Obsidian Energy Ltd (OBE) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Penn West Energy Trust first-quarter results conference call. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded on Monday, May 7, 2007 at 2:00 PM Mountain time.

I will now turn the conference over to Mr. Bill Andrew, President and CEO. Please go ahead, sir.

Thank you very much. With me in Calgary this afternoon are Dave Middleton, who is our Chief Operating Officer, and Todd Takeyasu, our Chief Financial Officer, and I may in the question period at the end I may refer a question or two to them. As well around the table, we've got a number of our senior officers.

On behalf of our staff and management, as well as the directors of the trust, I would like to welcome everyone who is listening to our teleconference and tuned into our webcast. There is a replay available. The numbers are on our press release of this morning and yesterday afternoon, and as well the replay is available on our website.

During the quarter we have had ample opportunity -- I have met with many of our unitholders both personally and via telephone and via e-mail, and we would encourage any unitholder with questions that you have concerning Penn West Energy Trust to please contact us. Their Internet address is www.PennWest.com, and as has been the case, with this address don't be afraid to pick up the telephone or send a letter, and we will do our best to answer it, to try to answer it properly.

We do 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 our conference call is to review the first-quarter results for 2007 and also to provide a little bit of an update on recent activities at Penn West Energy Trust. Additionally I intend to spend a few minutes discussing the Energy Trust landscape in general and Penn West Energy Trust in particular on a go-forward basis, maybe try and clear the fog a little bit for some of our investors as to what we see in the future for Energy Trust.

Following the review and following the text, we will open the line for your questions, and we would be pleased to attempt to answer them.

During the call we use Canadian dollars at a 6 to 1 ratio for conversion to barrels of oil equivalent except where we state in US dollars. Results for our first quarter represent our seventh full quarter as a recording entity as Penn West Energy Trust. For comparative purposes we're looking back to the first quarter of 2006, although where noted we may highlight more recent trends.

During the first quarter of 2007, our daily production averaged just over 28,447 barrels of oil equivalent per day. That is a 33% increase over the first quarter of 2006. Average production consisted of 49,106 barrels per day of light oil and natural gas liquids, 22,610 barrels of conventional heavy oil per day and 340 million cubic feet of natural gas per day.

During the quarter we experienced some minor operational outages and service interruptions that had a negative impact to our production forecast of approximately 1%. In the first quarter, average daily production was weighted about 56% to liquids and about 44% to natural gas.

Gross revenues for the quarter were C$582.4 million. That is an increase of 34% over the first quarter of 2006. Cash flow from operations for the first quarter of 2007 was C$311.3 million. That is up 28% over the first quarter of 2006.

During the quarter we distributed some C$242 million to our unit holders. That's an increase of 54% over the [C$156.7.9] million that we distributed in the first quarter of 2006. First quarter of 2007 natural gas prices averaged C$759 per Mcf. That is down 7% from the first quarter of 2006. Price realization for light oil and natural gas liquids was C$59.49 per barrel. That is a 4% decrease from the first quarter of 2006.

The very bright spot for the quarter in prices was conventional heavy oil, and we have a price realization on conventional heavy oil of C$41.03 per barrel, and that is up 33% over the previous quarter.

Overall commodity prices for the first quarter of 2007 averaged C$50.08 per barrel of oil equivalent. That is a 2% increase from the C$49.23 per barrel realized in the first quarter of 2006. In this C$50.08 there were risk management activities, and that added about C$0.29 per barrel of oil equivalent to our price. Operating comps for the first quarter 2007 averaged C$10.70 per barrel of oil equivalent. That represents an 8% increase over operating cost in the first quarter of 2006.

I will talk about trends here. Since the third quarter of 2006, we have worked against the cost pressures associated with the very robust industry activity in Western Canada, and we have achieved a general flattening of cost increases and we intend to keep that up over the rest of the year and going forward.

Over 68% of our liquids production consists of light oil and natural gas liquids that command a premium price. During the quarter heavy oil differentials narrowed as we saw US refineries increasingly turn to heavy crude as a secure source of crude oil in North America, and that is because of supply situations, that crude oil is becoming the -- heavy crude is becoming a unit of choice for the refineries, as well as some of the geopolitical events in Venezuela and some of the things that are going on with regard to the Mexican heavy oil supply. So it looks like decent times for Canadian heavy oil after having endured many years of some fairly high differentials.

Our rating towards premium price light oil and our ability to secure better prices for heavy oil leave us very well positioned to continue to achieve excellent operating margins. Our netbacks for the first quarter of 2007 were C$29.81 per barrel of oil equivalent.

Net income for the first quarter 2007 totaled C$96.3 million. That is a decrease of 33% over the first quarter of 2006. Our net income was negatively impacted by higher depletion charges, a reduction of unrealized gains on commodity prices and by slightly higher financing costs.

Capital expenditures for the first quarter of 2007 were $215.9 million, and that represents approximately 69% on our cash flow for the period. I will note that that is not a -- don't take that number and multiply it by 4, because our capital budget forecast does call for a bulge in first-quarter spending to take advantage of cold weather and to access many of our Northern project areas and most notably the Seal area.

First-quarter capital expenditures excluding the drilling of 61 net wells. That includes some 37 oil wells and 21 gas wells, and it also included a small C$17 million on property acquisition. We did drill a number of strap tests as well in the Seal area, and those were not included in the well numbers.

Our capital program for the first quarter of 2007 was funded by internally generated cash flow and a modest increase in our bank loan. On March 31, 2007 bank debt totaled $1.4 billion, and that compares with C$726 million on March 31, 2006.

On a trailing quarter annualized basis, our debt to cash flow ratio at the end of the first quarter of 2007 was approximately 1.1 to 1. In the first quarter 2007, Penn West entered into an additional bank facility with the Bank of Montreal on a bridge, and it is a bridge of C$250 million, which basically comes in pricing at our grid, and the bridge is for a period of one year. And that increases our bank lines to $2.15 billion. We then had some initial discussions with the bank last week, and we are probably going to have a peak at looking at where our lines are and where we think they need to be over the next little while. So we will be working to that end a little bit through the summer.

In early April Penn West went to the US long-term debt market to prices proposed the offering of notes to be issued on a private placement basis. Original intent was to secure approximately $300 million in notes. Due to the demand that we saw in the United States, we priced an aggregate principal amount of $475 million. The private placement is scheduled to close in late May. The intended use of the proceeds will be to repay a portion of the outstanding bank debt and replace the (inaudible) bank debt with some longer-term notes.

In the first quarter 2007, monthly cash distributions of totaled C$242.1 million, and that is a distribution of C$0.34 Canadian per unit per month that were made paid to unit holders of record in each of January, February and March 2007. This equates to approximately 78% of cash flow for the period. The current distribution rate of C$0.34 per unit per month has been in effect for 15 consecutive months as regularly reviewed by our management team and board. These reviews evaluate the distribution rate by assessing its asset performance, capital requirements and commodity prices. And at this time, we don't foresee any near-term change in the distribution that we are paying.

We have an active hedging program to increase the assurance of future cash flow to fund distribution and capital expenditures while providing effective downsize production. A little more information on our hedging program can be found on our website.

Subsequent to the end of the quarter, Penn West closed the previously announced acquisition of C$329 million for an asset package in the area of our Peace River Oil Sands project. The total acquisition was about 4600 barrels a day. Included in that were 3000 barrels per day of light oil and 10 million cubic feet per day of natural gas that is within Peace River Oil Sands project area, as well as a very extensive infrastructure platform. None of those volumes -- obviously we took none of the volumes in the first quarter, and we will be working on that package through the summer and just see if we can maybe dust it up or polish it up a little bit during the summer.

Our outlook for 2007 continues to be very positive. Commodity prices are strong, which are driving good margins for all commodities. The narrowing of the heavy oil differential better positions the future potential, particularly Western Canadian Basin for exploration and development.

We are forecasting a 2007 average daily production to fall within the range of 131 to 135,000 barrels of oil equivalent per day. Using this production forecast, an average WTI price of $59 per barrel. AECO natural gas price is 725 per Mcf and an exchange rate of C$0.86. We're anticipating cash flow to fall in a range between C$1.3 billion and C$1.5 billion for 2007.

The announcement on October 31, 2006 by the Canadian government changes the tax treatment or proposes a change in the tax treatment of income trust effective in 2011. This is -- I will say greatly impacted the market. It certainly impacted our unit holders, and it impacted their pocketbooks and what they held on November 1 as compared to October 31. And we will continue and do continue to stand up for unit holders in the face of what we believe is an unprecedented assault on equity in North America.

But we will note one thing. We will note that the announcement has not impacted the core assets of Penn West Energy Trust. So the assets are still there. We believe they are tremendous assets, and we believe that we can work to try and grind the way back up and get some money back into your pockets again.

Going forward, we believe there are several options open to Penn West Energy Trust. I should take this opportunity to share with our unit holders that it is our intention to maintain our current income trust structure at the very least until 2011 and probably longer. And maybe we won't have to worry about structure at all if all our politicians come to their senses a little bit.

But we're looking at a few options. The first option would be to basically maintain a trust or maintain a trust-like structure after 2011. It is not our intention to discuss any aspects of this option. We're working diligently with the tax counsel to try and determine exactly where we will be in terms of our tax pools by the end of 2010 and where that positions us as well as some other structured alternatives that may present themselves and be available to us at that time. So that is the first option.

The section option is to convert the trust after 2011 to a dividend paying corporation. In order to effect this option, we believe we will have to provide our current unit holders with a yield that is comparable to or higher than that which will be available from conventional financial instruments. And that may be a -- that may prove to be a fairly daunting challenge, so that is the second option.

The third option would be to convert the trust after some period of time to a conventional corporation that would use all or most of its cash flow to grow reserves in production. The decision on any decision on structure, and I will go back and stat very clearly that we have no intention of modifying the structure of this company, certainly prior to 2011 and we believe that we can extend the structure a bit longer than 2011. However, a decision may be made at sometime when we consider an evaluation of the growth potential of Penn West conventional and unconventional assets, the assessment of markets, assessment of tax regime. As you are very well aware, tax regimes can sometimes change overnight, and the impact on our unit holders and operating company of any proposed change. As with anything that we do in this Corporation, we would obviously need the approval of our unit holders going forward.

So in the meantime I will go back to the first option, and that is what we are following, and that is to maintain this trust-like structure well through 2010, and we believe we can take it further than that.

In the meantime, we've got a lot of work ahead of us. We continue to integrate the assets of Petrofund. We're working to provide stable distribution to our unit holders. We are trying to determine the ultimate potential of our unconventional assets, and we are continuing to strengthen our Company.

Thank you for your time. If you have got any questions, I would be pleased to try and answer them.

(OPERATOR INSTRUCTIONS). Greg Shaw, RBC Capital Markets.

I just had two quick questions actually. The first one would be, if you could provide an indication of what production volumes you have behind pipe?

And the second question would be just some clarification on your G&A costs through Q1. They seem to be running a little higher than they were the second half of 2006.

Yes. The first one is a relatively easy question. About 2500 barrels a day is what we have behind pipe, and that is a little bit of gas, mostly heavy oil and some light oil. The G&A is up, and we try to control costs as much as we can. But I think the fact of the matter is that the salaries are going up, so we saw some pressure from salaries quarter-over-quarter.

We also had some costs associated with the acquisition and integration of Petrofund. So we had some changes in what we are paying on average to lease our office space. So those would be the -- and then there were some minor corporate costs, but primarily salary. Salary would be 90% plus of the increase.

Kurt Wulff, McDep.

Remember in the last few weeks, there was a deal where Statoil of Norway is buying oilsands reserves for C$2 billion. Is there anything we can draw from that transaction about the implication for your properties?

I think, and I don't want to get too speculative, but I think the implication I draw is probably where you have gotten to, too. Statoil was one of the companies that was impacted with the pull-out in the Orinoco Basin. So I think you have just got large multinational oil companies that are continuing to look for a secure place to do business where they don't have to worry about changes in regimes and some of the geopolitical things that companies worry about.

And so you are seeing that -- we are seeing multinationals that are very attracted to our base and they are particularly attracted to our oilsands. And I would still strongly believe that as an oil and gas entity in Western Canada, you are a heck of a lot better off to have an oilsands property in your quiver instead of having one outside.

So that would be the main advantage. I think it is difficult to draw a straight line and say they have got C$2 billion for this. Therefore, our property is worry that much. I do note and you do note that the Statoil property that was purchased was basically a raw property, an undeveloped property. (multiple speakers). We believe there is tremendous value in this basin and a lot of it on the heavy oil or the oilsands side.

No doubt it is a high degree of confidence in oilsands, and it is goes along with your comment about the differential, why you think US refiners are more interested in Canadian oil as well.

Yes, we are seeing that, and we are seeing it is fundamentally driven by the supply-side. There's an increased demand for heavy crude. They want to keep the refineries full.

(OPERATOR INSTRUCTIONS). Roger Serin, TD Newcrest.

One simple question. Through 2006 your average gas price at the wellhead before hedging was at a modest premium, so your gas was a little hotter than AECO priced gas. And in Q1 a little bit of a discount. I cannot believe there's been a bit of a shift. Was there just something on the gas price in the Q1 that was different than sort of looking backwards a year?

Kristian Tange here. It is just really a function of our waiting on monthly versus daily. (multiple speakers)

And is it going to change going forward, or have you got a little bit more monthly versus daily gas?

It will fluctuate quarter to quarter depending on the weighting that we put on daily versus monthly. We make the call every month before we fill the gas.

Joe Arsenio, Arsenio Capital Markets.

In talking to other trusts, I've noticed that or I have heard that they are waiting upon the budget to the Canadian budget to actually pass before making any decisions relative to structure and in particular making decisions on leveraged buyouts and that kind of thing.

Are you in that same position? In other words, expectedly awaiting this budget to pass to make your decisions, or do you have a different kind of timeframe? Because in listening to you, I am a little confused as to whether you want to carry this structure out through 2010 or whatever the maximum date would be.

I think we have been clear on that. We want to carry the structure out. I do believe that there is an option. This morning there was a Congress going on in Calgary, and one of the fellows on the panel, which was Gordon Tait with BMO Nesbitt Burns, and he drew up some calculations just in general about the trust. If you take the average of where the trust -- the average of the tax tools that are available to the Canadian trust, he believes it is probably on a stuck period of two or three years after the D-Day of 2011 where there would be a carryover so that there really would be minimal impact. You would be looking at trusts that would be paying probably single digit tax on a percentage basis.

So we are a little bit over-weighted on tools I will say compared to the average. When we look at that, we look at where we would be towards that 2011 date. It probably makes a lot of sense for us. Obviously it makes sense to maintain the coupon because we've got tremendous interest from unitholders for yield. It sense to keep the coupon with the stock until 2011, and increasingly it looks like it makes a lot of sense to keep it after that, because the demand is still there.

Mr. Andrew, we have no further questions at this time. Please continue.

Thank you very much. I am sure that there are some questions. If you have any, feel free to give me a call in Calgary, 777-2502, area code 403. If you cannot get hold of me, the other two I could suggest are David Middleton. He is at the same area code, 777-3301. Todd Takeyasu is at 777-2572.

Thank you very much. We appreciate your listening.

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