Obsidian Energy Ltd (OBE) 2006 Q4 法說會逐字稿

Good morning ladies and gentlemen, thank you for standing by. Welcome to the Penn West Energy Trust Fourth 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. [OPERATOR INSTRUCTIONS].

I would like to remind everyone that this conference call is being recorded on Tuesday, February 27, 2007 at 11:00 A.M. Eastern. I will now turn the conference over to Mr. William Andrew, President and Chief Executive Officer. Please go ahead.

Thank you. Good morning. With me today in Calgary are Dave Middleton, who is our Chief Operating Officer; Todd Takeyasu our Chief Financial Officer; Thane Jensen and William Tang Kong, our two Senior Vice Presidents as well as other members of our management team.

I would like to thank everyone that's listening to our teleconference or who is wired in to our webcast. During the fourth quarter and in this quarter we have had the opportunity to speak to many unit-holders both on the retail and institutional side and I encourage any unit holder with questions or concerns don't hesitate to contact us directly via telephone or through our Internet address which is www.pennwest.com. We will endeavor to answer as quickly as possible.

We trade on two exchanges, New York Stock Exchange under the symbol PWE and the Toronto Stock Exchange under the symbol PWT.UN. The purpose of the call is to review our 2006 fourth quarter and also our year-end results and provide you a little bit of an update on what's going on at Penn West Energy Trust. Following the review we'd be very pleased to answer your questions.

During the call we'll use Canadian dollars unless otherwise stated. Use the 6 to 1 ratio for conversion of two barrels of oil equivalent. The results for the fourth quarter represent Penn West Energy Trust's sixth full quarter as a reporting entity. For comparable purposes we will be looking back to the fourth quarter of 2005 as a benchmark for this quarter.

The fourth quarter 2006, our liquids production averaged 70,819 barrels per day. Our production is weighted to light and medium gravity oil and NGLs that make up 68% of the liquids production. Average natural gas production on a daily basis was 354.6 million cubic feet. Total production for the fourth quarter of 2006 averaged to almost 130,000 barrels, a 129,915 barrels of oil equivalent per day. In the fourth quarter our average daily production was weighted about 54.5% to liquids and about 45.5% to natural gas. The fourth quarter 2006 natural gas prices averaged C$6.97 per mcf and that is down 40% from the fourth quarter of 2005.

Light oil and natural gas liquids prices averaged C$57.43 per barrel, that's an 11% decrease from the fourth quarter of 2005. Conventional heavy oil prices were C$37.57 in the fourth quarter 2006 and that was a bright spot that was an increase of 7% as compared to the fourth quarter of 2005. That reflects a narrowing of the differential on heavy crude compared to light crude. Overall, commodity prices averaged C$46.88 per barrel of oil equivalent, that's down 24% from the fourth quarter of 2005 and excludes any hedging impacts.

Our risk management activities or hedging activities added C$1.53 per barrel of oil equivalent to the C$46.88 price, so we were a little over C$48.00 with the addition of the hedging gains. The 2006 natural gas prices averaged C$6.75 per mcf, that's for the full year, that's down 22% from the C$8.68 price realized in 2005.

Light oil and natural gas liquids price averaged C$65.02 per barrel in 2006. That's a 4% increase over the C$62.59 achieved in 2005. Conventional heavy oil prices were C$43.07 in 2006, that's an increase of 21%, compared to the 2005 price and again reflects a narrowing in heavy oil differential. Overall commodity prices averaged C$49.58 per barrel of oil equivalent for the full year 2006, and that is down 6% from the C$52.50 price realized in 2005 and that excludes any hedging activity.

Operating costs for the fourth quarter 2006 were C$10.61 per barrel of oil equivalent that compares with C$9.44 in the fourth quarter 2005. Our efforts to control rising operating costs in the face of strong demand for services started to bear fruit in the fourth quarter as we began to reverse the trend of cost escalation by lowering quarter-over-quarter operating costs and that is something we are going to focus on quite strongly this quarter and next and then through the year.

Our netback for the fourth quarter 2006 was C$28.17 per barrel of oil equivalent that's down 27% from the fourth quarter of 2005. Netback comprised of an average light oil and liquid netback at C$31.87 per barrel, average conventional heavy oil netback of C$20.18 per barrel, average natural gas netback of C$4.70 per mcf.

Cash flow for the fourth quarter of 2006 was C$303.3 million that compares with C$332.6 million in the fourth quarter of 2005 a decrease of 9%. Cash flow for 2006 full year was C$1.18 billion and that is in line with the cash flow that was achieved in 2005. Net income for the fourth quarter 2006 was C$122.9 million and that's a decrease of 49% from C$241.1 million achieved in the fourth quarter of 2005. For the full year net income was C$665.6 million that compares with C$577.2 million in 2005.

On a per unit basis, annual net income was C$3.27 per unit diluted in 2006 that compares with C$3.48 per unit diluted in 2005. There were 248.4 million total units outstanding and that includes the outstanding trust unit right incentive program grant that's as of December 31, 2006. That compares with 172.7 million total units outstanding at December 31, 2005. The increase in units reflects primarily the acquisition of Petrofund Energy Trust in mid-2006, also a little bit on our drip program.

Capital expenditures totaled C$159 million in the fourth quarter that brought our total expenditures for 2006 to C$3.9 billion and that included C$578 million in capital expenditures and about C$3.3 billion on the Petrofund Acquisition.

On August 25, 2006 Penn West increased the size of our credit facilities, to C$1.9 billion. That was basically a push up in response to the acquisition of Petrofund. We feel that there is still room left there to go should we desire to push it a little further. Our balance sheet is quite strong. The bank debt at December 31, 2006 was C$1.285 billion that compares with C$542 million December 31, 2005. Again that reflects the acquisition of Petrofund so we do get the added production and reserves from Petrofund.

We remain very comfortable with the balance sheet. We exited 2006 with a bank debt annualized cash flow of about [.9] to 1. Fourth quarter 2006 monthly cash distributions totaling C$241 million or C$0.34 per trust unit per month were paid to unit holders on record for each of October, November and December. 2006 our total distributions were C$782 million which were paid out to unit holders. Penn West monthly distribution rate is currently at C$0.34 per unit. It is regularly reviewed by our management team and board and I can tell that as a result of the review that was done on Friday at our Board meeting we'll be carrying through with the C$0.34 per unit distribution through the next quarter.

These reviews that we do evaluate the distribution rate by assessing our assets performance by looking at our Calgary [inaudible] and also at commodity prices and we are well within our model at the C$0.34.

Penn West, we do have an active hedging program to increase the insurance of future cash flow to fund distributions and primarily to fund our capital program. It provides us as well with a little bit of downside protection but as I said many times in the past, we are not smart enough to beat the Mercantile people at their own game so we basically do it to protect capital and protect cash flow.

As opportunities arise, we plan to continue adding oil, natural gas and some electricity hedges and if you need more information on our hedging program, please visit our website or look in the year-end press release for more information.

At year-end 2006, Penn West Energy Trust had proven plus probable reserves of 482.8 million barrels of oil equivalent. That was weighted about two thirds towards liquids and about one third to natural gas. Our reserve life index, based on fourth quarter average production, is 10.2 years, which is pretty well in the middle of the pack for the Trust companies. Penn West maintains a high level of proven developed producing reserves and inventory. Proven undeveloped reserves accounted only for 9% of our total reserves. Now, I will come back to that comment in a second.

The finding and development costs in 2007 was C$24.07 per barrel of oil equivalent that includes C$4 billion in future capital. Costs reflect the acquisition of Petrofund which certainly weighted the number and our continued efforts to convert proven undeveloped reserves to proven producing reserves. I should note and going back to the 9% that we have on proven undeveloped reserves, you probably should note that our total bookings in the Peace River Oil Sands were less than 5 million barrels on a proven basis and that no reserves have been allocated to date for enhanced oil recovery at Pembina.

We expect that as we push towards increased levels of activity at these two major projects a significant portion of the reserves potential will be realized and will be booked accordingly. And we should note that as well as, we recognize that the focus within an income trust structure generally concentrated on our waiting towards proven producing reserves, your stresses is on cash flow and the ability to put out distributions and provide yield for your investors.

In the future, recognizing the proposed changes income tax and taxation. It's very possible that Penn West may convert to another structure that focuses more on growth potential. To this end a measured effort will be made to reflect the future potential of the Peace River Oil Sands and Pembina CO2 projects in our reserves portfolio.

2007 Penn West Energy Trust had an original capital budget targeted -- target between C$550 and C$600 million. Based on the success of recent exploratory wells on our Peace River Oil Sands as well as an opportunity that we have to improve process and pipeline capacity for the area-- and that is an opportunity that's arisen a little quicker than we had anticipated, we are going to be increasing our capital budget by C$75 million in the Peace River area.

Additionally, we are looking at another C$25 million. That will be spread through the budget but we are targeting two primary areas; one is that we are going to increase levels of our R&D activity on our CO2 injection project and we are also looking to bolster our environmental budget and increase it as well.

Increased budget amounts will increase our estimated capital spending to between C$650 and C$700 million. We are forecasting production at between 130,000 and 133,000 barrels of oil equivalents per day; we'll be updating that as the year goes on. We just did our budget change on Friday and we'll see how everything goes through the first quarter.

With that production we are looking at cash flow between C$1.3 and about C$1.5 billion and that is based on a West Texas price of $59 per barrel US; eco-natural gas price of $7.25 per mcf, an exchange rate of $0.86 US per Canadian dollar.

Primary focus of the 2007 capital budget will be the Peace River Oil Sands project. Initial project development concentrate on three areas Seal Main, Seal Cadotte, Seal North, and those areas are outlined in our latest investor package again available on the website. Development strategies for each area will differ and they will be dictated by the thickness of net pay and also by the oil quality. At Seal Cadotte we have encountered the thickest average pay section in that area and are drilling to date. We have got a net pay at an average over 60 feet and maximum pay thickness of up to 80 feet.

Recognizing the pay thickness and a proximity that shows experimental thermal project, we'll be setting up this area to evaluate thermal recovery techniques. At Seal Main we have encountered net pay thicknesses averaging 35 to 40 feet maximum, pay thickness is about 55 feet. A portion of this area will be intensely developed to primary and secondary recovery what will remain will be reserved for evaluating thermal recovery techniques and utilizing thermal recovery.

Seal North is the newest area that we have, the pay there is a little bit thinner, It would average about 25 feet so the variance on either side of that is about 5 feet. The good news about the area is that the thinness in pay and if you call 25 feet thin, relative thinness of the pay I guess, is offset by lower viscosity and the higher gravity so we have got better ability to [drill] and a better ability to flow. I would remind people that all the wells that we've drilled to date, we have drilled almost 70 now, 69 of the 70 wells have oil and have the capability of flowing into the well bore so when I say it flows better it's just relative to the other wells that we have in the area.

We have got a initial well that's now on, we have been waiting for that for about four months. We have finished the completion, got it on, got it producing now and initially it has been producing over 180 barrels per day on primary and we'd expect that the area should produce very well on primary production with additional potential of water injection and secondary recovery techniques.

Our intent for Seal North is to aggressively drill this area using high density or thermal techniques, such as those employed in conventional heavy oil development throughout the provinces of Alberta and Saskatchewan. Exploratory drilling in the last year has been successful particularly our efforts thus far this winter, which have added to our confidence in the area and what we have in the area.

Our intent is to ramp up our exploration effort in order to continue to unlock the potential of the Peace River Oil Sands. Other area of focus will be bringing the Pembina CO2 enhanced recovery project closer to commercial reality. And many of you may recall our pretty fair level of frustration recently at not being able to move this project that we think is a very viable project and we think is an excellent type of project the company should be pursuing and just to move it close to the commercial reality and to fruition. We believe we have got an opportunity to create the first integrated approach to oil sands development that will focus using CO2 by-products from heavy oil upgraders/refineries/chemical companies in and around the city of Edmonton to enhance oil recoveries and mature leg oil pools which are again located in fairly close proximity to the city of Edmonton.

Initial target pool is the Cardium at Pembina. We've been through that almost ad nauseam over the past two years. We have been successfully injecting CO2 on the commercial scale pilot for almost two years. In order to make this vision a reality, we intend to become a lot more proactive in our efforts to secure CO2. We believe we can do that while at the same time addressing future opportunities to upgrade oil sands production in the Peace River area.

To date, our plans have been affected by the lack of common ownership in the oil sands CO2 capture points and mature light oil pools. As a result, each party looked at the economic impact solely from one point of view. We feel a more integrated approach for one party or group of parties could look at the net benefit of upgraded capacity, CO2 capture and enhanced oil recovery through CO2 injection, and we think that should be made and once we do this we feel this will move the project forward towards economic reality.

To this end we also need much more involvement on the part of industry and all levels of government. We intend to more aggressively work towards increasing the visibility of this project and this type of project at all levels of industry and government. We continue to monetize our land base through farm-out sales and joint ventures since the third quarter of 2004. And we have been very successful at capitalizing on opportunities and farmed-out more than 1.1 million acres.

To date we've seen some success on farm-out land, but we have not seen the level of activity that we had envisioned originally. That was primarily due to the level activity in the basin and the fact that a lot of the people -- a lot of the companies that were working on our land had trouble getting equipment. That's changed and changed very much through this winter. The level of activity on our farmed-out land is increasing and it should result in additional near-term exploration success and longer term revenue additions.

Our conventional exploration development activities will continue to focus on capital efficiency and optimization. Primary areas of development will be plains heavy oil and gas as well as lighter oil and gas in central areas of Saskatchewan. But we are targeting our optimization budget at between C$125 and C$150 million and that speaks to the depth of projects that are available in Penn West and we feel that there's somewhere between 4 and 5 years more of that level of intensity that we can continue to do with optimization and a lot of the optimization will be targeted at improved recovery, we are also looking at -- and as a result of our optimization we end up being a lot more environmentally conscious company, which is important to us as well.

February 9, 2007 we announced that we'd signed an agreement to acquire a package of assets for C$339 million before closing adjustments and the right to first refusal. The acquisition will significantly bolster our infrastructure and operating presence and the future of our Oil Sands Area. Approximately 80% of the acquisition or 3,000 barrels of light oil per day and about 6 million cubic feet of natural gas situated within our Peace River Oil Sands Area as our 190,000 net acres of undeveloped oil and natural gas leases. The deal also adds infrastructure, including a sales line, a large processing facility, natural gas plant, compression facility and associated roads.

So we are very excited about this acquisition, particularly excited as we move forward with the Oil Sands project and move forward with our need on thermal for natural gas and with our need for light oil and process facilities access to the area. So it was quite an important little acquisition that we made in February.

We are continuing to carry out all of our health, safety and environmental protection programs. We spent not quite as much as we wanted to, but we spent C$27 million in 2006 on environmental programs and we'd like to allocate in excess of C$40 million to this area and maybe push it up towards C$50 million in 2007. While maintaining an aggressive environmental budget we can both work to reclaim worksites in a timely manner and mitigating against future environmental costs and we feel that we are providing leadership in this area within the industry.

The senior management team is committed to the health and safety of our employees, contractors and also to the health and safety of the communities where we actively explore, develop and produce energy. Our mission as the executive of the Company is to continue to provide leadership for a health, safety and environmentally conscious culture at Penn West Energy Trust.

In the fourth quarter of 2006, Penn West Energy Trust actively supported the formation of the Coalition of Canadian Energy Trusts. This coalition whose membership includes all the producing energy trusts in Canada continues to work towards the awareness of the important role that energy trusts play in supporting the continued success of the energy industry in Canada. In addition, we support the efforts of the Canadian Association of Income Funds to mitigate what we believe is an ill-advised proposal by the Department of Finance last Halloween and to work to continue to provide average Canadians the same access to high yield income investments that are usually the exclusive domain of high net-worth individuals and private pension funds. We will continue our efforts on behalf of unit holders to restore investor confidence and move Penn West Energy Trust towards the future.

If any concerns about the tax proposal and we do hear lots of concerns everyday, we urge you to contact your local member of Parliament. To this end we recently provided unitholders who may not have access to the internet with a postcard that can be used to send your views to our elected representatives. Basically, the bottom line, we feel this is democracy in action and the people speaking up when they feel that something has happened that they are not in agreement with and we've heard the positive and negatives, and for us there can only be a positive and that's discourse and democracy.

Additionally, there is an association, the Canadian Association of Income Trusts Investors that is a grassroots level organization, a coalition of investors who are also expressing their concerns to the Government of Canada. In this effort, through the Coalition of Energy Trusts and through our own initiative we want to encourage affected investors to become actively engaged in the dialogue.

While our near-term focus is on the tax proposal, we are not going to get overwhelmed by the tax proposal; we've also got a company to run. Our long term focus is on having a strong business plan that incorporates several of the possible outcomes from the proposal. In the interim, we will continue to execute plans for 2007 that will see Penn West Energy Trust work to maintain production volumes, to improve capital efficiencies and to continue our efforts towards the realization of the significance and long term benefits of the Peace River Oil Sands project and the Pembina CO2 enhanced recovery project or projects like the Pembina CO2 one.

Thank you very much. Operator, I'd be pleased to answer any questions if there are any.

Thank you. [OPERATOR INSTRUCTIONS]. Your first question comes from William Lacey from FirstEnergy. Please go ahead.

Bill, I was just wondering if you could reconfirm what the future development capital was on proved plus probable and what's your calculated p plus p costs were on that basis?

I'll let William Tang Kong who has lived with these day and night, I'll let him go through that, go ahead please.

Hey Will, the p plus p undiscounted future development capital is C$1.069 billion.

Okay, perfect. As far as our production rate now, what are the current levels at? In particular I'm more curious about heavy oil within the portfolio?

The current levels are -- at what where we talked -- 129 plus the addition of the -- plus the addition of the acquisition. So we are producing about 133,000 barrels a day. 133 to 134, our ratio actually of light oil would have gone up marginally since the fourth quarter.

Okay, and then on the integration that you are considering between Pembina and Peace River, am I to assume that you are looking at the upgrading potential there?

I guess why not? That is exactly what we are doing.

Okay perfect. Thank you.

Your next question comes from [Marcum Gusset] from UBS. Please go ahead.

Yes, sir. Thank you for your conference call. A question I have was on the Oil Sands and the Peace River project, what do you consider to be the break-even on that? Where is that profitable and where is that not profitable, what price of crude?

We've seen -- we've seen the differential narrow over the last year and that's certainly changed our view of the area, but I would think in order to intensely develop the area that we would need crude prices north of C$40. It is -- the margins are pretty good in the area, the finding cost is quite low relative to almost anything that exists in Western Canada and certainly the operating costs on primary and even on water flood are quite low comparable to any of the new projects in the basin. So we are saying C$40 just because of the differential that we see on heavy versus light crude oil and that should allow us to move forward with the project.

Your next question comes from Greg Shaw from RBC Capital Markets. Please go ahead.

Hey, good morning. Just a couple of questions for you. On the C$155 million you are now looking to spend on the Seal area, how many wells are you planning to drill? Have you increased the number of wells you are planning to drill? And how much do you budget for the pipeline construction?

The main thing that we are going to be doing, Greg, with regard to the expansion of the capital program is to do more delineation. You have to remember that we have 300,000 net acres and based upon our first 14 delineation wells we drilled this winter, we found that we have a lot of key areas to drill additional wells. So we are probably going to ramp those up to about 40 delineation wells and we can have about another 40 horizontals on top of that.

Okay.

A lot of those horizontals are going to be what we call primary horizontals too, where we drill the first one into the area and determine how the other well will produce.

Okay, thank you.

I think those that follow the area closely our stratagraphic tests are essentially sunk costs. We use them to obtain a sample of core and a sample of the oil to determine the viscosity. We are maintaining a few of them for observation wells but generally they are write-offs as we drill them. We then have to go in and drill the horizontal wells to determine what sort of production rates we can look forward to.

Okay, thank you. And with respect to the acquisition, have you had any of the [inaudible] exercised at this point?

No.

Thank you.

[OPERATOR INSTRUCTIONS]. Your next question is a follow-up question from Marcum Gusset from UBS, please go ahead.

Yes, sir. Another question on the heavy oil. Where do you sell the heavy oil as opposed to your light suite, are the refineries nearby as accessible as the refineries for the light suite that you sell or what pipeline do you go into?

We go into Rainbow pipeline, we blend our -- we blend the crude which is basically a heavy crude, not dissimilar to the crude that's produced at the -- and many will know the name of the [Polythene Lake] project which sits to the East of us and crude that's produced throughout the Lloydminster area. So there's a lot of heavy crude oil in Alberta and there is capacity to handle the heavy crude after refinery -- at refinery levels in Edmonton. Due to the increased focus on heavy crude, both conventional heavy crude, and on synthetic crude from Fort McMurray primarily there is tremendous initiative in Alberta both on adding refinery and upgrading capacity in and around the city of Edmonton and also securing additional pipeline capacity out of the Edmonton area down into the US and also to access the Pacific Rim.

Thank you. One other follow up question on the taxation issue. One group that the analysis of the current situation about a week ago said that there was -- it's very unlikely that we would grandfather-- the Canadian Parliament would grandfather in companies like yourself that were existing Canadian Royalty Trusts; however, was not a remote idea that they might extend the time from 2011 to 2017. Do you concur with that or what are your feeling about the possibilities for change here in the next month or two as the Parliament reconvenes on this issue?

I have given up guessing about politics or the proposals that they sit at the Finance Committee, which has looked at and held hearings on the lead opposition party in Canada, the Liberal Party had proposed a sur-tax on distributable -- on distributions of 10% and basically grandfathering of the existing trusts and the continuation of the structure. And then we have not -- I believe today or tomorrow there was supposed to be something come out of the Finance Committee on that. Other than that it's been -- the Finance [inaudible] has been fairly stoic in his stance on the four year grandfathering.

And then taxation of income trusts-- and I will say one thing, that in taxing the trusts and getting rid of the income tax structure that the government is in effect taking away the only high-yield vehicle that is available to individual investors in Canada and that's why we think it's a grave mistake, other than the obvious reasons on our international reputation; on our ability to raise capital that from a corporate point of view are very concerning.

I agree, thank you.

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

Thank you very much. If there's any questions my phone number is 403-777-2502 in Calgary and please feel free to call any individual investors as well, I will entertain -- I will certainly entertain any questions that you have after the call. Thank you very much.

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