Obsidian Energy Ltd (OBE) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Penn West Petroleum Limited second-quarter results conference call. (OPERATOR INSTRUCTIONS). I will now turn the conference over to Mr. William Andrew, President. Please go ahead, sir.

Thank you and hello from Calgary. Gathered around the table this morning with me in Calgary are Don Rae, who is our Senior Vice President of Exploration; Gerry Elms, our Vice President of Finance and Corporate Secretary; Thane Jensen, our Vice President of Engineering, and Phil Reist, our Vice President of Accounting and Controller. And also here are Randy Woods, who looks after land at Penn West, and Christian Tang, who takes care of our marketing.

I would like to thank you all for taking the time to listen to our teleconference and Web cast, particularly those of you who are our shareholders at Penn West. Many of our employees who are also of shareholders are listening in this morning, and I would like to thank them for their effort, for the dedication particularly over the last year. Then finally a good morning to those of you who follow our stock and update our story.

The purpose of this conference call is to review our 2004 second-quarter results and provide a brief update on recent activities at Penn West, including an update on our strategic review process. Following this review, we would be pleased to answer any questions that you might have.

On January 1st, 2004, Penn West adopted the new asset retirement obligation accounting recommendations, as well as the new (inaudible) accounting guideline for oil and gas companies. For this reason, we have reformatted our 2003 comparative numbers using the new recommendations and guidelines. For more details, we have attached Note Two to our consolidated and our financial statements. During the presentation, we will use Canadian dollars and a 6 to 1 ratio for conversion to barrels of oil equivalent.

And now we move onto the results. For second quarter of 2004, we achieved record average daily production of 109,280 barrels of oil equivalent per day, and that included 330 million cubic feet per day of natural gas and 54,316 barrels per day of crude oil and natural gas liquid. This represents an increase of 6 percent over the second quarter of 2003. Our volumes were impacted during the quarter by wet weather, and the wet weather has continued through July and the first week of August. This unseasonable weather has impacted our truck to oil operations and the movement of drilling and well servicing equipment. Currently we're producing approximately 107,500 barrels of oil equivalent per day. That puts us well within our guidance for average daily production in 2004.

During the second quarter of 2004, Penn West drilled 51 net wells with a 90 percent rate of success. We focused primarily on exploration and development drilling for natural gas, heavy oil and medium gravity oil in the Plains area and in Southwestern Saskatchewan.

Commodity prices were higher in the second quarter of 2004 compared to the second quarter of 2003. Natural gas prices averaged $7.03 per Mcf, and that was up 5 percent from the second quarter of 2003. Light oil and natural gas liquids prices averaged $39.80 per barrels. That was a 9 percent increase from the second quarter of 2003. Conventional heavy oil prices were also higher in the second quarter of 2004 compared to the same period last year. They averaged $30.17 per barrel, and that was up 5 percent from $28.72 per barrel last year.

With higher commodity prices in the second quarter of 2004, gross revenues compared to the same period last year increased by 10 percent from 354 million to 390 million in Q2 this year.

Operating costs for the second quarter of 2004 were held flat from the first quarter, but they are up year-over-year. That is primarily due to a couple of reasons. One is an increase in the proportion of crude oil in our production mix, and that portion is up from 46 percent to 50 percent. The second reason is due to higher cost for services in the field.

The latter factor is an industrywide reality due to increased fuel costs, cost of materials and labor costs. Over the past five years, we have shifted our emphasis towards long life oil reserves and the Northern gas reserves. The normal trade-off for long production life is modest per well production rates, while the rewards associated with Northern production come with the costs associated with operating in a remote area. So we have seen some increase in our operating costs. Some of them were expected as we moved towards the long life oil into Northern gas, and we have had that compounded with industrywide increases.

Our netbacks for the second quarter of 2004 were $24.24 per BOE. That is an increase of 3 percent over the second quarter of 2003 netbacks. Cash flow from operations in the second quarter of 2004 reached $211 million or $3.86 per share diluted. That is a 14 percent increase over the second quarter of 2003. Revenues were reduced by $23 million in the second quarter of 2004 as a result of commodity hedges, and that is versus a $3 million reduction in 2003. Revenues for the first half have been reduced by 35 million as a result of commodity hedges, and that compares to a $25 million reduction in '03.

Net income for the second quarter was down 66 percent to 66 million or $1.20 per share diluted. That compared with the same period in 2003. This reduction in net income reflects two onetime non-cash items in the second quarter of 2003 numbers. The first was an unrealized foreign exchange gain of $49 million. The second was a $98 million reduction in future income tax rates effected when federal and provincial tax rates were changed, bringing the rates charged to the oil and gas industry down toward the levels charged to other industries in Canada.

In addition, our depletion, depreciation and accretion reflects changes in reserves due to the adoption of national instrument 51-101. Cash taxes for the second quarter of 2004 dropped 28 percent to $13 million from 18 million in the second quarter of 2003. We are estimating that cash taxes for 2004 will be in the range of $40 million to $50 million for the full year.

Capital expenditures for the first half of 2004 totaled 530 million. That included $297 million spent on conventional exploration and development and $233 million spent on acquisitions, and that was primarily one acquisition of assets from Petro Vera.

In the same period of 2003, capital expenditures were $334 million with 328 million spent on exploration and development and 6 million spent on acquisitions.

At the end of the second quarter of 2004, our bank debt was $726 million. This debt level reflects the acquisition expenditure of 233 million in the first quarter, a special dividend of 81 million or $1.50 per share paid to shareholders in January, and our normal capital plan that calls for an active first quarter in our winter only access area.

2004 Penn West targeted capital spending will be approximately $700 to $750 million. The spuds will fund the drilling of approximately 400 net wells. We are focusing on development in the Central and Plains areas and an exploration in Southwestern Saskatchewan. To continue our efforts on enhanced recovery with major reactivation projects for the Pembrina cardium waterflood, a pattern expansion of the hydrocarbon municipal flood at Swan Hills and the commencement of optimization work on Southwest Saskatchewan oil properties acquired in late 2000 and in early 2004. Our new ventures that are ongoing include development drilling for heavy oil at the field and the commencement of our CO2 pilots at Pembrina in the Cardium.

By maintaining control of our capital spending in 2004, we expect not only to achieve a significant improvement in our finding costs but also improve our balance sheet. Based on commodity prices of 3650 U.S. per barrel of WTI crude oil, the $6.63 per Mcf of natural gas, we are forecasting cash flow of 750 million to 790 million in 2004. If one was to use the current strip prices for our products, cash flow for 2004 would be in the range of $850 to $900 million. The proposed capital program for 2004 will be funded entirely through internally generated cash flow.

In terms of hedges, on average we have 92 million cubic feet per day of natural gas hedged through the third quarter of 2004, and those are done on collars. The averaged floor price of the collars is $5.19. The average ceiling is $7.48 per Mcf.

On the power side, we have an average of approximately 60 megawatts per hour hedged over the next three years at an average price of just under $46 per megawatt. We also have hedges totaling approximately 47 percent of our liquids production until the third quarter of 2004 and another 19 percent currently hedged for the last quarter of the year. The average price collars range from a floor of $2550 U.S. per barrel WTI up to a ceiling of $3580 U.S. per barrel WTI.

If you want more details on our hedges or any other information, please check our corporate presentation on our Web site. Our Web site is www.PennWest.com. We have tables outlining our hedging numbers on that site.

Penn West will distribute a dividend of 12.5 cents per common share payable on October 1st, 2004, and that is to all shareholders of record as at September 15th, 2004.

In Penn West's recent information circular and proxy statement, we outlined the steps we have taken to date in our strategic review process. I should note that the process is ongoing, and it is our intention to make a recommendation to our shareholders at or before the annual and special meeting which is scheduled to take place on August 20th, 2004. Until a recommendation is made to our shareholders, it is my intention not to discuss any details regarding the strategic review process beyond those outlined in the information circular.

Through this process, our primary concern has been to conduct a thorough review of our strategic alternatives and to provide a sound recommendation based on this review for our shareholders.

During the strategic review, we have adopted a business as usual environment that isolates most employees from the strategic review process. Our results in the second quarter are testament to the quality of our staff and to the managements and to their dedication through this process.

In summation, we believe that Penn West continues to be a very strong and very effective company. Our current production of 107,500 BOE per day is on target with our guidance and our budget, Our financial position remained strong, and the outlook for commodity prices continues to be favorable. The focused asset-base that we have assembled over the past 11 years will continue to derive a tremendous platform for future value creation for our shareholders. We have a strong commitment to our communities, our stakeholders and to future generations. This commitment is demonstrated by our community involvement, our strong relationship that we have with our stakeholders and by our environmental stewardship and innovation.

We have a team at Penn West that worked hard to build a strong company that achieves and that cares. We remain committed to create value for our shareholders, to continue our track record of effective management of the assets of Penn West, and a strong corporate responsibility. I would like to thank you, and I am pleased to answer any questions that you might have at this time.

(OPERATOR INSTRUCTIONS). Allan Stepa, Salman Partners.

I would like to talk about your ability to grow your base production absent acquisitions? I was hoping that you could elaborate in some detail first off for natural gas, then light oil and then heavy oil whether or not the base production, the expectations for either a growth or a decline going forward?

Sure. We set up the budget this year without any acquisitions. We did do an acquisition in the first quarter, and we revamped our capital program to include the acquisition. We reduced some of the spending that we had in the normal exploration and development activity.

With regards to the three products that we talked about, with regard to natural gas, obviously it's a challenge to grow natural gas in the Basin, and that is shown in our results and in basically a flat sort of a profile or almost a decline profile on our gas.

Light oil, we feel that the work we're undertaking in waterflooding enhancement and then in tertiary recovery will over the long-term grow both our daily volumes and reserves of light oil. We would anticipate year-over-year growth in light oil to be a minimum of 5 percent per year.

In terms of heavy oil, that is the one product that is readily exploreable in the Basin, as well as providing a good development base. So we would estimate continued growth in the heavy oil site probably in the order of 10 percent per year.

Great. Thank you.

(OPERATOR INSTRUCTIONS). Kim Page, First Associates.

Just a quick question on your heavy oil price realizations. I am just wondering quarter over quarter it looked like you were flat, yet the index or benchmark prices are up. Can you give me some explanation or color on that?

I will turn you over to Christian. I hope you can hear him.

You're referring to the Penn West heavy price for Q1 '04 to Q2 '04?

Yes.

In Q2 our heavy oil differential, the Penn West realized differential to Bow River, was wider primarily to higher condensate costs. Condensate cost were at an all-time high in Q2 of '04, and we also had wetter than normal weather in the Plains, and that is our major area for heavy oil. Those contributed to higher costs, which drove up the differential at Penn West, the oil differential to Bow River. Then the Bow River differential is also, of course, wider than (inaudible) Q2 of '03 to Q2 of '04.

So the wet weather costs are factored into your price realization in what way?

Mostly the condensate. Mostly just polyem (ph) condensate.

The cost, okay. Thanks very much.

Chris Theal, Tristone Capital.

Can you comment as far as some of the work that you have done looking at some of the other trust reorganizations in a sense that in winding up layers of partnerships, have you seen any substantial current year cash tax impact as a result of those unwinding? And would you see something like that given the layering of Penn West's partnerships over the last several years?

I am turning it over to Gerry. I will answer (inaudible).

I think any winding of a partnership is going to have some sort of impact. We have not really focused on that issue, and on a go-forward basis, we will be looking at all aspects around that area and then making sure any (inaudible) would be mitigated in whatever way that can be achieved.

I would give a little easier answer that we don't feel there is any major impact from that.

Roger Serin, TD Newcrest.

I've got a couple of questions, one to follow-up on the tax question. If there was a negative tax ruling, would that change your view on the no minor impact on the cash tax situation?

I will have to go over that hurdle when we get to it. As we outlined in our information circular, we're still waiting our tax ruling, and my preference is not to talk about the details because it impedes the process and a breach of the confidentiality that we have with the government of Canada people.

Second question, and I'm just trying to do this simplistically, you had the Petro Vera acquisition in place for the entire second quarter, and when you acquired it, it was roughly 10,000 barrels a day. Would it be fair to say that absent the Petro Vera acquisition your production in the quarter would have been approximately 100,000 barrels a day?

No, that is not correct because we cut back our activity, and once we -- we knew we were going to get Petro Vera very early in the first quarter. I know we started working on it late November of 2003. And when we knew that we were going to get the acquisition, we cut back our development program.

Okay. So --

But it is difficult to say. Obviously the profile has changed with the acquisition. It is a profile that has got the highest growth in the second quarter. Without the acquisition, the volumes in the second quarter would not have been as high but we would have higher volumes in the third and fourth quarter.

And to follow-up on that, but also you would not have lost the full 9,000 to 10,000 barrels a day in the quarter because you would have had an increase in capital spending on development and drilling?

Absolutely, yes.

Okay, so then to carry on then, roughly the first-half capital spending round numbers both $300 million or 328 was on exploration and development, and from the fourth quarter to say the current quarter absent that acquisition, am I right to say net of declines you have increased production a couple thousand barrels a day?

Yes. Without the acquisition?

Yes.

Yes, that is correct.

Thanks.

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

Okay, I would like to thank you for listening in. I know some of you may have some questions. My telephone number in Calgary is area code 403-777-2502. If you have got any specific questions with regard to the numbers or the calculation of taxes or any of those other wonderful things, you can phone Gerry Elms. His number in Calgary is area code 403-777-2509. Thank you very much for listening.

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