the last quarter, we have tended to flatten them out. Operating cost about 640 in the last quarter, fourth-quarter 2003, and we think we have flattened that out. A lot of that operating cost was associated with the volumes of about 5% of that. Some of the additional operating costs were associated up in Wildboy. Where we were pretty much doubled our operating cost because of the infrastructure we added.

On the well side, we pretty much flattened from the fourth quarter, and we feel that that's going to be pretty much where we are going to be for the remainder of the year. We were about 1,128 in the fourth-quarter 2003, and 1,158 right now we should hold it at that line.

Steve, one thing that we are doing, and I talked about this in our last conference call, is that we're -- this year you will see us do more development compared to exploration. You will see us do more optimization. So we are expecting that by concentrating our work in existing fields that we will be able to, at the very minimum, control our operating costs to where they were in the fourth quarter of '03 and actually we are expecting that we can improve the cost, particularly on the oil side.

Great. Okay. So let me just clarify. When you were you were talking, Bill, at the beginning of the call about the production adds that were not related to the acquisition, did you say there was 423 BOEs a day from the gas and about 55,000 to 56,000 barrels as day from the oil and liquids?

I hope so.

Yeah.

Currently we're at 111, and I have a great habit of confusing people, so I hope not too many are confused. Our current production is 111,000 BOE per day and that consists as outlined in our press release of 336 mcf per day of natural gas and 56,000 of all the various oil and natural gas liquids.

Our base, including Petro Vera, we would have been about 295 on gas and about 50,500 barrels per day on oil. I think I said somewhere being 50,000 and 51,000, but about 50,500. Thus, if you look -- the difference between that and where we are today would logically be the money you would spend on exploration and development, excluding the acquisition. The adds thus were about 41 mcf per day of gas to take us from 295 on the base to 336. And the adds on the oil take us from 50,500 to 56,000 for about 5,500 barrels per day.

And you only spent $214 million to add that amount of production.

Right. I think if you remember the part of it -- and I talked about it in our -- I think as you know we were kind of disappointed with what went on last year and we talked about some of the concerns about timing in the fourth quarter and some of the projects that we had behind pipe and what needed to be tied in, so a portion of that is work that was a hang over from the fourth quarter, basically tie-in work.

Great. Well, that is what I wanted to ask on the capital cost. My question is, of that $80 million -- $83 million you spent on facility and well equipping, can you tell me how much of that was for future excess processing capacity and how much you really needed to spend to add that amount of production in the quarter.

We didn't -- in terms of adding extra processing capacity, the two places that we would impact the budget would be Firebird where we added to a gas plant there with basically double the capacity with a new compressor and processing equipment. Also out at Alterio [ph] we added a grass roots compressor out there. Other than that, and some minor modifications that you always do quarter over quarter on existing facilities, most of it was related just a tie-in of wells.

Okay. That's fine. Thanks a lot.

Your next question comes from Allan Stepa from Salman Partners. Please go ahead.

Yes, I am just trying to drill down a little deeper on the operating cost. You mentioned production mix as well as reduced gas production. How much of an impact maybe on a percentage basis did basically just general cost increases in the industry have on the operating cost in this quarter? Can you break it down by those --

I think we took most of our hit on that type of thing mid to late 2003, so we didn't see as much impact. The one thing that does go in there is the fact that the wages for the operators went up year-over-year. So there's a bump that is over the inflation rate. There's also minor changes to price books. I would think quarter over quarter we were probably combating somewhere between a 5% and 7% increase due to increased rates and labor costs.

Okay.

Not as much as last year. Last year the bump was 15% to 20%.

And I want to make sure I heard you correctly. Did you say that quarter 4 the operating cost, that would be the good run rate for full-year 2004 and forward. Is that correct?

Basically we don't expect -- we expect that our operating cost will come down from this quarter.

Okay. One final question. On the natural gas production side, obviously you mentioned the explosion at Wildboy and the cold weather. Were there any negatives as far as on the productivity of wells?

No.

It was all -- as you mentioned those two other factors?

I think as you know we operate 9,000 wells, so there are wells that go in and out of service every day. Nothing like a -- I wish we had some 50 or 100 million-a-day wells that we could depend on, but most of our wells if they do go out of service they are not a tremendous impact on daily production.

Okay. Great, thank you.

Your next question comes from Terry Peters from Canaccord Capital. Please go ahead.

Okay, thanks. Bill, I can respect your previous comments on the strategic review process; however, I would just like to clarify how this would conclude, and in your annual report on page 6, you say whichever strategic direction the Board adopts for recommendation to shareholders. Is this how this concludes?

Yes.

Or do you have an answer to that? How do you put three options to shareholders?

In my view, we would put a recommendation to the shareholders and provide them with information related, not only to that recommendation, but to the other alternative.

So it would be --

And the status quo.

So the recommendation would be a yes or no in favor of whatever the conclusion of your strategic review would be?

Yes.

One question, in other words.

Yes.

All right. Well, we cleared that up. Thank you very much

Your next question comes from Brian Prokop from Peters & Company.

Hi, good morning. So, Bill, when you say you are not going to say anything, you mean that, right?

Yep.

Good. Quick question. If you get excess cash flow, you indicated you might bump up your Capex but you obviously have a dividend policy, you also have a share buyback policy. Can you give me a sense of what your decision process is on increasing Capex versus the other two options.

Yeah, I guess we are a little reluctant to, certainly while our strategic review process is ongoing, we are a little reluctant on the share buyback to influence the markets and that regard. The two alternatives or a combination of alternatives could include a special dividend. It could include increasing the capital budget. And we haven't had enough thought. Obviously, the first consideration is looking at the capital budget and looking at the opportunities we have available, and then the other thing that we do, very much consider is the shareholders and the potential for enhancing their value.

So likely an increase in Capex though wouldn't go until you had some type of resolution vis-a-vis the alternatives?

It could. One of the things, and I don't want to sound too harsh on the strategic alternative review, but I hope that the people who are listening will understand that we have a company to run as well. And we want to hit decision day with a strong, active, ongoing company. And for that reason, we are in a situation where prices are strong. It looks like we are going to exceed our cash flow. So normal operating regime, normal conditions would dictate that we look at increasing our capital budget and the 600 employees at Penn West, I guess the 599 other than myself, their job is to look at ways of spending cash flow. So that's what we are doing.

Okay. Thanks.

Thanks.

Ladies and gentlemen, if there are any additional questions at this time, please press star one. As a reminder, if you are using a speakerphone, please lift the handset before pressing any keys. You have a follow-up question from Stephen Calderwood from Raymond James Ltd. Please go ahead.

Can you hear me okay?

That's fine, Stephen.

Sorry, I screwed up my phone here. I wanted to ask you about the heavy oil differential. It looks like it went up a little bit more than we were expecting in the quarter compared to last quarter.

I will switch you over -- I have got one more mystery person here. That's Christian Tang, actually Christian Tang who is our Manager of Marketing and Randy Woods our Manager of Land are here as well.

Okay.

So I will let Christian go on that one. Speak up.

In the first quarter, we purchased some 7,000 heavy oil barrels from Shavira [ph] now that's heavied up our mix a bit, so that's why differential has gone up first quarter.

Okay, so it's continuous. That's what we will expect is [inaudible] differentials going to go up? Going forward?

It will be higher than it was in the past, because the heavier oil has gone up proportionately relative to the --.

We are about 24% of our oil mix in the first quarter was heavy, and we had been running roughly 15% so heavy oil mix is going up

Yeah, but I am talking about your heavy oil differential alone. I mean, alone, your heavy oil differential looked like it would have been about $5 from the benchmark prices, but looks like it is close to $9 here on your financials. Is that because of the acquisition of Petro Vera, but if that's the case, that should be going forward as well.

There is also some hedging impact on the first-quarter too.

Okay, okay. We will look a little further into it. Sorry.

Yeah, I'll make this commitment on that one that we'll get back to you, but we will also put something on the website just on the differential and how it was derived.

Yeah, yeah, okay, thanks.

There is some -- as Christian says, there is some impacts from hedging on that.

Your they question comes from Ian Thompson from Wolverton Securities. Please go ahead.

Good morning, gentlemen. I was just wondering if you could you tell us what the current production levels are at Wildboy, and with the explosion, how things are proceeding with the facilities there?

They are very good. Basically what happened was we were doing an ignition on a compressor and had a back flash and had a fire. Nobody was hurt, thankfully, but we had to bring in some new equipment so that cost us a number of weeks of production on that one particular unit. Our current production fluctuates a little bit, but it is between 95 and 100 mcf a day, and we expect that's the rate we will level off at.

Thank you.

And that's sales gas.

Thank you.

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

I would just like to thank everyone. My number in Calgary is 777-2502, area code 403. If any of you have any more detailed questions, I'd give it a whirl and try to answer them. And I do thank you for your patience and attention. Thank you.

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