Obsidian Energy Ltd (OBE) 2006 Q3 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Penn West Energy Trust third-quarter results conference call. At this time all 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. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded on Tuesday, November 14, 2006 at 11 AM Eastern Time. I will now turn the conference over to Mr. William Andrew, President and Chief Executive Officer. Please go ahead, sir.

As you know, my name is Bill Andrew and I'm the President and CEO of Penn West Energy Trust. With me in Calgary this morning are David Middleton, who is our Chief Operating Officer; Todd Takeyasu, our Chief Financial Officer and other members of our management team. I do apologize for the change in reporting dates; it was kind of a late change. Originally we had planned to report on November 10th; however, we felt it was prudent out of respect to the men and women who sacrificed for our country remembered on November 11th to delay the release and delay the conference call until today.

I will note first that I intend to provide a little bit of color with respect to the announcement on October 31st by Minister Flaherty, but I also equally intend not to answer any questions at the end with regard to those specifics.

We appreciate any and all questions and feedback from our unit holders. Please contact us via our Internet address, www.PennWest.com, or by telephone or letter. We trade on the New York Stock Exchange under the symbol PWE and on the Toronto stock exchange under the symbol PWT.UN.

The purpose of this conference call is to review our 2006 third-quarter results, to provide an update on recent activities at Penn West Energy Trust and provide clarity for our unit holders on our future plans and direction. Following this review we will open the lines for questions. During this conference call we use Canadian dollars at a 6 to 1 ratio for conversion to barrels of oil equivalent.

For third quarter 2006 our daily average production was 129,059 barrels of oil equivalent, a 29% increase from the third quarter of 2005. The average daily production consisted of 48,029 barrels per day of light oil and natural gas liquids; 21,186 barrels per day of conventional heavy oil; and 359 million cubic feet per day of natural gas. Average production for the quarter was approximately 3,000 barrels of oil equivalent per day less than our internal forecast and that was due primarily to pipeline disruptions and primarily on the gas front.

Currently production is approximately 133,000 barrels of oil equivalent per day; that includes some 71,000 barrels per day of oil and natural gas liquids and 375 million cubic feet per day of natural gas. Currently our production is weighted approximately 58% to crude oil and liquids production. Crude oil liquids accounted for 63% of our third-quarter revenue or $636 million. Year-over-year revenue increased by 19% from $535 million in the third quarter 2005.

On an overall basis during the second quarter we drilled a total of 88 net wells in all areas resulting in 56 net oil wells and 29 net gas wells. Currently our conventional drilling is focused on oil development in Southern Saskatchewan and in Eastern Alberta, and we are also getting ready for our winter drilling season which will focus primarily in the Peace River oil sands block.

In the third quarter of 2006 natural gas prices averaged $5.97 per MCF, that was down some 33% from the third quarter of 2005. Light oil and natural gas prices were basically flat and they averaged $70.25 per barrel, basically flat over the third quarter of '05. Conventional heavy oil prices were $52.50, an increase of 7% compared to the third quarter of 2005 and we continue to see a fairly narrow differential [balance] and good demand for heavy oil.

Overall commodity prices for the third quarter of 2006 averaged $53.56 per barrel of oil equivalent and that's down 8% from the $58.27 per barrel of oil equivalent realized in the third quarter of 2005. And I'll emphasize again that that is primarily due to the decrease in natural gas and I'll emphasize again our weighting to crude oil.

Cash flow was $365.6 million in the third quarter of 2006 which is up 9% from the third quarter of 2005. Cash flow per unit was $1.53 diluted in the third quarter 2006 and that's in line with our second quarter of 2006 but down 25% from the $2.04 per unit realized in the third quarter of 2005. Cash flow per unit was impacted, as I mentioned before, by reduced the [net-back] by production shortfall due to pipeline overages and also by increased operating costs. Net income for the third quarter of 2006 totaled $177.8 million, that's a decrease of 15% from the third quarter of 2005.

Operating costs for the third quarter of 2006 averaged $10.64 per barrel of oil equivalent. This represents a 17% increase over operating costs for the third quarter of 2005. A portion of this increase is attributable to the increased ratio of higher operating costs, higher net back light oil properties in our production mix after the Petrofund acquisition. We're also continuing to experience cost pressures associated with the industry activity in Western Canada.

Our net-backs for the third quarter of the 2006 were $33.38 per barrel of oil equivalent; that was down 13% from the third quarter of 2005. On an individual product basis the net-back from light oil natural and gas liquids was $40.90 in the third quarter, that's a 10% decrease from 2005. Net-back for heavy oil was $33.70, that's an increase of 6% over the similar quarterly in 2005. Net-back for natural gas was $4.53, that's a decrease of 23% from our realizations a year ago.

Capital expenditures for the quarter were $154.7 million, that compares with $149.3 million spent in the third quarter of 2005. And I'll emphasize again the size of the Company now versus where we were in the third quarter of 2005 and the relative capital expenditures. Capital expenditures for the third quarter represent 42.3% of our cash flow and that's very much in line with our payout model. Cash distributions for the third quarter of 2006 were $216.2 million; this represented 59.1% of our cash flow which is, again, well within our payout model.

Current distribution is $0.34 Canadian per unit per month, that's payable on the 15th of the month following the calculation of the distribution. So your October distribution should be there tomorrow or another has been -- some have experienced a little bit of delay as we do conversion, especially for the U.S. unit holders, and we're aggressively working to plug the last few holes in that. Our capital program for the third quarter was funded from internally generated cash flow. Debt at the end of the third quarter was $1.15 billion, that's a decrease from the second quarter 2006. Current bank lines are $1.9 billion.

And I should note and I think you'll see it on there, that we had an increase in debt by 48% from $778 million in the third quarter 2005 to $1.15 billion in the third quarter of 2006. But I also note that the production capability of the Company has increased proportionately as of the number of units in the Company. So really the better way to look at it is the fact that our increase in debt per unit was a much more modest 3.8%. So effectively we had a similar deposition to where we were before the Petrofund acquisition.

Penn West has an active hedging program to increase the assurance of future cash flow to fund distribution and capital program expenditures while providing effective downside protection. Information detailing our hedging program can be found on our website; our website is www.PennWest.com.

We estimate that our capital efficiency as a trust over the first three quarters of 2006 was approximately 29,000 per barrel per day of production added. This represents a significant improvement over our capital efficiency as a conventional exploration company and it comes in an environment where we're seeing extreme pressure of service sector pricing -- upward pressure.

Now let's take a moment to look at the current situation. By now all of you are aware of the negative implications that the announcement by Minister Flaherty and the government of Canada has had on the trust sector. Since the announcement the downdraft created has impacted trust unit prices and the downward pressure is continuing, particularly in the retail sector. The Minister and his government seem to want to emphasize tax fairness and leveling the playing field. Let's look at the first item as it pertains to Penn West Energy Trust.

As many of you know, prior to converting to an income trust in mid 2005 Penn West sought and received a tax ruling from the Minister's department regarding the conversion of Penn West into an income trust. As part of the conversion to a trust we crystallized and paid over $200 million in income taxes and crystallized the capital gains of our shareholders. It's interesting to note that in all the rhetoric about tax avoidance no mention has been made on taxes due and payable on conversion by a trust. Is this tax fairness?

As a trust we provide distributions of cash flow in return of capital to our unit holders whose individual tax treatment reflects the rules and laws enforced by the Minister's department. We ask where is the tax avoidance here. The government's efforts to level the playing field has resulted in a large loss within the trust sector. A significant portion of the over $35 billion lost to date comes from the backs that the very people that the government claims to be protecting.

Over the past two weeks I've heard from hundreds of individual unit holders, many of them seniors, who feel betrayed by a government and a minister who have, in an effort to display their decisiveness, wreaked havoc on the investments of hundreds of thousands of unit holders and on our international reputation. Is this leveling the playing field or is it applying simplistic economic theories to a very complex business model?

Many individuals have voiced and will continue to voice their displeasure with the actions of the government and the resulting impact. Ours is a democratic society where change comes from action and from discourse. We encourage our unit holders to continue to press the government on this issue.

Unfortunately Penn West Energy Trust has been caught in this rush from the sector and we find ourselves trading at a level that does not reflect what we believe to be the inherent value of our units, let alone the fact that we continue to distribute cash as before to our unit holders.

To understand our current situation we need to look back, we need to look around and, most of all, we need to look ahead. The 70 months since conversion to a trust we've marked the improved capital efficiency and brought improved technical and operational efficiency to the Company. We've greatly enhanced our health and safety program to provide improved working conditions for our employees and for the communities where we operate. We continue to provide industry leadership in the area of environmental reclamation and are looking at providing effective means to reduce emissions.

As we look around we see a landscape where the unit value of Penn West Energy Trust is trading at a discount -- a net asset value and at a discount to most senior independent exploration companies. When we look internally we see a company with a very strong balance sheet, good operating and capital efficiency, a strong portfolio of conventional oil and gas properties and projects as well as outside the box producing an experimental project and enhanced oil recovery and unconventional gas. We also see the unbooked upside of the multibillion barrel oil sands project in Peace River Oil Sands.

It's clear to us that going forward we need to emphasize these strengths while also executing a plan that moves us forward. The government decides to go ahead and enact legislation based on the current proposal, the alternatives for Penn West Energy Trust are to reemerge as a stronger more focused and more efficient independent exploration company that can compete with any independent company in North America or to look towards a structure that would accommodate the payment of higher dividends than are currently available from independent exploration companies.

The work will be challenging, however our current strength of assets, balance sheet and prospects as well as the resolve of the management and employees of Penn West will position us to effectively meet the challenge. In the interim we are continuing with an aggressive capital program for 2007 that will include exploration and development on both our conventional assets, our enhanced recovery assets and on the Peace River Oil Sands Project. Our current distribution of C$0.34 per unit per month will continue and we expect that we can continue with this distribution and keep our balance sheet reserves and production in tact.

Going forward we are continuing to concentrate on field optimization and development projects that deliver capital efficiency that will drive the trust forward. We will aggressively pursue a program to delineate and develop the Peace River Oil Sands Project and we will continue our leadership in enhanced recovery of light oil.

Penn West Energy Trust -- we place a premium on training and awareness of workplace health and safety, on working in concert with industry stakeholders to minimize social and ecological impacts from our activities and on reducing future environmental liability. We believe that focusing current capital effort on profit planning, maintenance site restoration and aggressive workplace safety programs will minimize our current and future impact on the health of our staff and of the communities and on the ecology.

In summation, we look at our company before and after the announcement of October 31, 2006 and we see an asset portfolio that is unchanged, a land position that is unchanged, and management delivered results both as an independent explorer and as an income trust. We believe we have the structure, assets and prospects to overcome any effects of the October 31, 2006 announcement and to work on enhance the value our company to a level that adequately reflects our strength and our future. Thank you. We'd be pleased to answer any questions.

(OPERATOR INSTRUCTIONS). Gordon Tait, BMO Capital Markets.

Good morning. I was wondering on the cost that you cited rising, service cost, do you see some trend though that would slow down in drilling, flattening your prices? Do you foresee maybe some of those trends changing; are you getting any sense of that?

Very much so, Gordon, both from the service sector and from -- I guess the antidotal conversations with other oil people. But we're getting a lot more calls from service companies about available equipment. In talking to particularly the juniors, there's some concern on them and how much capital they're going to spend in the upcoming year, again in lieu of the announcement on October 31st and the impact on valuations of assets. So our belief is that there will be some downward pressure. It's a tough way to accomplish a downward price, but we think that's going to happen.

So that might translate through to reserve replacement costs?

I think so.

And then can you maybe just sort of tell us sort of where you are on some of the CO2 recoveries?

Sure. (indiscernible) what I'll do is I didn't talk about it in the text, but probably it's time that we did talk about actual results because we've been at this for about 16 months. Basically what we're seeing -- and you can break it into three particular areas on the CO2. The pilot that we're doing involves the injection of CO2 -- injected into an area of Pembina that has not produced since in late '60s. So effectively the wells were dead, watered out and done for.

We commenced injection in March. We saw a little bit of response immediately. We started to see much more response about three months ago. The results in terms of production are about a half to two-thirds of what we expected. We had expected that on average the wells would produce somewhere between 20 and about 35 barrels a day. What we're seeing is wells that are producing in the order of 10 to about 20 barrels per day.

What this does is that it impacts obviously the margin that we have on the project. When we did the original work on the pilot and on the economics for the pilot we were looking at $35 oil. We were looking at production rates on average of about 20 barrels a day to 30 barrels a day for the wells. Now that we are reduced where on average we'll be from 10 to 20 barrels per day, part of that will be overcome with a better oil price.

The other thing that we are doing, we're going to extend the term of our research period somewhat. What we want to do is, again, go into an old area, but this time rather than deal with vertical wells we intend to do it with horizontal wells and put a test pattern in with horizontals. What we've seen generally in the area with horizontal wells is that sustained production is generally 2.5 to 3.5 times what you would see on a vertical well and the costs to drill a horizontal well are not prohibitive. So we believe that that's probably the best answer to get our rates up and kind of tune this thing up so that it provides the types of returns that are demanded by our unit holders.

In the interim -- and remember again that this is one particular area of the field. Remember again that we've seen tremendous containment, but the rates are still improving, that we are making oil where there was no oil before. So those are all very encouraging. As I say, we are somewhat disappointed in the fact that the production rates did not hit or exactly hit our model curve.

The other part of the CO2 is where the heck do we get it from. We had -- up until September, we had a confidentiality agreement with a large multinational company. We made the decision at the end of September to terminate that contract because what we saw was an unwillingness on the part of the other party to continue. Basically it was a retrofit of an old facility and I believe that two things combined in the decision for our ex partner. One was the cost and the environment that we live in in Alberta right now with capital projects and the costs that are being incurred. And secondly, with the lack of any government movement on the clean air act and on the Kyoto court. There was certainly expectation from the previous government that there would be some working with the industry in cleaning CO2 out of the air.

So what we've done is that we've made an approach -- a very well-received approach to the new upgraders that are planned in the Gibbons or Fort Saskatchewan area. Very well-received because they are grass-roots projects and they're very concerned about building the proper facility to start off with. They're very environmentally friendly. We're down the road with one of those parties where we're talking about what we can do to get CO2 out of the plant. We're committed and we remain committed on the CO2 pipeline that would connect that facility to our Pembina Field.

That pipeline would run out through the transportation corridor in Edmonton. It is going to take a little bit of time. We've put that time frame into our projections. We're not anticipating an extreme delay in the CO2 project; however, I think it's prudent that rather than thinking late 2009, early 2010 that perhaps we added 6 to 12 months on that time frame. So that's where we are.

I should note as well that we're continuing and we'll be working on a pilot for Swan Hills area. We're looking particularly at our East Swan Hills unit where we've got some 95% working interest. Quite frankly, the area that most excites us right now, not from a technical point of view, but from a government receptiveness point of view, is Saskatchewan where the government is very much engaged with the idea of CO2 injection for oil enhancement.

We are a 21% working owner in the Weyburn unit and we're a 9% working owner in the Midale unit. And we have got assets in the immediate area that we're looking at for CO2 injection. So we're still very, very committed to this idea of using waste gas to squeeze more light oil. I guess our dismay is the lack of action that we're seeing at any government level when it should be very much a win-win situation for the economy.

Thanks, Bill.

Joe Arsenio, Arsenio Capital Management.

Any thought of buying in your units? And since you're talking about them selling below book value, clearly there's no enthusiasm in the market for these units at the moment.

I think it's my job to get out there and create enthusiasm right now. As I say, nothing has changed. The fundamentals of the Company have not changed. What's changed is that there's been a fence put up at the end of four years and we have to get over that fence and we will. In the meantime we're continuing with our distributions. We planned some tax effective measures over the next four years that would put us in the position in four years that we can make the move either to convert back to an independent exploration company or seek another alternative.

But certainly we've talked about a unit buyback. We believe that there are some other things we can do with the capital in the interim, particularly when we look at the upside of plays like the Peace River Oil Sands.

My follow-on would be related to the government's proposal and when you anticipate it being executed. And I assume there's a movement afoot to try to modify their initial proposal into something that would be more reasonable. Can you update us on that?

I have no idea and the fact that -- with the Ways and Means Committee it has to be a movement through the House of Parliament through the Senate. Generally depending on the level of support or the level of opposition, these things can happen quickly or take a while. We certainly know that there's a ground swell by unit holders who've been impacted by this decision. There have been -- an announcement yesterday by the Canadian Association of Retired People that they are against the decision of the government. As well there have been very recently more organization at a grass-roots level.

Certainly our umbrella organization, the Canadian Association of Income Funds, is lobbying the government. But we feel a much more effective lobby is from the individual unit holders who've been impacted.

Thank you.

Michelle Damon, Stifel Nicolaus & Co.

I have two questions regarding Peace River. On your total enterprise value of $10.9 billion, what amount or percent are you assigning to Peace River? And then with your goal of reaching 20,000 barrels per day of production in four years, can you give us further clarification of the expected impact that project will have on your reserves and your reserve life index?

Sure. Right now the total book reserves would account for about $6 million. So remember that is a decimal point of a percent. Very minimal bookings basically just associated with the well that we had drilled a year ago. There would be some further bookings as we're doing the reserves this year, but they would, again, be minuscule with regard to the value of the entire company.

As we move forward with production in the area and then find out more about the resource, quite simply exploration wells lead to development wells, development wells lead to an intensive infill wells and infill wells lead to enhanced recovery. And we see it as almost an exponential effect on production. We're using very conservative recovery rates of about 3% are primary and about 5% secondary. There are other examples where you've got thinner pay, where you've got a less-extensive area, where you've got a more heterogeneous reservoir, where recoveries -- we're seeing recoveries from other companies that are in the order of 15 to 20% with infill of thermal or with other enhanced recovery such as polymer [induction].

We believe that we're very confident in the number that we've given of 6 to 7 billion barrels of oil in place net to what we've seen so far. We're also very confident that we can deliver oil volumes. This is a unique deposit of oil in the world and certainly in Western Canada. The thickness is between 50 and 85 feet, very homogeneous, good porosity, good permeability, lack of any apparent gas cap, lack of any apparent water dry. So it should lend itself very well to the horizontal methods that we're using for initial production.

The gravity and the viscosity of the oil allow us to produce it on primary; so unlike mineable oil sands where you have no primary production, everything has to be treated. In this case we can produce a product that we can sell. So we have the advantage of producing cash flow while we're doing the initial exploration work and development and then we believe we've got a great opportunity to enhance that cash flow as we go to enhanced recovery.

The difference between this and the mineable oil sands -- I guess if there's a negative spin on is that they can much more easily identify and quantify their reserves through shallow drilling of [attached] wells to determine overburden thickness and the thickness of their pay. What they have trouble predicting of course are their operating costs and their cycle times of the trucks and repairs and energy costs. We believe we can more easily do that in what is effectively a conventional oil environment.

Thank you.

John Carlton, private investor.

I have a quick question about a clarification in your earnings report. You mentioned that the tax proposal was enacted on October 31st of this year. That one thing you could do is a portion of the cash flow could be allocated to cash taxes and I was wondering if that meant after 2011, not these next few years?

John, it's Todd. Yes, it would be after 2011. There's no proposal to do anything to that effect before that time.

All right, thank you. That's what I wanted clarification on.

Mark Warner, private investor.

Hello, ladies and gentlemen. I'm a U.S. investor and my condolences for what's happened up there. I know it's affected you all as much or more than us -- proportionately at least. Anyway, earnings per share of $0.65 versus $1.27. Though I believe you all say it's because of increased depletion, is that another word for depreciation and charges related to the merger and future income tax offset of risk management activities? Could you please clarify that?

Sure. How the accounting works generally is if you do an acquisition, something like we did with Petrofund, generally there's an increase in your book value per unit. And what that does as you produce your reserves, it leads to a higher depletion charge. And you're correct, that is synonymous. A good way to think of depletion is to think of it synonymously with depreciation. So it's a non-cash charge wherein you're allocating part of your book value of your oil/gas assets to match it up with your production as you produce your reserves.

And the offsets are the future income tax, how that works -- and maybe this isn't the right place for this, maybe we should have a call after. But generally speaking the second quarter, there were corporate income tax rate reductions which, under the current accounting model, you immediately recognize again through your net income whereas there was not the rate reduction generally in the third quarter and that's kind of the offset.

And then thirdly, the financial instrument -- as the market value -- the option value of the underlying instruments that are used to fix our future commodity prices change in the market. There's a non-cash charge which goes through a -- which increases or decreases our earnings depending on what the forward strips for commodity prices are doing. But I'll leave it at that and give me a call if you'd like to explore any of those concepts further.

May I ask one more question? Was the merger dilutive or not?

We talked about that on our last call. We believe that the merger was very slightly dilutive.

Okay. Thank you.

Roger Serin, TD Securities.

Good morning, Bill; I've got a couple questions. Could you repeat what you think your trailing capital efficiency is? I missed that.

29,000.

A couple of other questions. Could you give a little more detail on your farm-out wells? 58 wells drilled in the quarter, oil or gas bias, regional bias, when you expect to see some production coming from the farm-out activities?

We're starting to see some production now. The bias is towards oil or the two -- one large impact area that we've started to see some production from is out in the Zama-Shekilie area in Northern Alberta. That is a deep oil play -- light oil. We've got two wells that are producing. One of them is producing in excess of 200 barrels a day and we're on a nonconvertible override on both of those.

The plan would see the (indiscernible) drill another 25 to 30 wells this winter and, again, our expectation is that there would be added production. The smaller independent company is drilling in the Peace River Arch. They are primarily looking for light oil in the granite wash and in the Gilwood. They have not had success in those zones to date; although they have had up-hole gas. They're continuing with an aggressive program through the winter, so we're optimistic there.

Probably the one that's got a fairly high risk factor to it, but also a very high reward factor is our farm-out in West Pembina. And we're going to see about a dozen deep wells drilled there. They're looking for Nisku Reef and we should be seeing the first well -- our first wells completed in the first quarter. So the production has been coming in slowly and we expect that to ramp up considerably in the next year.

You seem to be in a talkative mood on the CO2 so I'll ask you a question. Given the change in productivity and oil prices, what would be your base rate, internal rates of return that you were looking at and do you think there's still met under the new environment of productivity and oil price?

Our original model we put in base royalty rates of $35 per barrel of oil. The operating cost outs we don't change too much. And we had assumed productivity on average -- 25 barrels a day is a good number. I think the reality of the situation would see us on average more at 15 barrels per day. What that means -- one of two things. One is that we would look for a concession on royalty from the government; or two, that we would need a sustained price environment in lieu of that in the order of $50 per barrel.

And what sort of return on capital or return on investment would that give you?

It's not the shiniest thing. It doesn't compare with Peace River Oil Sands. It would give us about in the low teens.

Thanks.

John [DeWest], private investor.

I wonder if you could allude to the fact that we seem to be going down so much faster than some of the other trusts. For an example, Canadian National as we speak is up $0.11 and we're down $1.03. And it seems to follow basically the same pattern each day. Is there a logical reason for that?

We've looked at our stock in isolation; it certainly isn't the one that's being hit the hardest. I believe what's happened is basically you're seeing a move away from the sector because of a fear that's been planted in the minds of the investors. So the investors are no longer looking at fundamentals associated with the Company, but the companies rather they're looking at the potential for change four years down the road and they're saying to themselves where do I want to be, where are these things going to go? And basically they're the masters of the decisions they make.

So I've got to believe that normal market mechanics would indicate that we don't allow companies to trade below net asset value for too long, but there would and should be a recovery at some time. Yes, I'm aware of the decline and obviously acutely aware of the decline in unit price. I don't believe that we are on the leading-edge of that decline. However, we're concerned about the decline in the overall sector.

Okay. And one more question. It appears by what you've just said that you are not too optimistic about changing the government's viewpoints on taxing the trust. Would that be true?

I'll just go back to the -- you're an American I trust?

Yes, sir.

You saw what happened in Boston Harbor, so it's the will of the people.

Yes. That's all I've got. Thank you.

(indiscernible), Resources West.

Good morning, gentlemen. Just to let you know, I have e-mailed every member of the Canadian Parliament three times and it probably won't be the last. My question concerns a publication that came out on the 8th where the head of the Fidelity Investment Group, Fidelity Income Trust Fund, was urging a couple of different tacts for the energy trusts over the next four years. One was to make as much money as they could and to an affect take 100% of the cash flow and pay it to the unit holders in the form of dividends. That apparently they intended to be applicable to the small- to medium-sized trust.

Those who already have a strong technical position and a strong internal billing program, it was suggested that they were probably in a very good position to convert back to an exploration and production company past the year 2011. There seems to be a considerable gulf or dichotomy between those two approaches. Would you care to comment on that, please?

I can't really comment. I did see the article and I've certainly met with her in the past -- with the Company in our current form and when we were an exploration company. Yes, I think as things progress and depending on the wording of legislation there are decisions that have to be made individually by companies. Certainly we don't believe that with our asset base, particularly with the untapped assets in the Peace River Oil Sands, that it makes a lot of sense to blow the Company down.

Rather we would look to strengthen the Company over the next four years to aggressively move into the Peace River area or more aggressively move into the Peace River area. And if we reemerge or emerge back as an independent exploration company, we believe that we would emerge as a more efficient company -- as a company with a tremendous asset base of conventional oil and gas and also as a company with the added bonus of a large oil sands play and with enhanced recovery.

So as I say, each company will have to make an individual decision on which direction they want to go. The landscape is so foggy right now that it's difficult to really plan to any extent because there's been some comment about undue expansion of the sector and unfair expansion of the sector. So what does that do with regard to mergers, what does that do with an acquisition that may make you more tax efficient, what does that do with an acquisition that may strengthen your position in a particular project or play?

It seems that what has been created in an effort to create a level playing field is a very unlevel playing field where the conventional corporations can go ahead and do their business and we're restricted while we wait and see exactly what the legislation is going to say.

Thank you for your comments.

(OPERATOR INSTRUCTIONS). Barbara [Suranka], private investor.

Good morning. At this time can you tell me what percentage of your units are owned by institutional investors and pension funds and are they lobbying the government in this regard?

I don't believe -- I believe it's much more individual. The calls that I have received, the calls that our investor relations department have received have been I'll say 99% from individual investors such as yourself. Our institutional holding is about 35% retail, about 65% -- so people like you hold about 65% of our units.

And you said 35% up or down post Halloween?

My sense is that it's up. My sense is that the flow is going from the retail sector and into the institutional sector. But I haven't -- it's tough until you get a month-end confirmation or a week end confirmation to determine exactly. We've got a fair idea -- a relative idea of who holds the stock, but if you ask on a daily basis it's a little difficult.

Thank you.

David [All], [Spherehome] Capital Management.

Bill, just a couple more operational questions. Your production costs for the quarter were up considerably year-over-year and we understand that's because of the integration of the higher cost Petrofund properties. In the past you talked about perhaps driving those costs down. Are we going to see your production costs come easing off here over the next say six to nine months? Or will any reductions you achieve on the Petrofund properties be affected more on stable production costs?

The second question is that you had talked about perhaps selling off some of the -- some properties from Petrofund as part of noncore properties. Given the current turmoil in Canada would you be -- and the low -- well, relatively low price environment for gas, would you be holding off on those asset sales?

Two parts. As we integrate the Petrofund assets into the Energy Trust there will be efficiencies of scale as we -- I guess in the worst instance we've got a couple properties where their were factories across the road from each other. One of those would be shut down. We'd be looking at where particularly in the Petrofund case where there were some third party charges where they were going to another facility they'd come to our facility. We'd look again at some efficiency at an operator level on the reduced time that they'd be in the field because they'd be able to handle more wells in a shorter period.

We've also gone to permanent employees rather than contract employees basically on a global scale. That is our company philosophy that we don't tend to use contract employees to operate our wells. We want employees that partake in our training for safety and environmental awareness training. We expect that we can push the cost down, yes. There should be some resulting efficiency there.

The thing that should work in our favor is the fact that as a trust we've been devoting much more capital than we had as an independent exploration company towards optimization. And to the extent that you optimize and add production in existing fields and existing facilities, it should follow that producing costs should come down. So that expenditure has really ramped up; we plan to be over $100 million next year. That would compare to the $35 million that we had budgeted in the first year. As those things start to work their way through the system we would expect to see some efficiency.

With regard to the dispositions, yes, it's kind of a complicated time to look at dispositions. Part of the overall plan going forward has been to -- I guess the word they'd use in other businesses would be rightsizing, but in our business it would be just taking the properties we want to move aggressively on going forward and then looking at other properties and seeing if it's better to attempt to sell them and to use that capital in the properties that are future.

So we're in a process right now. We did a little bit of -- a tiny bit of sales in the last quarter. We have a plan to put a few more smaller properties on the market and we shall see how the -- kind of test the temperature of the water by sticking our toe in and determining whether we ramp up that process. The process as we see it would involve selling on one side and acquiring or drilling on the other.

Can I ask one more? With regard to your drilling program for Seal next year, are those all -- the 60 to 65 wells, are those development wells or are a portion of them [core niche] strata graphic wells?

They're going to be strat wells. We're looking at about 15 strat wells.

Thank you very much, Bill.

Seymour [Schlimer], private investigator (sic).

I'm a unit holder in Penn West of some significance and I've followed all of the proceedings since October 31st. And one of my real expertise -- an expertise that I have is in the media. And I have contacted every member of the Parliament as well as the Prime Minister and the Minister of Finance here. And I've followed in the media in Canada how this whole situation has developed. And I don't want to repeat the arbitrary unfair sort of sweeping change than the government has proposed here in their tax reform.

The thing that I have not noticed and, unless I'm missing something, would be a simple solution and should be a focus of the coalition of trust, as well as [CARP] and any other individuals here, would be to place a moratorium on any new trusting which, in the government's own statement, they based there changed as a threat to the tax base.

Now again, unless I'm missing something, it appears to me that a moratorium would resolve their fears and the problems and the only downside would be for the new private companies who wanted to trust. And I would like to ask you whether the coalition has really pursued a campaign in the way the government has -- they have really declared war on the trusts whether the coalition has a campaign of ads. Where the focus would be moratorium is the solution here for everybody I believe, and if so why not, why isn't this the focus? And if the government has particularly addressed that issue, a moratorium, at this time?

I very much agree with your conclusion. It seems it's common sense and that the problem is the fear of the future and expansion that you shut the gate and keep everybody inside. What they've done is shut the gate and then got rid of everybody that's inside, which seems a little bit drastic in my mind. The case as well as the coalition of energy trusts are working at all levels to try and posh as hard as we can push.

But as I said before, a lot of it -- because they're elected representatives they feel they impacted individuals. It's kind of like when you're making a snowman, you start with a little snowball, roll it up and it gets bigger and bigger. And that's what we have to do here I believe is there is a tremendous lobby going on right now by individual citizens both in our country and in the United States and other holders and it is increasing and it is increasing everyday. And I think that a government can become entrenched in a position; but they soon become unentrenched when faced with the prospect of maybe a change by the voters.

The government has taken an adamant position on this and it's sweeping change. And what I'm asking you whether they have addressed the real solution here, unless I'm missing something, of a moratorium. How have they answered that question if it's brought up in Parliament or in other places? How have they answered (multiple speakers) moratorium resolution?

Let me go back to the rhetoric on tax fairness and leveling the playing field and, as I say, it's generally -- that's a typical or fair response from government is that they generally entrench themselves and then stick their nose out and see how the wind is blowing. And the wind is blowing fairly strongly against them right now and I can only surmise that there must be concern at their level even though they're not expressing it.

Once more, I'll just ask you because, as I said, I'm a media person. And I could see that the government initially in their statement was a media statement, using the image of fairness in this really unfair plan. And whether the coalition has gone to the media, taken out ads, gone to the television stations and whatever other financial places there are to go and made this -- as the government has made their focus fairness in taxes -- making the coalition and anybody else's position unfairness. And fairness equals moratorium as a focus here. To try to increase that wave of resistance because it appears to me that I have not seen that kind of exposure of a simple solution that even satisfies their own fears.

I understand that. But obviously we were caught very much unprepared. We are an oil and gas company, so we don't pretend to be lobbyists. We don't pretend to be much involved with the media. But there the professional politician and staff have got a hell of a leg up on us. So we're recovering and we're moving forward.

There are certainly plans and the plans will be put into action with regard to a much more aggressive campaign. And I can just highlight one more time the fact that my belief is that the individual unit holders that have been impacted, particularly the Canadian individual unit holders that have been impacted, particularly Canadian unit holders that have a vote can have a fair say on the direction this is going to go.

Could I ask you why the other [splinter] parties have gone on board with the conservatives here in a very radical position? And in fact, what I read somewhere is that the MVP may have even instigated this.

I can't comment on that. I enjoy very much coming to work everyday and running an oil and gas company, that's why I'm not in politics.

Okay. But I'm just saying that the politics here is impacting everybody and this may be the company (multiple speakers).

We're doing everything we can.

Okay. Thank you.

Mark Warner, private investor.

Thank you. (indiscernible) the American I had to get back online. Along those same lines, the gentleman prior to me was talking about -- I understand fully the (indiscernible) of your lawmakers just as our Congress or the lawmakers here in the U.S. But this is so much of a totalitarian dictatorial type of change, or at least it smacks of that, especially to foreign investors. Is there any possibility of going to your judicial system?

I realize you don't want to make any more enemies for a while with these politicians, but at some point with the magnitude of it, with the retroactiveness of this, it's almost like the debate in this country we've been having in the last two years over eminent domain. Is there any possibility of that? I realize you may not be an attorney, but if there's an attorney in the house, is there any possibility of going to your court system where basically your government is trying to roll back something that was approved by them.

I understand that. Not on our part because we're a -- we're convinced that there is -- democracy exists in this country and in the U.S. and that we do go through a democratic process and that is all can be heard and that voters can influence the direction of government. So we're working on that avenue. I have heard some rhetoric, certainly not from us, but I have heard some rhetoric with regard to potential legal recourse.

At least maybe we could hold them up for another two, three, four or five years possibly with that approach. So listen, I understand you're doing the best you can and we appreciate it.

Thank you.

Okay. Thank you.

Jim Wozniak, RBC Dain Rauscher.

Good morning. I got on the call a little bit late. Just two quick questions. If they're being repeated I apologize. What is the current asset value? And also are you currently or do you have any type of a stock buyback in place?

I'll answer the second one first, we don't that. As an E&P company we did have a share buyback in place, we don't have one currently in place. It's one option that we're looking at right now. Our net asset value we think is about C$34 a share.

Okay. Thank you both, very much. And I'm very intrigued for all of my clients who probably will be owning the stock shortly.

Thank you.

Joe Arsenio, Arsenio Capital Management.

As I listen to this call I can see that there's a potential for the interest of the unit holders and the interest of management and your Board, whatever the governing body is, to diverge. Are there any unique voting requirements in Canada? Since I'm in the U.S. I don't know what your -- the law relating to trusts in Canada and voting an so on. But is there anything that would prohibit the unit holders removing management as a group in order to alter the policies of the Company?

None whatsoever.

I'm not suggesting --

The Board is up for election every year. I report to the Board of Directors, the rest of management reports to me. So obviously we work for the unit holder. The unit holders want another direction then they deal with their vote.

Right. Is there any penalty for foreign unit holders? Do they get the same vote as domestic?

Every unit holder has a vote.

Okay. I'm not suggesting this is the right course of action, by the way, I'm simply trying to understand what the playing field looks like.

The playing field is we have just one class of shares and all our unit holders are equal shareholders.

And a staggered vote for members of the Board?

Currently we elect a slight and obviously as part of our ongoing review of governance that's some of the issues we look at.

Okay, thank you.

Paul [Forrester], Morgan Stanley.

I have been talking to the Investor Relations of a lot of different income trusts in the last little while. And one of the things that I'm guessing is being missed, but I don't really know, is that even if this is enacted, if you guys turned around tomorrow and said okay we're going to stop paying the dividend because we're going to batten down the hatches and figure out what our next step is. As soon as you did that, and I'm just clarify for myself, you would actually begin to pay corporate taxes regularly. Is that correct?

That's correct.

So it doesn't seem logical to me that anyone would do that. Does that seem reasonable?

Very reasonable. And again, the only -- I guess the only exception to that would be a move to privatize the public trust.

So to do it earlier rather than later?

If you've got a -- if you have a block of shareholders or a large individual shareholder there may be some independent move to privatize or do something with the Company. A widely held vehicle like ours, there's no point in doing that. You keep making your distributions and that's what we're doing. And then look at a way to -- I look at ourselves compared to other independent exploration companies.

Our tax horizon isn't that much more horrible than they're seeing right now. A lot of them are taxable and are on the verge of being taxable. There's a lot that we can do in the next four years to manage the process if we elect after four years to convert back to an exploration company and I think we'll be well-positioned. And I think the market is absolutely missing that.

Thanks very much. Just on another note, I'm Canadian and I live in the United States and I registered to vote on November 2nd for the first time since I moved to the United States. Thanks very much.

Robert [Dieros], private investor.

Good morning. You mentioned that Saskatchewan has a more favorable basis for doing CO2 [flooding]. Could you provide some details on that?

It's just been the expansion that we've seen in commercial projects (indiscernible) Saskatchewan. The Weyburn project, which is the largest in Canada, is in an expansion process. Midale is a brand-new one that's just getting started. And there's been very good cooperation at all levels in the Saskatchewan government, both in the elected representatives and in the bureaucracy to move forward with a process that will enhance our recovery and remove greenhouse gas from the air. It's just been the best reception of the (indiscernible) is Saskatchewan, so it's just a fact.

And if Saskatchewan is in the opposite direction of the proposed CO2 pipeline from the oil sands, where were the increased sources of CO2 coming from?

We've been through this another call before, but the source in Saskatchewan is (indiscernible) North Dakota and it was worked at -- the work was a cooperation between the federal government of the U.S. and the state government of North Dakota and the utility company that has the coal-fired generator -- they put in a coal gasification process. As part of it they sought a place to move the CO2. The nearest and best reservoir was one that was operated by EnCana and Weyburn and they did a commercial arrangement to inject CO2. That CO2 injection has been going on for a number of years.

The results have been very good and they're expanding back particular flood. So basically we see the same sources. The sources are heavy industry, coal-fired generators, obviously the oil sands. To the extent that you could take a major pipeline in Canada and slipstream some of the CO2 out of it before it's finally processed, that would be another source. But the major sources are our refiners, our upgraders, our coal-fired generating plants and obviously the oil sands.

This will be new commercial CO2 producers as opposed to the one in -- where is it? -- Montana or North Dakota?

That's right.

Okay. Thank you.

Richard Holt, Seton Management.

Bill, a question along the lines of the polymer injection. I know you have a pretty invested interest in conventional wells, old technology, more horizontal. But I'm wondering about the latest ones that I've read about about polymer injection. Is it worth it from what you all have up there to go further into that or are you getting sufficient recovery rates at a lower cost that weighted out and do it only when you need to?

We haven't gotten to that point. We have tried polymer injection on a couple of the more mature reservoirs with mixed success. It is a technology that, as any enhanced recovery technology needs sort of the right circumstances. And it's an option that we'd obviously look at as we move along in the maturity of the reservoirs.

Would you say there would something that it only would be possible when we started seeing things like prices of $80 a barrel oil and that sort of thing five years out? That sort of an idea?

No, I think it's being successfully done right now with prices where they are right now, 50 to $60. Obviously it's a little bit more cost prohibitive than a lot of the conventional pressure maintenance and enhanced recovery, but it's something that does provide more oil.

ON that line, you said the prohibitive costs and whatnot, and I noticed they had gone up some. I guess some of them part of the Petrofund merger and some of them just because of inflation at this point. Do you foresee this as an ongoing sort of rate of increase?

No, we're always working to stem the tide somewhat. But yes, there's been a lot of pressure in Alberta particularly for services and that has impacted prices.

Thank you very much.

I'm going to cut this now off if that's all right. If there's any more questions I'd urge you to give me a call at area code 403-777-2502. Thank you.

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