Obsidian Energy Ltd (OBE) 2006 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Penn West Energy Trust first quarter results conference call. (Operator Instructions) As a reminder, this conference is being recorded today, Wednesday, May 10, 2006. I would now like to turn the conference over to Mr. Bill Andrew, President and CEO. Please go ahead, sir.

Thank you. Good morning. With me in Calgary this morning are Thane Jensen, who is our Senior Vice President of Exploration and Development; Todd Takeyasu, who is our Vice President of Finance; William Tang Kong, our Vice President of Corporate Development; Eric Obreiter, our Vice President, Production; Anne Thomson, Vice President of Exploration; Gregg Gegunde, Vice President of Development; and Randy Woods, our Land Manager. Two of our officers, Dave Middleton, who is our Chief Operating Officer, and Kristian Tange, who is the Vice President of Business Development, are out of the office on business. Actually, the business is the CO2 business, so it is a good excuse to miss the call.

On behalf of the staff, management, and directors of the Trust, I would like to welcome everyone who is listening to our teleconference and webcast. Recently we have had the pleasure of speaking to numerous unit holders, both retail and institutional, regarding our announced intention to merge with Petrofund Energy Trust. We appreciate all and any questions and feedback from our unit holders. Please contact us via our Internet address, which is www.pennwest.com, or by telephone or letter if you have any questions or feedback.

The purpose of this conference call is to review our 2006 first quarter results and to provide an update on recent activities at Penn West Energy Trust. Following this review, we will open the lines for questions.

Many of you have had the opportunity to listen to our webcast of April 17, 2006 and to read our press release of April 16, 2006, regarding the proposed merger with Petrofund Energy Trust. It is my intention not to revisit the proposed merger in detail this morning. We anticipate completion and mailing of proxy materials and supporting material for our annual and special meeting in the very near future. This material will outline in detail the proposed merger and assist you in completing your proxy.

During the conference call, we will use Canadian dollars and a 6-to-1 ratio for conversion to barrels of oil equivalent. Results for the first quarter of 2006 represent Penn West Energy Trust's third full quarter as a reporting entity. As many of you know, we converted to an energy trust from an oil and gas production company in mid-2005. As a result, the quarter that we are using, which is the first quarter of 2005 for comparative purposes, is not directly comparable because the business strategy and direction within a trust is different than that of a growth-oriented E&P company.

In the first quarter of 2006, our daily production averaged just over 96,700 barrels of oil equivalent per day. That is a 4.5% decrease from the first quarter of 2005. Average daily production consisted of 31,541 barrels per day of light oil and natural gas liquids; 20,685 barrels with conventional heavy oil per day; 267 million cubic feet of natural gas per day.

Production ratio was approximately 54% weighted to oil and natural gas liquids, 94% weighted to natural gas. Average production for the quarter was inside our production target range for the quarter. However, during the quarter we experienced extended shutdowns of volumes at Wildboy and Willesden Green, due to the failure and replacement of major equipment. The impact of the shut-in production was approximately 1,500 barrels of oil equivalent per day when put on the quarter.

First quarter 2006, natural gas prices averaged $8.12 per MCF. That is up 18.5% from the first quarter in 2005. Light oil and natural gas liquids prices averaged $62.09 per barrel, a 10.8% increase from the first quarter of 2005. Conventional heavy oil prices were $30.76 per barrel. That is an increase of 9.6% over the comparable period in 2005.

Overall, commodity prices for the first quarter averaged $49.23 per barrel of oil equivalent, and that is up 12.6% from the $43.70 per barrel of oil equivalent realized in the first quarter of 2005.

Gross revenues for the quarter were $433.9 million. That is an increase of 7% from the $405.3 million realized in the first quarter of 2005. Cash flow was $243.2 million in the first quarter. That was down 6.4% from the first quarter of 2005. And we should note here that of the $260.1 million of cash flow realized last year in the first quarter of 2005, there was an inclusion of $63 million hedging gain. So without the hedging gain, our cash flow is significantly over where we were last year. Cash flow per unit was $1.47 diluted in the first quarter of 2006.

Net income in the first quarter of 2006 totaled $144.4 million. That is an increase of 116% over the first quarter of 2005. Net income per unit was $0.87 diluted in the first quarter 2006.

Operating costs for the first quarter 2006 averaged $9.88 per barrel of oil equivalent. This represents a 13.6% increase over operating costs in the first quarter of 2005. We continue to experience cost pressures associated with the very robust industry activity in western Canada. We are working to minimize these impacts through optimization. We also expect that the downturn in gas price experienced over the winter will slow down activity to some extent.

Over 60% of the Trust's liquids production consists of light oil and natural gas liquids that command a premium price. They are produced from pools that have a long reserve life. As such, we remain well-positioned to absorb industry-wide operating costs escalation and still maintain strong operating net-backs. Our net-backs for the first quarter 2006 were $29.95 per barrel of oil equivalent. That is up 9.6% from the first quarter of 2005.

I will note that during the first quarter of 2006, heavy oil differentials narrowed as more diluent available. That was basically when gas prices decline and operators tend to lean their gas streams and produce more liquids, thus there was more liquid available for diluent purposes. Also, more liquid became available for hydrocarbon miscible floods, and we started our miscible flood back-up in South Swan Hills, some six months earlier than we had anticipated doing it because of the availability of liquids.

In the first quarter as well, the normally narrow gap between WTI and Edmonton light sweet widened due to refinery outages.

Capital expenditures for the quarter were $158 million. That compares with $202 million spent in the first quarter of 2005. The $158 million in capital spending in the first quarter represents 65% of our cash flow for the period. It is in line with our capital budget forecast, and our forecast calls for a bulge of first quarter capital spending to take advantage of cold weather and the resulting good access to our northern project areas.

Cash distributions in the first quarter of 2006 totaled $156.9 million. That equated to approximately 64% of cash flow. Current distribution is $0.34 per unit per month, beginning with the February 2006 distribution, which was payable on March 15, as many of you may recall. We increased our distribution from $0.31 to $0.34 per unit per month.

Our capital program for the first quarter of 2006 was funded by internally generated cash flow and by a modest increase in our bank loan to $610 million. That is from the $542 million that we carried at the end of the fourth quarter of 2005. I won't get into too much detail, but in the MD&A, you will look at our debt and notice that our bank debt is up somewhat. However, our non-bank or amount owing is less than it was in the first quarter of last year.

We have an active hedging program to increase the assurance of future cash flow to fund distributions on capital program expenditures, while providing effective downside protection. More information detailing our hedging program can be found on our website.

Our back of the envelope estimate on capital efficiency over the first quarter of 2006 was approximately 25,000 per barrel per day of production added, and that is in line with where we have been for approximately the last seven months.

Going forward, we continue to concentrate on field operations, development projects, and enhancing capital efficiencies in all areas of our business. Penn West is Canada's largest producing energy trust. We will bolster our position with the merger of Petrofund, which will increase our size significantly.

We are continuing our efforts in monetizing our extensive land base through farm-out sales and joint ventures. To date, we have secured deals for farm-in partners to actively explore and develop over 750,000 net acres. We are seeing continued strong interest in our land and we plan to extend this process until as much of the surplus acreage as possible is marketed.

I will make a comment there that particularly a number of the very high level farm-outs that we did, one in particular in [West Pembina] on the Nisku trend, the [farm E] is just getting to drill the wells right now. They experienced about a 10-month delay with regulatory approval. As many know, these are deep and sour oil wells, and they require a fairly extensive consultation program with the general public before approval. So that is one we are looking forward to in the next quarter.

As well, late in 2005, we did quite an extensive deal with Apache in our northern area. They started the work there, but they will continue with a much, much more aggressive program next winter when they have opportunity for more planning.

In addition to non-core property rationalization and conventional exploration and development activities, we are continuing to work on the implementation of the Pembina recovery project.

During the quarter, we completed an in-depth CO2 supply pipeline engineering study. We also increased CO2 injection by 25% at our pilot project in Pembina. The next step in the project is to finalize a supply pipeline route and our supply contract prior to proceeding with construction.

We remain very confident on the financial viability of this project and on the positive impact of utilizing greenhouse gas to increase production from and extend the economic life of late oil reservoirs. We believe that the application of this technology provides for a win-win solution to the challenge of reducing atmospheric emissions and increasing a future domestic supply of light oil. In fact, we think that we need more of this type of thing going ahead.

We are also continuing an active exploration and development program in the Peace River Oil Sands block, focusing on our Seal Main oil sands development project, as well as our Phase II and III block at Seal Cadotte and Seal North.

During the quarter, we expanded our oil sands holdings in the Peace River oil sands block. Currently, our oil sand leases in the block cover some 400 square miles. This gives us a prominent position in an area that is currently the focus of industry attention, with the recently announced Shell Canada decision to acquire the assets of Black Rock Ventures.

During the quarter, we continued an aggressive horizontal program that will move us towards our production target of 4,000 to 5,000 barrels per day by year end, and again towards our target of 20,000 barrels per day by 2011.

Additionally, we completed drilling of a pilot well group at Seal Cadotte, and drilled horizontal delineation wells at Seal North. Over the next 12 months, we will continue to drill lead exploratory wells to provide information on oil sand quality underlying certain of our exploration plays in the block.

Our outlook for 2006 continues to be positive. Commodity prices, while down from the fourth quarter of 2005, are still robust. We are basing our projections on product prices of $58 U.S. per barrel WTI and $875 Canadian per thousand cubic feet of natural gas.

Penn West assets continue to generate strong volumes, which is supported by our capital budget of between $400 million and $500 million, and our plans to drill approximately 250 wells. Our forecast average 94,000 to 98,000 of barrels of oil equivalent per day in 2006.

On a final note, we are working towards a listing on the New York Stock Exchange by mid to late June, and we continue to prepare for the integration of Petrofund staff and assets into Penn West, assuming a favorable resolution on the merger.

Thank you very much. I would be pleased to answer any questions that you might have.

Thank you, Mr. Andrew. (Operator Instructions)

Our first question comes from William Lacey with First Energy Capital. Please go ahead with your question.

Bill, I was wondering if you could talk a little bit about where the current production is. There is a lot of facility outages going on right now. I was just wondering if you could give an update on that front.

We are still adding the volumes from the first quarter. We had about a 2,500 barrel per day equivalent hit with our decision to push ahead with the hydrocarbon miscible flood at Swan Hills. That was something that we had in the books for October. We actually had it in the books for about a year. We wanted to start a new pattern there, and I trust as everybody understands in the business, when gas prices were high, there was a shortage of material to use for hydrocarbon miscible flooding. As the prices crept down, there became more availability. We were able to secure some term contracts that fit with our mix pattern plans at Swan Hills. As a result, we have started that up in March. That will impact about 2,500 barrels a day. We are going to work like heck to make it up on optimization.

Basically, where that leaves us right now is that production of about 95,000 barrels of day. We anticipate about another 2,000 to 2,500 barrels a day that we are going to see from the remainder of our first quarter tie-in. That will put us up to about 97,500.

On the Pembina side, you did talk about the injection rates going up by 25% in the quarter. Can you just talk a little bit more about the significance of that?

Well, the significance, I think there has been some conjecture about the quality of rock in Pembina and who has the best wells. We have always felt that Pembina, because it is the largest conventional oil field in Canada, was a tremendous target for adding oil reserves and adding oil production.

We picked the pilot project as sort of an average case. We didn't necessarily migrate towards the best rock. We took what was average rock and we took an area that had been previously swept with water, previously had water injection, and a significant amount of water injection in it.

The fact that we are able to bump up the CO2 injection means that the rock is taking the CO2 very well. It means that we will be able to accelerate the movement of the front or the face into the oil and the miscible process. Basically, what it means is it increases your volume of injection by 25% and it increases the rate at which you are going to get oil to the surrounding wells. So we are very enthusiastic about that.

Everything has been going -- I hope you understand this is very much proprietary to us. We are the first company to put CO2 into the ground on an extended base in the area. We have had this pilot project underway for a year. We are keeping all the information confidential. However, there will come a time and place where we share that information. However, we are very, very pleased with what we are seeing.

Understood. Then you did talk about the fact that you got the CO2 pipeline study done, and you talked about the next benchmarks. Are we talking by the end of this year you are hoping to have some more clarity on that front?

I think earlier than that. The main reason my Executive Vice President and my Business Development Vice President are away this morning is to get some clarity on exactly the schedule. They are meeting with our partner right now.

Excellent. Thank you.

Thank you. (Operator Instructions) We have a question from Kurt Wulff with McDep Associates. Please go ahead with your question.

Good morning. Mr. Andrew, can you give an idea to the U.S. analysts how your properties at Seal compare to the properties that Black Rock had, that Shell is acquiring?

We think they are a dead layover in terms of quality. Shell, as many will know, were the pioneers up in that area. They have been active in the Peace River oil sands since I believe the early to mid-70's. Black Rock, to their credit, took the initiative most recently to go in the area, and we followed them about two years after they started.

We were able to, because we were a much larger company, we were able to post and secure a great deal of land in the area. I guess that is one advantage of a large capital budget, you can do that. As a result, we feel that we are very well-positioned within that block.

We had a good first round starting in November of this year in Seal Main, where we changed around the way that we are completing the horizontal wells. We went into the middle and lower part of the zone. The zone thickness is between 60 and 70 feet thick. We are going into the middle and lower part. We are getting much, much better wells as well. We've revived the orientation of a lot of our wells. As a result, we are getting wells that are on average about twice as good as what we had before. They are very much in line with results that we have seen from Black Rock and from Baytex, who is the other operator in the area.

The unusual aspect of these properties are that it is heavy oil but the oil actually flows through conventional wells, is that the case?

That is correct. They are about a 10API oil. It is an oil sands and it is classified so by the government, so you get the normal advantages of an oil sands with regard to land tenure and royalty regimes. The advantage, we feel, of this property is because it will move or is mobile, I guess is the word, that means that there is a certain percentage of production that we can get out of the reservoir before we have to go to a thermal project.

So basically, we are looking at primary production or cold production from the area. We are working on three fronts. One is with conventional water injection for pressure maintenance. The second is looking at polymers for moving more oil out of the rock. The third phase is thermal, and we will be working actively on all those three fronts over the next 12 months.

That is a great answer. Thanks.

Thank you.

Thank you. Mr. Andrew, there are no further questions at this time. You may continue.

Thank you very much. As I said earlier, we are working hard to land the Petrofund merger and we will have more news on that front. Expect your proxy in the mail very soon. Todd gave me a nod that he is working very hard to get this thing out, so we will have that very shortly. We are targeting a special meeting towards the end of June. That is a vote on that resolution, as well as others. Thank you very much.

Thank you. Ladies and gentlemen, this concludes the Penn West Energy Trust first quarter results conference call. You may now disconnect and have a good day.