Obsidian Energy Ltd (OBE) 2007 Q3 法說會逐字稿

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 Friday, November 9, 2007 at 11 AM Eastern time.

I will now turn the conference over to Mr. William Andrew, President and Chief Executive Officer. Go ahead, sir.

Thank you very much. As you know, my name is Bill Andrew. I'm the President and CEO of Penn West Energy Trust. With me today in Calgary are Dave Middleton, who is her Chief Operating Officer. And also a fellow who is not supposed to be here is Todd Takeyasu, but he is defying his doctor and he's our Chief Financial Officer. He's here. With us as well are some other members of our management team.

Before I begin the formal call, we would like to extend our sincere condolences to the families of [Martin White] and [Alvin Dusterhoff], both who are part of our field operations team and both who recently passed away.

Originally we had planned to report on November 5. Those of you that follow our stock will know that on the 31st of October, we announced a strategic combination with Canetic Resources Trust. Thus we felt it was prudent to delay our third-quarter release and conference call just to align our dates with those of Canetic and I believe Canetic is set to go around 10:00 or 11:00 this morning.

We appreciate the questions and feedback from our unitholders. Please contact us, either myself or the investor relations group, via our Internet address, www.pennwest.com. We have telephone toll-free telephone lines as well and we do always look forward to the occasional letter. We trade on the New York Stock Exchange under the symbol PWE and on Toronto Stock Exchange under the symbol PWT.UN.

First for the conference call is to review our 2007 third-quarter results as well as present an update on some of our activities, current activities at the Trust to provide comments and they will be very brief comments on the combination with Canetic that we announced on October 31.

And then what I want to spend a little bit of time with today is just provide some clarity for the unitholders on two things. One is the Alberta proposal on increasing royalties in Alberta after the panel review. And the second is to provide some very clear direction as to our future plans with the Trust and with the Combined Trust going forward. Following this review, we're going to open the telephone lines up for a few questions.

During this conference call we will be using Canadian dollars on a 6 to 1 ratio for conversion [of two] barrels of oil equivalent. The third quarter of 2007 daily average production was 125,345 barrels of oil equivalent. That is a 3% decrease from the third quarter of 2006. Our average daily production consists of 50,861 barrels per day of light oil and natural gas liquids. That's an increase of 6% over the third quarter of 2006. 21,922 barrels per day of conventional heavy oil. That's an increase of 3% over last year at this time. And 315 million cubic feet per day of natural gas. That's a decrease of 12% over the third quarter of 2006.

Now many of you that have followed the Company over the past six months will know that a significant portion of the year-over-year reduction in daily natural gas volume is due to the impact of our production interruption at the Wildboy. At Wildboy we experienced a fire in our water handling facility and as a result, we were shut in for an extended period from very early in May until the 4th of November when full production was restored at Wildboy.

Currently daily production for Penn West is averaging approximately 131,000 barrels of oil equivalent per day and that includes approximately 73,000 barrels per day of oil and natural gas liquids and 350 million cubic feet per day of natural gas. Our current production is weighted approximately 56% to crude oil and liquids production. Based on year-to-date production including the impact of the Wildboy outage which lasted about six months, and our forecast for the fourth quarter, we're now expecting production to be on the bottom end of our guidance and in the range of 128,000 to 129,000 barrels per day for 2007.

Crude oil and natural gas liquids sales accounted for 70% of our third-quarter revenue of C$627 million. Year-over-year revenue decreased by 1% from C$636 million in the third quarter of 2006. The third quarter of 2007, our natural gas price averaged C$5.86 per Mcf and that is down 2% from the C$5.97 per Mcf realized in the third quarter of 2006.

Light oil and natural gas liquids prices average C$72.62 per barrel in the third quarter. That's up 3% over the price of C$70.25 per barrel realized in the third quarter of 2006. Conventional heavy oil prices average C$48.75 per barrel in the third quarter. That's a decrease of 7% compared to C$52.20 per barrel realized in the third quarter of 2006. So we had a little bit, just a minor touch of widening in the differential but most of it was pretty consistent prices on heavy oil.

Overall commodity prices for the third quarter of 2007 averaged C$52.73 per barrel of oil equivalent. That's a 3% increase over the C$51.33 per barrel of oil equivalent realized in the third quarter of 2006. As a result of all of this cash flow was C$346.8 million in the third quarter of 2007. That's down 5% from the C$365.6 million recorded in the third quarter of 2006. On a per unit basis, our cash flow was C$1.43 in the third quarter. That's down 7% from the C$1.53 recorded last year at this time.

Operating costs for the third quarter of 2007 averaged C$11.18 per barrel of oil equivalent. That's an increase of 5% over operating costs from last year. The bulk of the increase in operating costs came from the impact of reduced natural gas volumes quarter over quarter due in part to the Wildboy outage.

The average royalty paid by Penn West in the third quarter of 2007 was C$9.46 per barrel of oil equivalent. That represents about 17.9% of the quarter's average sales price realization of C$52.73. This compares with an average royalty burden of about 18% for the same time last year.

Net income for the third quarter was C$137.4 million. That's a decrease of 23% from C$177.8 million in the third quarter of 2006. On a per unit basis, net income was C$0.57 per unit as compared with C$0.65 per unit in 2006. Distributions for the third quarter 2007 were C$244.4 million. That's an increase of 13% over the C$216.2 million in distributions paid in the third quarter of 2006.

Capital expenditures for the quarter were C$230 million as compared with C$116.7 million last year at this time. Capital expenditures for the third quarter represented 66% of our cash flow so we got a little bit outside of our model in the quarter. We generally look at targeting about 40% to 45% of our cash flow and capital. The extra money that was put into play in the quarter was spent on infrastructure expansion at Seal and that is a very vital infrastructure to handle future production in our Seal Main area.

We also spent approximately C$40 million to acquire significant shale gas rights in the Northern British Columbia that we should be working on this winter and hopefully is going to bring some exciting gas, new exciting gas prospects to the Company.

Our long-term debt at the end of the third quarter was C$1.825 billion. On a per unit basis, the debt is about C$7.52 and on a ratio basis, it's about 1.3 to 1 of the third quarter per unit cash flow analyzed. Todd tells me on an EBITDA basis, it's also about 1.3 to 1. So we think it is a reasonable level of debt going ahead.

We do have been active hedging program to increase the assurance that future cash flow to fund distributions as well as our capital program expenditures while trying to provide some effective downside protection. Information detailing our hedging program can be found on our website at www.pennwest.com.

On an operations side, and I will focus primarily on Seal, during the quarter we continued our efforts to achieve better results from our development work at our Seal oilsands project. Work on a major oil processing facility and field (inaudible) system was completed at our Seal Main property. This capital expenditure will improve overall operating efficiency and will lead to additional production through the present and future conservation of solution gas. It will also assist as we move forward with pressure maintenance work and ultimately a waterflood in part of the Seal Main.

At Seal Cadotte, we recompleted two wells into the upper portion of the pay zone with marked improvements in well productivity and that is an area where we had originally drilled down in the middle of the lower end of the zone and felt we would get better results pushing the wells up higher in the pay zone and it indeed does look like the production is significantly better with the new wells.

At Seal North, we are working on a multilateral horizontal technique. We drill the well that has got five laterals from the original horizontal well bore. And we believe two things will be achieved with that well. One would be much better per -- I guess production unit or per well productivity. What that does is reduce the amount of surface locations that are required also significantly reduces the amount of infrastructure in terms of pipeline and it greatly assists us logistically.

We are about a week into the test on that well and it looks like there is very enhanced productivity going through a multilateral well that we will continue to monitor. And we're going to look probably at a few more before making the ultimate decision on when to use that technology and where to use this technology.

During the quarter we did commission Sproule Associates to conduct an independent engineering assessment of that portion of our oilsands lease which falls within the definition of contingent resources. In evaluating the area, Sproule ended up looking at approximately 20% of our oilsands lease primarily the area where we initially started to produce and areas where we have gone in with some horizontal wells and have some basically hard data and ideas on potential productivity.

The area is about 20% of our oilsands lease in total in the Peace River oilsands area and it was determined that Penn West's share contingent resources on this fraction of our full lease is approximately 1.7 billion barrels in place and that is consistent with the numbers that we saw over the same area. And then we talked earlier about reserves on the full lease, the full area being in excess of 6 billion barrels. So we are still internally comfortable with that number.

During the quarter, the government of Alberta announced changes to the royalty program that will take effect in 2009. And I guess a little history lesson, royalties are funds that are paid to the owner of a resource in exchange for the right to explore for and develop that resource. So it's kind of like a commission that is paid.

In the Province of Alberta, as in many states in the United States and in many countries in the world that rely on oil and gas resource revenue, percentage of the funds collected by government were used in funding the maintenance and construction of infrastructure and social amenities such as schools, hospitals, courts and public buildings as well as the ongoing operate costs of the public service come out of this money. In Alberta, this revenue forms a very large portion of the amount that goes into the public treasury.

In order to provide continued funding at increased levels due to the age and quality of the infrastructure and due to the needs of our expanding population -- and our population is expanding because of the boom that is going on in Alberta particularly in the oilsands -- because of this, changes were made in the amount of royalties collected from oil and gas revenue. Based on our analysis at current prices, the increase in provincial royalties will result in an impact of about approximately 3% on cash flow.

This is slightly less than the average impact in Alberta and it reflects the fact that approximately 35% of our production is located outside Alberta. We believe it's important to emphasize that Alberta's income tax and sales tax rates are the lowest of any Canadian province. Plus their future capital allocation within Canada will be continued to be measured on operating margin, timing and the size of resource being explored and being developed.

We're concerned that the government has increased this take from our sector; however, some of this concern is offset by the knowledge that additional funding is required to keep up with the needs of our expanding population who we greatly depend on for our labor, our knowledge and our services.

Last week we announced our intention to seek a strategic combination with Canetic Resources Trust. While I do not intend to retrace the ground that was covered in our conference call last Wednesday, I will comment on our vision going forward. The combination with Canetic Resources improves the quality of our conventional resource base and accentuates are bias to light oil. Fortunately these light oil assets are being targeted for enhanced recovery which will add not only reserves, but higher margin production in the future. The go-forward management team improves in both depth and strength and better positions Penn West to meet future challenges.

As we move toward the effective date of the SIFT tax in 2011, we need to look at where we want to position Penn West for the future. Our Company will have a high-quality foundation in both conventional and nonconventional opportunities. In the period leading to 2011, we have great opportunity to further enhance the depth of our resource base through exploration and development as well as by merger and acquisitions both inside and outside Canada.

We believe that the C$15 billion that is available in our current Safe Harbor and the allowance for Trust untouched mergers with no impact under the Safe Harbor allowance improves our opportunities to grow through merger and acquisition and clearly influences our decision to remain a Trust until at least 2011.

After the effective date of the SIFT tax in 2011, the depth of our tax pools will allow us to continue to work inside a Trust model while minimizing the impact of taxability on distributions.

As we move forward after 2011, I don't want anybody to draw a solid line in the sand and say this is what happens before 2011, this is what happens on the first date of 2011. What you are going to see is a period of transition and a period of change. And it may take two years and it may take five years and it may take seven years. It will depend on circumstances. And also depend on our prospects for growth, primarily from our nonconventional assets, one of which I talked about at some length this morning at Seal.

We could very well choose to adopt a corporate structure that would involve a lower payout and increase retained cash flow to use the fuel growth projections. In talking about this, I believe that it's prudent to be ready for any eventuality, however, I'm going to just restate one more time that we are not in a headlong rush to convert to corporate structure from the current form after 2011.

The upcoming winter season will present many challenges as we continue to work and will work on integrating the people and assets of Penn West and Canetic. We believe that the combined staff is up to the challenge in creating a strong aggressive and focused energy trust with assets that rival many conventional energy companies.

We also believe that we will move Penn West forward to better reflect our position as the predominant force in North American energy trusts.

We do thank our unitholders for their patients during this time. There are significant events influencing the markets right now because of the nature and timing of our deal. We've also got four entry points into Penn West stock which is probably not the most ideal situation from an arbitrage point of you.

We'd also like to thank the staff of Penn West. And I'd also like to extend thanks to the staff of Canetic who -- the senior management of whom have worked very hard to try and move forward with this idea of what we believe we can make as a new company. There is going to be in a lot of work ahead but we believe we can do it.

I'd like to thank you. I'd be pleased to attempt to answer any of your questions now.

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

I must have amazed them. We are available. My direct phone number is 403-777-2502. If you've got any questions, Dave Middleton's number is 403-777-3301 and Todd is not supposed to answer questions but any of you that need to get hold of Todd will probably have his number. You can reach investor relations at 777-2500 and we welcome your call. Thank you very much.

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