Obsidian Energy Ltd (OBE) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Penn West Energy Trust second quarter results conference call. At this time all participants are in listen-only mode. Following the presentation we'll 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 Thursday, August 2, 2007 at 11:00 a.m. Eastern -- 11:30 a.m. Eastern time. I will now turn the conference over to Mr. William Andrew, President and Chief Executive Officer. Please go ahead, sir.

Thank you very much and I thank everyone who is listening today. With me in Calgary this morning are Dave Middleton, who is our Chief Operating Officer; Todd Takeyasu, our Chief Financial Officer, and other members of the management team.

On behalf of all the employees on the team at Penn West as well as the directors, I'd like to welcome everyone who is listening to our teleconference and tuned into our web cast. If you have or any other interested parties have any questions or concerns regarding Penn West Energy Trust, there is going to be a question period after I finish; but we're also available on the Internet at www.PennWest.com and please feel free to call us toll free at 1-888-770-2633 and we'll try and help you out.

We trade on the New York Stock Exchange under the symbol PWE; also on the Toronto Stock Exchange under the symbol PWT.UN.

The purpose of this conference call is to review the second quarter results for 2007, and we'll also try and provide a bit of an update on our recent activities at Penn West Energy Trust. During the call we'll use Canadian dollars and a 6 to 1 ratio for conversion to barrels of oil equivalent.

Results for the second quarter 2007 represent Penn West Energy Trust's eighth full quarter as a reporting entity, and for comparative purchases we'll be using the second quarter 2006 as a benchmark.

Before starting with the results, I'm pleased to advise our unitholders that Shirley McClellan, the former Deputy Premier of Alberta, has joined our Board of Directors; and Shirley will provide us with her valuable opinion, her insight, and as well a good direction and guidance for the Board itself.

Also on a sad note in the second quarter, one of our employees in Calgary, Cheryl James, passed away so we would like to express our condolences to Cheryl's family.

In the second quarter of 2007, our daily production averaged 126,600 barrels of oil equivalent per day; that compares with 93,242 barrels per day in the same period in 2006. Previously announced the press release that we fed out on the fire and production outage and curtailment at our Wildboy gas facility reduced reported second quarter gas production by approximately 20 million cubic feet per day or 3,300 barrels of oil equivalent. We have to date restored approximately 50% of the pre-fire production level at Wildboy; however, we will not restore full production until sometime in October 2007 and that's a little bit later than what we had originally anticipated. However, the -- our property insurance will cover the majority of the capital costs to replace that is equivalent and our business interruption insurance that will make up a significant portion of the revenue that would be allocated to the reduced production. So in terms of cash flow, there will not be much of an impact. There will be an impact though as the result of the production levels staying down.

Average daily production for the second quarter consisted of 49,635 barrels per day of light oil and NGL's, 21,288 barrels per day of conventional heavy oil and 334.1 million cubic feet a day of natural gas.

I'll also take you through the --- go through the numbers in the second quarter. Our average daily production was weighted 56% to oil and liquids and 44% to natural gas. Those of you that follow the Company for any length of time know that we moved slightly towards the oil weighting on our production, and all of you will know that we are weighted on liquids very much towards light oil.

Second quarter natural gas prices averaged [C$7.55] for MCF; that's up 23% from the second quarter of 2006. Light oil and natural gas liquid price averaged C$65.24 per barrel. That's a 9% decrease from the second quarter of 2006. Conventional heavy oil prices were C$42.45; that's down 20% from the second quarter of 2006.

Overall, commodity prices for the second quarter averaged C$52.63 per barrel of oil equivalent. That's a 3% increase from the second quarter of 2006. We had a very minor impact from risk management activities. That added C$0.03 per barrel equivalent for a total realization of C$52.63.

A stable low back production combined with strong demand resulted in continued strong prices for crude oil, natural gas. Because of the warm winter and the fairly soft demands prices were down somewhat in gas, maybe not as much as some expected.

Operating costs in the second quarter of 2007 averaged C$10.94 per barrel of oil equivalent and that's a 7% increase when compared to the second quarter of 2006. Approximately 60% of the increase was related to the impact of the reduced gas production at Wildboy, and I think it's important to note that the second quarter historically in western Canada with operating costs are always a little bit higher than the average for the year because of some of the one time charges we take related to regulatory payments and tax, county tax, and local tax in the province.

So in spite of the inflationary pressures seen in the industry, we feel we've been able to keep operating costs relatively flat. Our net tax for the second quarter of 2007 were C$31.38 per barrel of oil equivalent, mainly due to the pricing and that was down 5% from the second quarter of 2006.

Gross revenues for the quarter were C$608.3 million; that's a 34% increase over the second quarter of 2006. Cash flow C$326.2 million in the second quarter, an increase of 23% over the second quarter of 2006. Cash flow per unit was C$1.35 diluted in the second quarter of 2007. That's a 13% decrease from the second quarter of 2006. At the end of the second quarter of 2007, in accordance with Canadian generally accepted accounting principle, Penn West booked future tax expense related to the enactment of legislation regarding the specialized investment flow through tax measure, which will be introduced in 2011 and which will impose a corporate tax rate of 31.5% on Canadian income trusts or SIFT'S as they're being called. Included on this one time and I will underline that one time, future tax charge of C$325.5 million in the quarter resulted in our first ever quarterly loss in earnings.

Net loss in the second quarter of 2007 was up C$185 million. That compares with a net income of C$221 million in the second quarter of 2006. If you exclude the one time tax, net income for the second quarter would have been C$140 million positive. The SIFT tax enactment and the related charge against income did not affect cash flow, did not affect distributions in the quarter. Based on our current forecast, little or no SIFT or corporate income tax will be paid until approximately 2014, so we've made an allowance for it on the books, but in terms of actually writing a check we believe it will be sometime around 2014.

We're continuing obviously with our efforts to obtain a reevaluation of the SIFT tax and we'll be working on that in the future and that's the only comment that I will make on that area today.

There were approximately 239.2 million units outstanding as of June 30, 2007 and that compares with 168.7 million units outstanding this time last year. Increase in units reflects our merger with Petro Fund Energy Trust and also to a small part an issuance of units from treasury as part of the distribution reinvestment plan.

Capital expenditures for the second quarter of 2007 were C$483.6 million. Of that the bulk of that was C$351 million on property acquisitions. This compares with a C$105.8 million spent in the second quarter of 2006 so quarter-over-quarter in terms of our operational activities we were up slightly, but we did have the bulge in spending because of the property acquisition.

The major property acquisition was in our Peace River project area and that acquisition closed in mid-April. On May 31, 2007 we entered into an agreement with C1 Energy Limited to make an offer to its shareholders to acquire all the issued and outstanding shares of C1 Energy and that was for an estimated total cash purchase price of C$23 million. The acquisition was a strategic one. Our (inaudible) was that certain of the assets of C1 are located in our Peace River Arch core area in close proximity to our Peace River Oil Sands project. The acquisition is expected to close in August 2007.

Our prime well program and many of you have heard us talk about it, many of you have been wondering when we were going to start to see some results and I'm pleased to report on some of the results today. Since 2005 some 378 wells have been drilled on Penn West Lands. A number of these wells are still in the stages of being tied in for production. A number of the other wells were exploratory wells that have resulted in discoveries.

In the second quarter of 2007, which is traditionally a very soft quarter for drilling in western Canada, 16 wells were drilled on our prime well lands. During the quarter we really began to realize the initial impact of our prime well program post conversion to an income trust. Realized net volume to Penn West Energy Trust in 2007 were approximately 800 barrels of oil equivalent per day. That's an increase of almost 600 barrels of oil equivalent per day since the beginning of the year. We expect that these volumes of associated revenue will continue to grow as farm and partners move from the exploration phase of projects into development, and I will remind investors that the 800 barrels a day that we are realizing from the farm ends in most cases comes without paying any operating costs and with a little bit lower royalty than you would pay if you were the operator of the property.

During the second quarter of 2007 on our own lands as operator, we drilled 13 net wells. Of these wells 8 were natural gas wells, 3 were oil wells, and we had one stratigraphic test well and the other one didn't work out.

Our capital program and distributions for the second quarter of 2007 were primarily fueled by internally generated cash flow, and the net property acquisitions were financed using our credit facility.

On June 30, 2007 bank debt totaled C$1.823 billion. On April 18 of 2007, Penn West Energy Trust entered into a digital bank credit facility, a bridge facility of C$250 million with our -- one of our syndicate bankers.

On May 31, 2007 Penn West pulled an offering of notes issued on a private placement basis in the United States with an aggregate principal amount of U.S. $475 million. The company used -- we used the proceeds from the notes to repay a portion of our outstanding bank debt under the credit facility. The -- a little bit of both the notes since this is the really the first time we've had the opportunity to talk about them. They've got maturity that ranges from 8 to 15 years, and they bear interest at rates between 5.68% and 6.05% so they -- what they do more than anything is they give us certainly some stability in interest rates over the next 8 to 15 years and we're very happy that we were able to close that deal with interested parties in the U.S.

We remain very comfortable with the strength of our balance sheet as we exited the second quarter of 2007 with a bank EBITDA, a ratio of about 1.25 to 1. In the second quarter, 2007 monthly cash distributions totaled C$243.1 million and has been a consistent number that investors have looked at for over a year now. That's C$0.34 Canadian per trust unit, per month for each of the months of April, May, and June. Based on current forward strip prices, we're forecasting our payout ratio to be approximately 70% with no change in current distribution levels.

Current distribution rate of C$0.34, as I mentioned earlier, has been in effect for well over a year and we also regularly review it at our management team and with the Board. We had one of those reviews on Monday at our regularly scheduled Board meeting, and we have -- I am pleased to announce today and to confirm that the distribution of C$0.34 per unit per month will continue through the next quarter and we will look at it that time. Our most recent review indicates that we're in a good range to continue to pay about C$0.34.

We have an active hedging program to increase with the assurance of sufficient future cash flow to fund distribution and capital program expenditures while providing some downside protection. More information on our hedging can be found on our website. I guess the simplest thing to say right now is that on our oil hedges, in spite of the move upward on crude prices, we're within our callers so basically there is no impact on the oil site; and we are slightly positive on the gas callers that we did. Recognizing that we have production as well that's unhedged, you never really want to be a tremendous winner on the hedge game. So we're basically, as stated in the last quarter, we're effectively neutral with our hedges right now.

Our outlook for 2007 remains very positive. Oil prices have continued to stay strong. Natural gas prices well -- relatively soft are still over C$6 per NCF. We do have a very strong Canadian dollar, which is acting a little bit against us right now. It's reached a three decade high against the U.S. dollar.

We're currently forecasting expenditures of C$850 million to C$950 million in 2007. That includes the property acquisition that we did. Due to the impact of the Wildboy outage, we now expect the production for 2007 will average between 129,000 and 132,000 barrels of oil equivalent per day. That's down a little bit from what we talked about at our annual general meeting and basically as a result of the final scheduling coming in for Wildboy as to when we'll be able to get that plant fully on the stream.

Cash flow in 2007 is forecasted to be between C$1.3 billion and C$1.4 billion based on our production forecast, average WGI price of $69 U.S. per barrel, average ACGO price for natural gas is [660] per NCF Canadian and an exchange rate for the year of C$0.92; and I will caution you that that's for the year. That's not ongoing, so that includes the early part of the year as well as what we're seeing right now. So basically our cash flow forecast is intact from where we were at the first of the year and that's primarily because of the impact of the Wildboy outage will be lessened through insurance recovery.

The second half of 2007 in addition to ongoing geological and engineering studies and pilot tests, Penn West plans to drill an additional 19 horizontal wells, 14 stratigraphic test wells in our Peace River Oil Sands project; and most of those wells will come a little bit later in the third quarter and into the fourth quarter as we start to have the ability to access that property as the roads freeze up and as we start to enter our winter drilling season.

We do expect that to complete the tie-in of most of our existing producing wells to recently constructed production facilities and pipeline by August 2007. We're behind on that project by about 3 months, but we should have it done sometime this month.

The tie-ins are very important to us. They enable us to really do 3 things. The first one is to conserve gas at our Seal Main property. We're looking at volumes of approximately a million cubic feet per day there. We'll be able to sell that rather than what we're doing right now, which is flaring the gas. That's good from a cash point of view, also good from an environmental point of view. The second thing that we will be able to do is that we will be able to increase -- try and ramp up the production a little bit on the wells that will be connected. We're holding back a little bit on some of them right now because of the gas that's being flared. Also it's important to note that with connection to pipeline and not only to our production facility but also connection for the sales pipeline, that will greatly reduce the trucking costs that we've seen on that property over the last year.

Previously announced the acquisition of producing light oil and natural gas properties, undeveloped lands, additional infrastructure, and all-weather roads in the project area are very important as well. The ability now to start to utilize the very large oil production facility, start to do some modifications there is important; and we'll be working on that through the winter and next year. The other key components -- the key two components in the Seal area, number one, the road system that will help us greatly with access and secondly is the natural gas plant in the area, which will allow us to bring associating gas volumes on; and we'll eliminate the need and we don't have a want to do it, but there sometimes a need to flare gas and we really don't like to flare gas if we can avoid it and we will be avoiding it.

In the second quarter we continue to evaluate an integrated approach in testing our light oil recovery rates from large light oil pools using miscible flood techniques, utilizing CO2 that will be captured from heavy industry gasification processes. What we're working at there obviously is trying to get more oil out of the ground, and then the win-win side for it is the fact that we'll be able to utilize (inaudible) gasses that are currently being admitted to atmosphere.

We're working diligently with industry and with potential partners on this. There is no doubt that with costs in Alberta that there is concern at the costs of conserving CO2, but the spread is -- there is a spread right now between what we can afford to take and make a project work in CO2 and what the emitters feel that they can afford to spend to capture the CO2. And we're working with the emitters, and I do know that the emitters are working diligently with all levels of government to try and come up with a solution. I'm very confident that a solution will be forthcoming in the very near future.

In the interim, our CO2 pilot project at Pembina is going along very well. We've got two wells that are now flowing oil. They are flowing oil with very reasonable rates in excess of 20 barrels per day per well, and this is without any artificial lift whatsoever; and these are wells that had been shut in since the mid-60's. The last time that they had produced conventionally was with a pump jack at quite low rates, generally 3 to 5 barrels per day with a lot of water. So basically now we're flowing oil. We're flowing effectively clean oil, although there is certainly some water associated with the wag as those slugs come through.

We're very busy lining the wells out, and we believe that production will start to stabilize. We believe that production will probably increase more as we continue with the process of CO2 and water injection. And as I said, we're very excited about the second phase, which is where we're going to drill more horizontal wells in the third quarter into a second pilot area, and we expect that those wells will be on-stream in the first quarter of 2008. We're able on that project to take advantage of some of the facilities that we had put in for our original and our ongoing vertical pilot in the area. We're certainly not slowing down with our effort to that end. And we've had numerous discussions as well with potential companies that could help on the emitters' side with coal gasification processes and some of the chemical processes that are necessary. Basically the work that I feel needs to be done in Alberta is certainly a CO2 pipeline hub. As well we have to figure out what to do with some of the byproducts from coal gasification, which is hydrogen; but it all makes a heck of a lot of environmental sense. So I believe we'll be going forward very, very rapidly with that.

Our core well on Swan Hills CBF pilot project is continuing through the desorbtion phase. Pleased to report that current production levels are approximately 300 MCF per day and increasing as we dewater the wells. This project for those that have been following the project -- I'll give you an update for those of you that maybe aren't aware of it. It's a pilot that we started to assess our commercial viability of about 25,000 acres of land that we have directly over the top and offsetting our South Swan Hills oil producing area, and we're quite pleased with the results today given the limited time that we've been dewatering. So it looks like everything is working. We're planning through the winter and through next year to look at other areas within Swan Hills for pilots and looking at when the time will be right to move to a commercial project. Commercial project for the area would entail somewhere between 12 and 18 horizontal wells per section or per square mile of land and we've got roughly 40 square miles of land and rights that we have on the CVM. So this is another area that we have been working on in the company.

To give you a little bit of an exploration update as to where we are. We're continuing to work on our land base. Our land base is still well over 3 million acres. We're back looking at natural gas. We're of the opinion that natural gas prices are probably in more likelihood to strengthen than they have to weaken from where they are right now. For that reason we're going to be looking at bolstering our program of gas exploration and we have a lot of gas prone land in the company. We're continuing with our exploration efforts in our Plains area. We're continuing with our exploration in the Central area. We're looking at ideas related to unconventional gas, shale gas, as we talked about some CVM work we've been doing. So we're not -- we're certainly far from a state of sleep in the Company. We're very, very active and aggressive and through the leadership of Ann Thompson on the exploration group.

June 12, 2007 the legislation implementing the new tax on publicly traded trusts and limited partnerships. I referred to this as the specified investment flow through energies or SIFT's received third reading in the House of Commons and on June 22, 2007 the bill received the Royal assent. As such, barring a change in government or barring something dramatic, this legislation will be enacted or basically this tax will be enacted in 2011. We're continuing to review the impact of the tax on our business strategy. We expect that there's going to be future technical interpretations in detail from government. The file that we've gotten from government on the tax has been fairly thin. We do have certainly our marching orders with regards to our ability to go the Company, and we're allowed to take the Company to twice the size that we were basically on Halloween of 2006, before 2011; however, we're just looking for a few of the details.

We do believe at present that several actions could result due to the enactment of the SIFT tax. We're reviewing all organizational structures and alternatives, which would minimize the impact of tax on our unitholders and that's basically just good corporate governance. We are certainly not tax avoiders, but we do want to make sure that we're running an efficient company.

In the meantime there is a lot of work ahead of us as we work to provide stable distributions to our unitholders, and I do know that there is still a tremendous activity on the part of the unitholders with regard to this tax and the impact that it has had on particularly on the individual Canadian investors, and we are as well continuing our efforts through the Coalition of Canadian Energy Trust to try and work with government on the impact of the tax.

On behalf of the Board of Directors, I'd like to thank as well Jeff Errico for his counsel as Director of Penn West since the merger of Petro Fund. Many of you that were original Petro Fund shareholders will know that Jeff was the Chief Executive Officer and President of Petro Fund and, unfortunately, Jeff advised us in the quarter that he would not be standing for reelection and that was entirely for personal reasons that I won't get into; but we're saddened, I guess a little bit that Jeff has left as the Director, but certainly we wish him all the best in his future endeavors.

Thank you for your time. If you've got any questions, I'll be pleased to try and answer them now and so, operator, I'll turn it over to you for questions.

Thank you. Ladies and gentlemen, we will now conduct a question and answer session. (OPERATOR INSTRUCTIONS). First question comes from Ted Levy of Excel. Please go ahead.

Yes, good morning, gentlemen. Thanks for the report. I have just a quick question. Nowhere in your presentation did I hear or maybe I missed it, the 6.8 billion barrels of oil reserves potential out of your Peace River area? Did I miss that? Did you give an update on that or -- I didn't hear any emphasis on that? I may have missed it.

It's not through an effort to down play it and there has been no change. We have talked and continue to talk about the resource potential in the Peace River area. When we talk about resource potential, that's our estimate of oil in place under our land in Peace River. We believe that the number is in the area of 6.8 billion barrels. We're well on the way to have that number independently verified through efforts of third party engineers. We've engaged both Stroll Engineering, who has extensive experience in evaluating properties in the area for Blackhawk and others, to look at it; as well we're looking at the numbers that GLJ Associates have booked on our producing areas.

We expect to have a final number within about a month and a half and basically from what we're seeing so far it looks like the number that they come up with should confirm what we've estimated to date.

Understand and relative to that property, I mean, it requires a massive amount of money. Are you considering partnering with anybody to develop this because it's probably, I'm just guessing, it would be difficult on your own or any thoughts along those lines at this point?

Ultimately, as we get to the -- to what the final -- the area will finally look like and then I think it's important to remember that in order to access all of these barrels and in order to properly put in a development plan that would allow us to maximize the amount of oil we can get from the area up there is going to take a number of years. The work that we're doing right now, the work that we're doing probably for the next 3 to 4 years, I believe that we can handle that easily utilizing our cash flow and maybe a little bit of debt.

As we get further along with much more intensive development and the larger need of capital, that would really play into the timeframe after 2011 and at that time you've got many options. One is an option that a lot of companies utilize in the conventional oil sands business and that's basically to utilize credit and to increase your bank lines. At that point, you're dealing with a much more proven asset, and you've got a much greater ability to set your targets and your schedules and much greater ability to finance it through the bank. There would be ability as well, I believe, to raise some capital with an equity issue. Today is probably not the best day to do something like that and we're not talking about doing it in the short term, but as we get to 2011 and 2012 that may make a lot of sense as well.

So those are probably two of the ideas that we would look at where we would remain under a trust structure, a trust-like structure and have the ability to continue to finance the project. And I look at the one trust in Canada that is really associated with the oil sands, Canadian Oil Sands Trust, and they've been able to take on very large projects in conjunction with Syncrude and have the ability to access the capital to do it and still continue as a very vibrant trust. So that would be the initial thing we look at.

Understand. Thank you for the answer and good luck in the future. Thank you.

Your next question comes from Rob Brawdy of Profit Investor. Please go ahead.

Yes, thanks for taking the call. Just have a question, how does the change in 2011 affect the U.S. investor and also how will it affect the price of your shares?

I think you've probably seen the effect on the price of the shares. I do believe that the impact of the trust has always been accounted for in the price of many of the energy trusts and when I look at the price of many of the energy trusts compared with conventional oil and gas companies, particularly in North America, I see a pretty large disconnect right now and I guess on a personal opinion and whatever that's worth, I feel that there is probably a bit of nervousness on behalf of some of the investors and that's what's keeping the stock prices down.

So I do believe not only have they accounted for future tax but they probably, in individual situations, they've probably over accounted. The legislation is in place. The legislation will not be enacted until 2011. We're continuing with our distribution. We continue to have a very strong Company. After the tax is enacted in 2011, we've stated publicly and I will state again that we have the opportunity to continue as an income trust, continue to pay distributions to the unitholders.

As far as U.S. holders are concerned, the impact would be as it is on Canadian investors is that individual companies, now that there is tax payable at a corporate level as well as by individual investors as individual companies that they've got the ability through pools that have been tallied up and generated over the past number of years, will have an ability to delay the payment of the tax or to offset tax payable against tax credits. That occurred primarily from exploration activity and losses that have happened on some of the activities that have been done in the company over the years.

Companies that haven't got quite the depth of pools as others would be in a taxable situation sooner. Obviously, that would impact the amount of cash flow in the company after tax and would impact quite possibly their ability to maintain distribution levels. So that's the impact on individual investors.

Okay, thank you.

Thanks.

Next question comes from Harry Labend of Income Research (inaudible). Please go ahead.

Yes, good morning. I just was wondering, you made some sort of an interesting reference to natural gas and potential for recovery or at least an uptrend in price. I sort of sensed that the post-Katrina bump and then the slide we've tended to have a natural gas crisis. I just wondered if you could have any sort of actual background there, supply and demand fundamentals sort of particularly on the supply side changing and maybe in the U.S., but what's holding the price down? I guess if you might comment on that.

I think fundamentally it's demand that's holding the price down. The weather is -- like I say we've had a fairly mild winter season. We saw storage levels increase over the winter. We've had a less than stellar start to the summer, although the heat wave is starting to hit the Midwest and down through the Eastern seaboard in August, generally weather that we would expect to occur a little earlier in July.

If you look at the Canadian landscape versus the U.S. landscape, it's very interesting to note that there was very active drilling in the U.S. last winter for gas. There was virtually no drilling in Canada, and I believe that had everything to do with the cost of services in Canada because the level of activity went down. A lot of the drilling rigs, a lot of the service rigs and services directly associated with drilling, completing natural gas wells have come down and I believe that we're not alone in looking at a return to gas drilling next year. Basically, if you go back to last fall, in many cases in Canada we have to plan our activity well before the end of the fourth quarter and the first quarter, which effectively are our winter drilling seasons. So last fall, I think the speculation from a lot of people that was maybe we would see C$4 gas. We didn't. We've seen what would be deemed softer gas prices, but I don't think we went down quite as far as we thought; and I do believe that a lot of the operators were looking at going back. You can make the -- start to make the numbers work again at C$6 or C$7 gases with the service -- couple of services getting a little bit more in line again.

Okay, thank you. And just one question on Peace River on the oil sands. What -- well actually two. What would be your sort of estimate recovery of the 6.8 billion and you indicated that the reserves would be -- you would have some numbers in 30 to 60 days; and if that's the case, if you could answer, would those numbers maybe be included in year end when we come into early '08?

I don't want to -- I certainly don't want to mislead or confuse investors. What we're looking at is the resource number, and the resource number is basically the volume of oil in places enough to -- and we're doing that because generally in the preliminary stages of oil sands development the number that is associated with it is a resource number. So that gives -- I believe it gives investors the ability to compare Penn West versus other companies that are working in oil sands development. So it's basically a reference number. It's an important number for us because it gives us an idea of how much potential there is in the area for oil in place.

The ultimate recovery will depend on many things. It'll depend on our ability to successfully drill the wells and bring them on production. It will depend on our ability in some areas to institute secondary recovery through water flood and will depend on our ability to execute in some areas with thermal projects.

The range of recovery that we've talked about and will continue to talk about on primary, because it is heavy viscous oil, we anticipate that if you just drilled the wells and left everything as is that you would see ultimate recoveries in the area that you drilled somewhere between 3% to 5% on individual well basis.

With water flood or secondary recovery, as it's termed in the industry, we believe we've got an ability to increase that at least two fold. As we move in a number of the areas in the future towards thermal recovery, again you've got an ability to take that number and probably increase it two fold again. So we're looking at -- to give you a rough range we'd be looking at recoveries in about the 5% to 20% range depending on whether it's primary, secondary, or thermal recovery and we're not -- we'll book those reserves as we encounter them with the drill bit and as we bring them on production. So we feel -- we believe there will be tremendous impact over the next 10 years in the Company. There will be some impact this year, but certainly we can't get ahead of ourselves with booking. We need wells producing oil and a lot of wells that are producing oil; and as we get there, then certainly we'll book the reserves.

Okay, thanks very much for the clarification.

Thank you.

Next question comes from Roger Serin of TD Newcrest. Please go ahead.

Morning, Bill. I've got a couple of questions on Seal. It sounds like your spending less capital on the development side and more on your strats test. So I'm wondering if you can (technical difficulty) a little capital spending on a development basis still in 2007?

I've got all these engineers giving me the blank stare right now; but roughly, Roger, most of the horizontals that we talked about would be developmental. We are doing some star patterns, I'll call it for lack of a better word, from some of our vertical stack tests. Really less -- I'll say on development itself and recognizing that we're almost completed with the major tie in from Seal Main. If you look at the rest of it, it'd be less than C$25 million on the development side.

So total spending on fuel other than acquisitions this year would be -- now I'm trying to remember you said maybe a couple of hundred million at one point. Are you down to more like 125?

Yes, we're down to the 110 to 130 range.

Okay.

I think if you wanted to land on the number, 120, 125 would be a good one.

Okay, and as it relates to Pembina, you're drilling some horizontals on the CO2 there. Will any of those be injection wells or are they all intended to be producers?

Pre-injectors, one producer.

Pre-injector is one producer. And the easiest question of all, could you give me a sense of your current production?

Yes, we're currently producing about 128,000 barrels a day.

Thanks very much.

(OPERATOR INSTRUCTIONS). Mr. Andrew, there are no further questions at this time. Please continue.

Thank you all very much. For individual investors that are listening, many of the institutional investors as well, the analysts all know our phone number so I don't need to restate it for them. But for the individual investors primarily, our toll free number is 1-888-770-2633. Please feel free to give us a call if you have any question or any clarifications in the quarter and we'll try our best to help you. There is a replay available on our website, www.PennWest.com. Those of you that will have seen our press release about the conference call will note that there is a replay number as well. So thank you all very much and have a good rest of the summer.

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