Obsidian Energy Ltd (OBE) 2004 Q3 法說會逐字稿

Welcome to the Penn West Petroleum Third Quarter Result Conference Call. (OPERATOR INSTRUCTION). William Andrew, President of Penn West Petroleum limited.

Thank you very much and I apologize we having some -- a little bit of phone trouble this morning, and we finally got it resolved. With me today in Calgary, in our conference room are Don Rae, who is the Senior Vice President of Explorations; Dave Middleton, our Senior Vice President Of Production; Gerry Elms and Phil Reist who are Officers looking after Finance and Accounting, Gerry is also the Corporate Secretary; and Thane Jensen, our Vice President of Engineering, we have also got 2 Senior managers, Christian Kang, who looks after Marketing, and Randy Woods who's our Land Manager, and I forgot Bryan Clarke -- I wanted to always forget one. Bryan Clarke, very important job, is Vice President of New Ventures with Penn West.

First this conference call is to review our 2004 third quarter results and to provide an update on recent activities of Penn West. Following this review we would be pleased to answer any questions that you might have. Before we get started, I wanted you to note that certain 2003 comparative figures have been restated to reflect the change in accounting policy and the accounting reclassification. And for details that we announced two, on the consolidated in our financial statements matter of line the changes. During the presentation we'll use Canadian dollars and a six to one ratio for conversion to bear the royalty equivalent.

During the third quarter of 2004, Penn West drilled 120 net wells, resulting in 59 net gas wells and 55 net oil wells. This compares with 154 net wells drilled during the same period in 2003. And our field operations particularly on drilling on completion we're hampered wet weather in July and August, as we experienced as an unseasonable summer for the west. In the third quarter of 2004 our light oil and natural gas liquids production averaged 33,370 barrels per day, conventional heavy oil production averaged 19,596 barrels per day. I give this total liquids production on an average of 52,966 barrels per day. That's an increase of 15 percent over the third quarter of 2003. In the third quarter of 2004, our gas production averaged 316 million cubic feet per day, that's a decrease of 7 percent from the third quarter of 2003.

On a barrels of oil equivalent basis, production for the third quarter of 2004 averaged 105,639 barrels of oil equivalents per day, that's an increase of 3 percent over the third quarter of 2003. During the year-to-date, and as a result of opportunities that has been available to Penn West, we have decreased our capital spending on natural gas and increased our capital spending on oil projects and properties. So we've increased the ratio of that's spent on oil and decreased the ratio that's spent on gas. As a result the increase in daily oil volumes and the decrease in daily gas volumes from our original budget, we're now at the mid to lower end of our guidance on a six to one basis. Commodity prices were higher in the third quarter of 2004, than in the third quarter of 2003.

Natural gas prices averaged CAN $6.43 per mcf that's 9 percent increase over the third quarter of 2003. Light oil and Natural gas liquid's prices average CAN $52.01 per barrel before hedging at CAN $42.37 per barrel after hedging. That is 39 percent increase from the third quarter of 2003 before hedging and a 15 percent increase after hedging. Conventional heavy oil prices were also higher in the third quarter of 2004, compared with the same period last year, hedging 37.37 per barrel. That is up 36 percent 27.39 per barrel achieved in the third quarter of 2003. The higher volumes and commodity prices in the third quarter of 2004, gross revenues compared with the same period last year increased by 16 percent and that is from $331.4 million in 2003 to $384.3 million in 2004. Operating costs for the third quarter of 2004 increased 18 percent, and that is up to $7.78 per barrel of oil equivalent, that compared with $6.59 per barrel of oil equivalent in the third quarter of 2003.

A portion of this increase reflects the decrease in our natural gas production year over year. Remainder of the increase reflects plant turnarounds, including a major non-routine plant turnaround at Minnehik-Buck Lake and general fields service expenses increases particularly in our northern properties. Our net tax for the third quarter of 2004 were $23.96 per BOE, that is a 7 percent increase over the third quarter of 2003 net tax. Cash flow from operations from the third quarter of 2004 was $236.5 million, and that includes $29 million of realized foreign exchange gain on conversion of a portion of our US debt. We currently have over $110 million of realized and unrealized foreign exchange gains on our existing and converted US debt, and those of you that follow the Company closely will know that we have some US debt instruments on short term.

Net income for the third quarter was down 1 percent to $76.7 million, compared with the same period of 2003. Cash taxes for the third quarter of 2004 were $8 million that compares with $7 million dollar recovery in the third quarter of 2003. The provision for future income taxes in the third quarter of 2004 was $33 million and that compares to $46 million for the same period in 2003. Future income taxes in the first 9 months of 2004 was $62 million, compared to a future income tax recovery of $34 million in the same period in 2003. The second and third quarter of 2003, future income tax recoveries due to federal and provincial tax rate re-adjustments totaled $100 million and they were reported at that time. That compares with a $20 million future income tax recovery recorded in the first quarter of 2004. That $20 million reflects a re-determination of the tax rate by the Government of Alberta or a reduction.

Capital expenditures for the first 9 months of 2004 totaled $637 million, $406 million spent on conventional exploration and development and $231 million spent on property acquisition. For the same period in 2003, capital expenditures were $559 million with $463 million spend on exploration and development and $96 million spend on property acquisitions. At the end of the third quarter of 2004, our bank debt was $573 million, compared with bank debt of $577 million at the end of the third quarter of 2003. Over the past 4 years, we funded our growth largely through internally generated cash flow and continued to do so.

For 2004, Penn West target capital spending will be approximately $700 million to $750 million. This capital spending will fund the drilling of approximately 400 net wells. Our focus will be primarily on oil exploration and development in the central and plains area and secondarily on gap development on plains area and on shallow gap development of the central area. We are continuing with our efforts in the Pembina Cardium water flood development and we intent to execute a pattern expansion in the hydrocarbon miscible flood at Swan Hills in the fourth quarter. We remain actively looking for opportunities to acquire properties that would complement our existing portfolio and should an opportunity arise, we are about to limit our balance sheet to make an acquisition. By maintaining control over our capital spending in 2004, we expect to achieve an improvement of (finding) costs and to continue that with strong balance sheet through the end of the year. Based on average commodity prices for 2004, $40 per barrel WTI and $620 per million btu, for 1000 btu of NYMEX natural gas we are forecasting cash flow of $840 million to $880 million in 2004. In terms of hedging, all of our natural gas hedges that we had in place through the first 3 quarters of the year, expired in October with realized prices falling within the range of our call list. So, there was effectively no impact from those hedges.

We just have completed hedges on approximately 75 million cubic feet of natural gas for the winter. The prices on that are on average flow of 725 per mcf that's the an, average feeling of $13 per mcf . On the power site study in 2005, we have an average of approximately 50 megawatt per hour hedged over the next 3 years in a average price of just under $45 per megawatt. We also have hedges currently in place holding approximately 19 percent of our liquids production for the last quarter of the year. The average price caller's range from a flow of $28 per barrel WTI up to a ceiling of $35.80 per barrel WTI. We are to continuing to monitor the accrued markets and look for opportunities into 2004, but currently we're unhedged with any production of crude oil in 2005 I should say. If you want additional details both on our corporate presentation and on our hedging we suggest that you go to our Website, our web address is www.pennwest.com and we got table that line in our forecast and our hedges at the Website.

Going forward, we're continuing our focus on exploration, development opportunities that are available in our core areas and we're continuing to enhance shareholder value and provide profitable growth. We are extremely focused on the balance sheet and we're working to maintain control of our costs. We are progressing well in our efforts to advance our enhanced recovery in new venture programs particularly tertiary recovery in the Pembina area. And that we believe will provide future growth and opportunities for Penn West. Following the Annual and Special Meeting of shareholders held in August 2004, the company announced that the Board of Directors had accepted a management recommendation, that all of the assets of Penn West be converted into an income trust continued on receiving a satisfactory advanced tax ruling from Canada Revenue Agency. This ruling was in regard to certain tax, consequences of converting into an income trust. To date in advance ruling has not been issued by the Canada Revenue Agency, Penn West's legal counsel are actively and diligently continuing with this process to obtain a favorable ruling as quickly as possible. In the interim, our company is continuing with our business as usual, the strategy, and philosophy. I would like to thank you for your attention today, and we will be pleased to answer any questions and I'd like to now turn this session over to the operator who will solicit any questions from the audience.

(OPERATOR INSTRUCTIONS). Allan Stepa, Salman Partners.

I was wondering if you could elaborate further in how the weather has impacted your program this fall. How many wells are delayed, how much behind pipe production do you have and are you able to get the whole program done this year or will there be some that slides into 2005?

The Basin that's been on an area that's using never impacted and that's the plains area. Generally the eastern plains of Alberta and western plains reduction plans in Saskatchewan, extremely dry country, and generally accessible about 10.5 or 11 months of the year. This summer, we had a terrific amount of rain, which is good for the farmers and not so good for the oil and gas business, and that was our primary area of delay, it impacted an ongoing oil development program that we have in that Hoosier area, and many properties that we have in South West Saskatchewan and around Hoosier, as well as an exploration, a large exploration and development program that we have in and around the Gull Lake area of Southwest Saskatchewan, and also impacted a gas program that we have in eastern Alberta, in an around the area. Of the top of my head, the impact was roughly on 40 to 50 wells and the delay cost was between 45 and 60 days, from when we had originally anticipated getting them on and getting them on, and we working diligently in order to get everything on by the end of the year. We don't feel like there will be a tremendous amount of pushover into 2005, and certainly not will we experience with their program last year, where we stack up a tremendous amount of drilling in last quarter of 2003, and ended up time, wells early in '04.

Could I just ask one more follow up, you mentioned that CapEx being diverged oil projects relative to gas projects, just looking at your gas production following the year-over-year, where is some of the big down ticks as far as production is concerned, is it Wildboy, and can you just may be elaborate on where you are seeing some of the production declines in the gas side in particular?

The declines in terms of productions haven't changed over years, the more the fact that we haven't added gas to the expenses that we have in the past. So, even the reservoirs that are failing, so, we haven't had reservoirs that have gone to water or that have indicated that they are smaller than they were originally. We are quite happy with areas like Wildboy and Hotchkiss and our new areas that we've discovered over the past 5 or 6 years have developed. It has been a more a case of not bringing us much new gas opportunities to the table, from an exploration point of view, and that's basically limit the amount of out that we had for our new gas developments. And I had also -- my consideration is the price of oil, we have always been a company that in addition to long-range and medium-trend planning, we get the ability to react fairly quickly to product prices, and when we saw oil prices charge up over $40, a barrel, we moved a portion of our budget into oil and out of natural gas. So, as a result we end up being a little more oily than we had originally planned. That doesn't weighed very heavy on particularly my mind, and I don't think it is tremendous not to impact the people around the table, because we've always been a opportunity driven Company, so we will -- we see a lot of opportunity for gas in the future.

Great. Thank you.

Stephen Calderwood, Raymond James.

Yes, Good Morning. I wonder if you could expand a little bit on the miscible project in Swan Hills. I guess you are injecting ethane and other light hydrocarbons to recover more oil. What is the size of the project, in terms of the expansion that has been developed before year-end, and what do you hope to get in terms of increased recovery?

Sure. If you don't mind I am going to switch it over to Bryan Clarke, who has got the numbers fairly close to that.

Yes. When we are looking at, we've got 2 new patterns and the patterns comprised of a horizontal well and there are 6 vertical wells around the outside of the horizontal, and we are injecting hydrocarbons out there, referring around with the mix in terms of trying to minimize the cost of the solvent, although we do expect to get back 75 percent of the solvent over time, and we expect to see the recovery in about 6 months. We see fairly quick response out there. The other thing we are looking at down the road is switching to steel to - which potentially has the lower cost. If we can get the infrastructure in the product at a reasonable price.

Okay, and I wonder, if you could respond to somewhat of a hypothetical question. You said that you were conducting your business on a statistical basis despite the fact that you are actively negotiating with the government at the same time to answer the questions on the tax -- read trust conversion. What if you had an opportunity to do a significant acquisition at this time? Would you consider the opportunity to do an acquisition just for the sake of the statistical and the benefits of the shareholders to be a priority or would you defer or forgo opportunities to make acquisition with respect to the top priority being the negotiations with the government?

I think first thing, Steve is, I think it is just a choice of words. The -- it is not a negotiation process with the government. It is only a matter of requesting in advance drilling from the government certain tax matters. So we are still awaiting that. Our balance sheet is very, very strong and as you know, there are a number of property factors on the street. There are also some opportunities in Western Canada primarily to add production, and so we are constantly looking at that. Personally my choice would be to proceed with the acquisition to submit the terms satisfactory to the company and our evaluation because in the long term that would add shareholder value or unit holder value whether we maintain with the statistical or we convert to a trust. When I say that we are operating business as usual, we are. We've got very few of our staff who are concentrating on the request of the government and right now the vast majority of the staff is busy running Penn West as an oil company.

David of DLA .

Bill, can you talk a bit more about what is going on in Pembina in terms of what's with expansion of production you are looking for there and any sort of developments in terms of securing a CO2 source. I know you were in negotiations, you were considering various alternatives. Can you tell us when you expect either to make your decision to supply your own CO2 or do whatever you have to do to start bringing that project on line.

I'll start first with the CO2 side of it. We feel we are quite well down the road on the potential source of CO2 and will be same as where it is outsourcing. We don't have any internal source of CO2 in the Company. We don't operate any large industrial facilities that -- for processing oil and natural gas that would lead us to a immediate source of CO2 and we don't have any naturally occurring CO2, there are very minimal naturally occurring CO2 in Canada. So we are working primarily with one lead but we worked a number of leads in the past. For a source of CO2 we are well down that road, we are working on the regulatory end right now, both the design end and the regulatory end and our feeling is that we are pretty much on schedule. The schedule that we had originally thought of was to get our pilot started this year. We have started drilling on the pilot and we will be putting CO2 into the pilot next year. That will be CO2 that's trucked into the area. We would be working on our regulatory approval and final design next year, and with the aim of starting construction in late '05, 2006 and again depending on one of the wrenches in that works is always the regulatory approval and the timing that is required. But we had originally talked about 2007, I think we were still fairly confident that we can start injecting CO2 in 2007.

And can you tell us what you are doing, how Pembina is doing in terms of the waterfall in terms of production coming out of Pembina, and what the effect of the drilling program won't you expect to have this ?

We are still, basically with our drilling program, we are maintaining our volumes year over year. We are adding minor incremental volumes as well. We have concentrated a tremendous amount of our work over the past year and after 2 years on conversion of injector wells are taking old wells and turning them into water injectors and in changing water flood patterns. We are certainly starting to see response on a number of our properties and our feeling is that with the response with it will come the growth that we have been outlining.

Thanks very much Bill.

Kim Page, First Associates.

Hi Bill, a two parted for you. First of all on the Q4 drilling program on the gas side with that and the getting the other wells that were delayed here in Q3 on stream, do you think you will be able to get back to your run rate level that you are out in Q2 about 330 million and second part is, just any change in direction on cash taxes for this year?

I will answer the first part and then I'll slip it over to on the tax. Basically -- I think looking at the objection of our program going forward and looking at what we have done in the past 2 months; our feeling is that we won't -- will not strengthen gas line the whole lot before the end of the end of the year. Our concentration is still primarily on oil exploration and oil development in the fourth quarter and reason next gas adds would come in the first quarter as we get back up into Northern DC, and Northern Alberta. So, I don't expect that we will achieve 325, 330 exit rate at all. However, we expect to be certainly within our target range that we don't find a shift with more oil ratio less gas. Second part was on cash taxes and I'll slip that over to Jerry.

So, Kim we haven't changed any of our guidance on the cash tax. We are still estimating 2004 of $40 million.

Okay. Great thank you.

Brian Prokop - Peters & Co. Limited.

Couple of quick ones. What's the actual current production split by oil & gas?

Sure, current production is 105,000 barrels a day and we are doing about 315 million gas and the rest oil. So, 50 odd of oil.

And --

Almost 53,000 of oil.

53, okay. And just on going forward here into '05, what would be a fair number for you guys to use CapEx just assuming ongoing and what kind of production range are you looking for?

We are still working on it. But, looking for the same type of pattern next year and last year which would be growth from the 3 to

5 percent range and maintaining a good strong balance sheet that would see us spend somewhere between $700 and $800 million depending on the selection of projects and part of this Bryan is -- I guess the wildcard in there as how much would be spent on the enhance recovery. So, we're somewhere between $700 and $800 million and we're looking at production and growth of 3 to 5 percent. We haven't finalized any of that yet.

Okay. And just final question, I know it's in the front part of that press release. You reiterated that as well Bill vis-a-vis the advance tax ruling. But in letters to the shareholder, I know there is a sort of a however and that's a back in there suggesting there can be no assurance to a satisfactory events ruling, and if not granted it will continue to operate under other strategic alternatives. Now, does that status close any MP or is that sort of going back to looking if a full sale would occur or just any color you can throw on that will be appreciated.

Yes, I will go back Bryan and then I know that quite a few of you were the attendants on our annual meeting in August and I think I had a similar question on the telephone conference call after that. Obviously our intention is to secure the favorable ruling as soon as possible and move on and convert Penn West to a trust. In the event that did not happen, basically what the status quo means is that we're elected to two other alternatives being a sale of the Company or a portion of the assets of the Company. The other would be looking at the operations of the -- and the structure of the Company going forward. And I hope that's sufficiently unclear for you?

That's sufficiently unclear.

(Catherine , Scotia Capital.

I wanted to follow up on the whole tax ruling issue too. Can you provide us with any color on what the process is? I mean you've been in since April, and you've also made comments in the past that you weren't asking about anything that's in particular the structure of Penn West was different than the Universe of trust we have and so, are they just too busy with other things or have they come back with something that's specific to Penn West? Can you provide us with color on what the question is that seems to be holding up the process?

I'll temper it a little bit by saying that we have not and will not get into too much detail on what is happening with the ruling and that's with respect and the confidence to our legal counsel, and also to the Federal Government. We are not looking for anything unusual but I think one thing we have to look at is the timeframe and we put the request for ruling in April. There was the federal election almost immediately following that an announcement of the federal election. So, that would certainly put some constraints on the same senior people that would be looking at our ruling. Then you are into the summer months, and then now we are into the fall and our original thought was that it was going to be a process that would take 3 or 4 months. I don't think our original thought factored in the fact that there was a federal election. So, we are still not quite on the schedule that we were originally, but I don't believe there is anything untoward that's preventing the people in from making the termination on our request. It's just you are dealing with government agencies, and anyone that's dealt with them at a federal level or provincial level on a decision or a regulatory matter knows that patience is always a good virtue to have when dealing with them.

(OPERATOR INSTRUCTIONS). (Scott English, First

Just going on the assumption, it sounds like you are proceeding with getting the advanced tax ruling. Are you ready to go on a conversion when and if you get that, or have you settled all the other structuring issues that might be involved with regards to US ownership of trusts or the other AMB shares? What you payout ratio policy would be? Whether there is any asset, divestitures or other shifting around? Have you gone a long way down the road in terms of solving all the other structuring issues?

We've got a bit of delay down the road -- a fair bit of delay down the road. We've certainly got an idea of where we want to go as a trust company, and certainly have an idea what we want to do to facilitate that process of a favorable ruling. So, we don't anticipate that that is going to add a tremendous amount of time to the process. If it did, and I am saying we don't think it will but any time that's added, we feel it's again normal diligence for our Company. We've always been a very diligent Company, and a very conservative Company in terms of implementing future plans. So, yes, we are looking at payout. We are looking at everything involving our trust.

Can you comment on what you are looking at?

No

Roger Serin, TD Newcrest.

Couple of questions. First of all, do you have a sense of F&D cost for this year ON?

No, we're just -- we've been working on it, but it will be less than last year. But, no sense on the exact number right now.

Second question, you acquired the assets from Petrovera heavy oil focus operating costs, it's sort of up as result of that in the heavy oil assets. Do you have a plan that you think you'll get them down and sort of what's your goal in terms of operating costs in the heavy oil assets over time?

Yes, the big plan that is obviously not so much efficiency. Petrovera is quite an efficient company in terms of operating assets and we feel we're a fairly efficient company as well in terms of operation. What we can provide that wasn't available in Petrovera was capital. And we are working on a program of development drilling. We're working on a program of exploration drilling. And we feel that the decrease is that we can implement an operating cost in the heavy oil area, it will be primarily from volume ads. So, we would target a modest decrease for next year and try to get them down. There is a certain point with the mature oil property, beyond which it's difficult to decrease operating costs, and that's primarily a function of having to move water around the countryside. And so, we'll work on the parts that we can do more efficiently.

I guess, one question on your strategic alternatives reviewing your tax ruling. Other trusts have converted to royalty trust structure using or relying not so much a ruling, but a tax opinion. Is that still an option for the Board if they don't get a favorable ruling?

The options of the Board have been outlined in our press release at our annual meeting. I believe, we've been fairly clear on direction there.

Mark Heim, Orion Securities.

I wonder if there are any plans in place on the liquid side for hedging in 2005?

I would say, yes. We certainly look at hedges as a means of securing our capital program. We have hedges in place right now. 19 percent of our liquids, and if you ratio that back, it's a higher proportion of our light liquids, light crude oil, which is the product that can be hedged quite easily. We don't have to worry about differentials and those sort of things. We are hedged pretty well on crude oil for the end of the year, which we weren't, but we are. And we will look, as those hedges ease off in December, we'll look at the first part of 2005, and if it makes sense to put hedges in place to secure a cash flow. We didn't make the move this week to put some gap hedges in for the winter month.

Okay, so you'd probably be looking over the next month end to start layering in '05 crude oil hedges?

Over the next -- more probably in the next couple of months, yes. Whether we do it, it is basically a determination of management, and ultimately with our hedging policy of the Board.

Do you happen to have a split on that roughly, 53,000 of liquids production currently as to the light and NGL's versus the heavy oil?

Yes, I think the split would be very much as I outline in my discussion for the quarter that we're roughly 33,000 to 34,000 barrels a day of light oil and natural gas liquids. Natural gas liquids are now 5,000 barrels a day, and then roughly 19,000 to 20,000 barrels a day of heavy oil.

And just one more question with respect to cash taxability. It's true your guidance really hasn't changed, but certainly the commodity price and cash flow has. Is it being pushed into 2005, and do we have any indications as a growing concern where cash taxability would be next year?

Mark, we clearly looking at our budget and don't see taxes related to capital expenditures, revenues, prices all of our assumptions. We haven't yet finalized the forecast for 2005, we are just happy with our forecast 2004 in 40 million range.

But it is fair to assume that it did be probably up from those levels?

I think anything -- if you see quantity prices to these levels I think with they will go them -- and less capital expenditure keep pace with another nontax deductions, and obviously they are to going pay us more taxes in that environment.

Ryan Shay, Sprott Securities.

Bill, this too a follow up on Brian Prokop's question, if you do not receive a satisfactory tax ruling does that mean you will continue on as an ENP company or does that mean you will back and review the other strategic alternatives available to you?

I don't know, we will go back and revisit the whole thing if -- the starts tomorrow who goes to win the first game I guess it's just -- we are focused on the conversion to a trust right now, and working to receive the trade more ruling. We have -- I think, as you know, when I was charged by the board with looking after strategic alternatives, we have looked at a sale of portion or all the assets of the Company. We have looked at the structure and manpower within the Company and the management of the Company and as well looked at conversion to a trust. My recommendation, our recommendation is, senior management was to convert to a trust and we are going down that road. So, I think any thing I say there would be much too hasty and we are assuming that we don't -- you are assuming that we wouldn't get positive ruling from --

No I am just talking in that event.

Yes, I will just leave that until we find out what the government has to say.

Stephen Calderwood, Raymond James.

I already had an opportunity to ask questions, thank you very much.

Well, Andrew there is no further questions at this time please continue.

Thank you very much. I will be in the office for most of the day, I am heading for Saskatchewan for a safety exercise later today that will occur tomorrow. So, I will be out, you have my phone number in Calgary. If I am not available, please feel free to phone Gerry Elms who is our Investor Relations, as well as being the Corporate Secretary, and the Vice President of Finance with the Company, and thank you all very much.

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