Obsidian Energy Ltd (OBE) 2007 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. 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 today, Friday, February 22, 2008, at 9 AM Mountain Time.

I would now like to turn the conference over to Mr. William Andrew, Chief Executive Officer. Please go ahead, sir.

Thank you and good morning. I would like to welcome you to Penn West's fourth-quarter and year-end 2007 financial and operating results conference call. Penn West Trust units are traded both on the New York Stock Exchange under the symbol PWE, and on the Toronto stock exchange under the symbol PWT.UN.

As required by securities regulations, I will now read an advisory statement before the conference call proceeds. Also note that all references during this conference call are in Canadian dollars unless otherwise indicated and that all conversions of natural gas to barrels of oil equivalent are done on a 6-to-1 conversion ratio.

Certain information regarding Penn West and the transactions and results discussed during this conference call, including management's assessment of future plans and operations, may constitute forward-looking statements under applicable securities laws and necessarily involve risks. Participants are directed to Penn West's news release issued this morning to review the advisory notices therein. Participants are also cautioned that the included list of risk factors are not exhaustive. Additional information on these and other risk factors that could affect Penn West's operations or financial results are included in reports on file with Canadian and US securities regulatory authorities and may be accessed through the SEDAR website, and that is at www.SEDAR.com, and it's S-E-D-A-R; and the SEC website at www.SEC.gov; or through Penn West's website at www.PennWest.com.

Additionally, during this conference call certain reference to non-GAAP terms may be made. Participants are directed to this morning's news release and previous filings available on the websites noted earlier to review disclosure concerning non-GAAP terms.

The purpose of our call today is to review our fourth-quarter and full-year financial and operating results for 2007 as well as to provide you with an update on recent activities. Following the review we will open the phone lines, at which time we would be pleased to answer your questions.

We appreciate questions and feedback all the time from our unitholders, and we do encourage you to contact us directly via telephone or email, and we will certainly endeavor to respond to your inquiries as quickly as possible.

With me in Calgary this morning are Dave Middleton, who is our Executive Vice President, Operations and Corporate Development; Todd Takeyasu, our Executive Vice President and Chief Financial Officer; and other members of our management team.

To my right as well is Dave Sterna; he is our Vice President of Marketing. I have put Dave pretty close to the phone, assuming that there may be some marketing questions or questions about our hedges.

Murray Nunns, our recently-appointed President and Chief Operating Officer, is in Vancouver presenting Penn West to a symposium of institutional investors this morning.

As many of you will be aware, there have been some recent changes to our management team. Early this month we announced the appointment of Murray Nunns as President and Chief Operating Officer. As well, David Middleton was appointed the Executive Vice President, Operations and Corporate Development; and Todd Takeyasu appointed Executive Vice President and Chief Financial Officer.

David and Todd will need no introductions to most of our investors, as both have been long-serving members of our management team.

Murray Nunns brings to Penn West a wealth of experience in exploration and in senior management both in Canada and internationally. As a professional geologist in the lead operational role at Penn West, Murray's involvement will be key in charting Penn West's medium- to long-term strategy for developing and enhancing our asset base.

Dave Middleton in his role will concentrate his focus on the day-to-day production operations of Penn West and on guiding the development of our enhanced oil recovery programs. His key priorities will include the advancement of our initiatives to revitalize our light oil assets through the application of technologies that include the capture and sequestration of greenhouse gas.

Now we will move to the numbers; and please note that the numbers for the quarter do not include the Vault, Canetic, and Titan acquisitions. I will provide numbers that reflect these acquisitions after reviewing the quarter.

During the fourth-quarter 2007, daily average production increased 2% to 128,024 barrels of oil equivalent per day compared to the third quarter of 2007. We were down from the fourth-quarter 2006; our production at that time was 129,915 barrels of oil equivalent per day.

Light crude oil and natural gas production averaged 51,070 barrels per day. Conventional heavy oil averaged 22,262 barrels per day. Natural gas production averaged 328 million cubic feet per day in the fourth quarter of 2007.

The fourth-quarter average daily production was weighted about 57% to oil and natural gas liquids, and about 43% to natural gas.

On a year-over-year basis, annual production increased by 13% from 112,369 barrels of oil equivalent per day in 2006 to 128,025 barrels of oil equivalent per day in 2007.

Average realized commodity prices for the fourth quarter of 2007 averaged C$55.44 per barrel of oil equivalent. That is an 18% improvement over the fourth quarter of 2006. This was primarily due to realized prices for light oil and natural gas liquids, which averaged C$76.99 per barrel in the quarter. That is an increase of 34% over the fourth quarter of 2006.

Conventional heavy oil also proved strong with an average realized sales price of C$48.69 in the fourth quarter of 2007. That is a 30% improvement over the fourth quarter of 2006. This improvement is attributable to increased light crude oil prices that were somewhat offset or offset to some extent by wider quality differentials for both our heavy and our sour barrels.

Quality differentials have narrowed since the fourth quarter of 2007 and are now much more in line with historical averages. Dave may address that if we have any questions about where the oil price is going.

Realized natural gas price averaged C$6.34 per mcf in the fourth quarter of 2007. That is a decrease of 9% from the fourth quarter of 2006.

For the full-year 2007, our natural gas price averaged C$6.85 per mcf. That compares with C$6.75 per mcf in 2006.

The price for light oil and natural gas liquids averaged C$68.75 per barrel in 2007, compared with C$65.02 per barrel in 2006. That is an increase of 6%.

Conventional heavy oil averaged C$45.26 in 2007. That was up 5% over the full-year 2006.

Overall commodity prices averaged C$52.73 per barrel of oil equivalent for the full-year 2007. That was a 6% improvement over 2006; and that excludes the impact of hedging that we did.

Operating costs in the fourth-quarter 2007 were C$11.35 per barrel of oil equivalent. That is an increase of about 6.5% over the C$10.61 per barrel cost in the fourth quarter of 2006.

We're continuing our efforts to control rising operating costs in the face of a strong demand for services. If you look at our trend over the last few quarters, we believe that our efforts are bearing fruit as we are seeing a flattening of our quarter-over-quarter operating costs. We will continue to focus a great deal of attention on cost control going forward. That will be a primary responsibility of Dave Middleton going forward as well and his team in the field.

Our combined netback for the fourth-quarter 2007 was C$32.54 per boe. That is an increase of 17% from C$27.81 per boe in the fourth quarter of 2006.

Now we will move to the financial numbers. Cash flow for the fourth quarter of 2007 was C$347 million. That is an increase of 14% over the C$303 million in the fourth quarter of 2006. On a per unit diluted basis, cash flow was C$1.43 per unit. That is an increase of 17% over the similar period in 2006.

Higher commodity prices in the fourth quarter of 2007 were offset somewhat by realized hedging losses, higher royalties, and slightly higher operating expenses, as well as a very robust Canadian dollar.

Net income for the fourth quarter of 2007 was C$127 million. That is an increase 3% over the fourth quarter of 2006 income of C$123 million. On a per unit diluted basis, net income was C$0.52 per unit. That is an increase of 18% over the net income per diluted unit of c$0.44 in the fourth quarter of 2006.

Fourth-quarter 2007 capital expenditures were C$211 million. Capital expenditures represented 60% of funds flow in the fourth quarter of 2007 including acquisitions, and 55% of funds flow excluding acquisitions. Capital expenditures for the full year in 2007 totaled C$1.2 billion.

Fourth-quarter 2007 monthly cash distributions totaled an aggregate of C$246 million or C$0.34 per trust unit per month for each of October, November, and December. This marks a very consistent trend with Penn West in our distribution policy.

Distributions for the full-year 2007 were C$976 million. That compares with C$782 million that was distributed in 2006. 2007 distributions represented 73% of funds flow excluding our distribution reinvestment plan, and 63% including the DRIP plan that we talked about.

Penn West's current monthly distribution is C$0.34 per unit. The Board of Directors, subject to current forecasts of commodity price, production, and planned capital expenditures, have approved a continuation of the current per unit distribution levels through the second quarter of 2008.

Funds flow was approximately in line with forecast. However, the 2007 capital program and net acquisitions were in excess of our original budget. We increased those to capitalize primarily on strategic opportunities that came about in the year.

In the fourth-quarter 2007, cash distributions of C$246 million, plus capital expenditures of C$211 million and environmental expenditures of C$15 million, totaled C$472 million. That compares to funds flow of C$347 million and equity issuance of C$50 million. So we were a little bit out of balance in the fourth quarter.

In January 2011, not quite that yet -- January 2008, we drew C$3.1 billion on our new unsecured revolving syndicate credit facility with an aggregate borrowing limit of C$4 billion. That credit facility was put together with a syndicate of banks. We appreciate the strong support of the banking syndicate to Penn West. That credit facility will expire in January 2011.

The credit facility was used to retire Canetic, Vault, Titan, and prior Penn West credit facilities. The C$3.1 billion draw, combined with US notes of C$475 million and convertible debentures assumed of C$360 million, totals our pro forma debt, which excludes working capital. The pro forma debt is C$3.9 billion; and that is as per our forecast in November.

Total debt capacity is currently approximately C$4.8 billion including the convertible debentures and the US notes.

In addition, the new credit facility will bolster our Trust's financial flexibility and provides us significant additional credit capacity. This is very important going forward, as from time to time you get opportunities, primarily on the acquisition front. It is always good to have a strong bank line in corporation.

At year-end 2007 Penn West's proven reserves of crude oil and natural gas liquids totaled 370 million barrels of oil equivalent. Our proved plus probable reserves totaled 482 million barrels of oil equivalent. Our finding, development, and acquisition costs, excluding changes in future development costs, were C$25.30. Proven plus probable including future development costs our finding costs were C$26.16 proven plus probable.

I will comment on that, and I will go back to the appointment of Murray Nunns and our need to shore up our finding and development costs. We are targeting this year to improve and on a worst-case basis a 10% improvement on those numbers. We would like to see an improvement in the 10% to 20% range.

We believe it is achievable. We are having a good start through the first quarter, through our first 50 wells, and things are looking quite good today.

In January, we did complete the acquisition of Canetic, Vault, and Titan. We have reviewed the year-end reserves of these firms, and we have aligned the booking guidelines with those of Penn West and also with those of our third-party engineers, GLJ Petroleum Consultants.

So we ended up with a lot of numbers coming in from a lot of different sources, and we wanted to reflect the way that we book reserves. We also wanted to reflect the way that our third-party engineer books reserves.

As a result, on a pro forma basis our reserves at year end that we calculate are 750.2 million barrels of oil equivalent P-plus-P. That includes 488 million barrels of oil and natural gas liquids and about 1.57 tcf or 1.6 tcf of natural gas.

If you use a production rate, sort of a mid-level production rate of 200,000 barrels of oil equivalent per day and these year-end reserves numbers, our reserve life index is approximately 10.3 years.

On October 25, 2007, the government of Alberta announced that effective January 1, 2009, it intends to adopt a new royalty framework incorporating some of the recommendations of the Alberta Royalty Review Panel.

At our current commodity prices and asset mix, the royalty regime will have some impact on Penn West production and cash flow going forward. But we expect that that impact will be small and not significant to the Company.

So when I say small, in the range of about 3% to 4% on cash flow. And again, depending on the strength of forward commodity prices.

We are reviewing our go-forward strategy on a project by project basis. We have formulated the 2008 capital budget that considers the impacts of the new royalty framework on project economics.

We should note that Penn West does have a very large and very diversified land and product base throughout the Western Canadian Sedimentary Basin that provides very significant flexibility to us in our capital program, where we can respond not only to changes in commodity prices, but also to costs and to changes that are made to fiscal regimes. So we do have that opportunity in the Company going forward.

As well, our Board of Directors and management are continuously monitoring the impact of the SIFT tax legislation that was introduced on Halloween 2006 on our business strategies. We expect future technical interpretations and details will further clarify the legislation. The Trust continues to review all organizational structures and alternatives to minimize the impact of the SIFT tax on our unitholders.

While there can be no assurance that the negative effect of the tax can be minimized or eliminated, we are continuing to work diligently on these issues and to work on minimizing and mitigating against the tax.

As a result of recent acquisitions, we have a capability of approximately C$15 billion in expansion under the SIFT tax rules. We continue to evaluate the best corporate structure for Penn West after the SIFT tax becomes effective in 2011.

Subsequent to 2011 the current alternatives available to Penn West include maintaining the Trust structure; converting to a high-yield low-growth corporate model; converting to a low-yield high-growth corporate model. We went to reemphasize, and I will reemphasize again probably for the ump-teenth time, that there is no plan to convert the combined corporate structure to a conventional corporation on or prior to the effective date of the SIFT tax.

No change will be made until it is clear that the change is the best alternative for our unitholders. But we just basically want to be ready for 2011, and you are in much better shape when you can make that decision on your own terms rather than being forced into a decision because you haven't done your homework or because you haven't prepared.

On an operational front in 2007, we continued working on our CO2 enhanced oil recovery projects, with the medium- to long-term goal of applying this technology to pursue significant additional resource recoveries to Penn West's leading industry-leading ownership in a lot of Canada's large light oil legacy pools.

The addition of horizontal wells in the Pembina CO2 pilot project and the CO2 pilot at South Swan Hills are targeted to be onstream in the first quarter of 2008. We have completed one well and are working on finishing up our second well on the pilot projects at Pembina.

The key to the horizontal well in Pembina is to increase rates of both CO2 injection and oil productivity. That should greatly assist the commercial viability of the Pembina project.

Penn West as well is a participant in the Alberta Saline Aquifer Project which is led by Enbridge. That includes 19 other industry participants. The mandate of this project will be CO2 sequestration in Alberta.

The initiative is a joint venture between industry and the governments of Canada and Alberta. The governments of Canada and Alberta have earmarked approximately C$500 million towards this initiative.

In the Peace River Oil Sands, we drilled a total of 29 horizontal and 20 stratigraphic tests on the project in 2007. During the year, production pads and in Seal Main were tied into Penn West's new oil production facility to increase netbacks by eliminating trucking costs.

Our capital program in 2011 (sic) resulted in further delineation of the project's resources and included seismic programs, detailed engineering, geological and analytical work that we did on our cores and fluids.

As well, we had Sproule Associates Limited, who is very experienced in the Peace River area and with the Oil Sands, do a study on a portion of our 300,000 net acres of undeveloped land in the area that confirmed our internal resource estimates.

We conducted an intensive study on the reservoir through much of 2007 to enable better horizontal well completions. That resulted in a much more result -- robust per well production rates.

We are also continuing to test a variety of new development technologies in the project area including multilayered horizontal wells and a range of wellbore configurations. The results to date are encouraging, and I would say very encouraging.

As a result of the work that we conducted primarily through the latter part of the third quarter and into the fourth quarter of this year, we ramped production up from under 2,000 barrels a day to almost 4,000 barrels per day, with most of the added production coming on very late in the quarter.

We continue to be very modest in our reserves bookings for the area. That is basically because we don't want to put the cart ahead of the horse. We recognize that there is significant future capital that is required to exploit this resource of heavy oil.

It is clear from our work to date that a portion of our lands can produce oil using primary production recovery techniques, while another portion of the land will require thermal assistance to achieve initial commercial production rates. Our intention is to focus our thermal pilot activity in the areas of high viscosity, while developing lower-viscosity areas initially for primary production.

We have as well a smaller portion of our land that will see waterflood and possibly polymer flood being the optimal solution for enhanced recovery. So we have got a very, very large area of land, and we've got a drilling program that is spread through the area.

The area access is not optimal at present. So we are putting in infrastructure and continue to put in infrastructure, primary infrastructure in the form of roads; secondary infrastructure in the form of pipelines and production facilities. That work is ongoing and will continue into 2008.

Our Board recently approved a C$960 million exploration and development capital program for 2008 that includes the drilling of approximately 270 net wells. Included in the budget is C$55 million allocated to the Peace River Oil Sands Project; C$65 million to new ventures and enhanced oil recovery; C$170 million to optimization activities; and C$50 million to environmental activities.

The combined Penn West production base is expected to generate 2008 production of between 195,000 and 205,000 barrels of oil equivalent per day. You will note that that is down a little bit. One of the challenges you have with putting a lot of barrels together is determining exactly what you should have for guidance going into the next year.

We have done that. Eric Obreiter and his team have been putting the barrels into the tanks. We have current production roughly 205,000 to 206,000 barrels per day. We believe that a guidance that is targeted between 195,000 and 205,000 barrels per day is appropriate for the year.

Using commodity prices of $80 WTI per barrel of oil, natural gas prices of C$6.75 per GJ at AECO, and a prior US-Canadian exchange rate, 2008 cash flow is expected to be C$2 billion to C2.1 billion.

As many of you do realize right now, the oil prices are trading significantly above that range, as is natural gas currently. The exchange rate, I believe, this morning is around $0.985 US per Canadian dollar.

In conclusion, we believe Penn West's asset base will enable us to add significant unitholder value in the future. We continue to be very excited as we review our many combined conventional and unconventional opportunities that include exploiting and optimizing conventional production base of 200,000-plus barrels of oil equivalent per day; assessing and applying new technology aimed at increasing ultimate recovery rates, such as the CO2 miscible flood to the largest portfolio of light oil properties in Western Canada.

As well, the application of secondary enhanced oil recovery and new drilling and completion techniques to the 300,000 net acre position that we have in the Peace River Oil Sands will greatly enhance the position of the Trust.

We have in the combined assets now of Penn West some 4.1 million acres of land in addition to our -- undeveloped land. In addition to the undeveloped land we have very significant developed acreage that brings our combined acreage into the about 10 million acre range.

We also have very significant infrastructure across the basin. If you look at where our land lies, both developed and undeveloped, the interesting thing for investors is that most of the plays that people talk about individually hit our land, or are on our land, or we're actively working on them.

So when we talk about unconventional resource -- and that seems to be the buzzword today in the basin -- and you look at coalbed methane, you look at tight shale gas, tight oil, you look at oil sands, enhanced recovery, we have our finger on the pulse of all of those opportunities. And we will pursue those opportunities going forward.

As well, it is our intention to move forward aggressively not only within the basin -- I think to steal the words of Murray Nunns, we intend to use our passports and certainly start looking south of the border at some opportunities where we can apply technology and apply ideas in the US, as well as internationally.

That will come in a very measured approach. We have no intention to go internationally and participate in small operations and look for small structures and small reserves. So our move internationally would be where we want to do it to enhance what we're doing in Western Canada.

We would be doing it on the same basis that we are going forward in Western Canada. That is, looking for large opportunities that provide us with repeatability in our drilling and the ability to add significant production and reserves to the Company.

On behalf of the Board of Directors I would like to thank the staff and management of the now combined Trust for their hard work and patience as we completed the integration of Canetic, Vault, and Titan. It hasn't been a particularly fun time. It is going to be a very fun time going forward.

We are in place. We are very excited about what we have put together, and we believe that we positioned ourselves for future success.

Operator, we would now like to open the phone lines for questions.

(OPERATOR INSTRUCTIONS) Ted Levy, Excel Securities.

Yes, Bill and your team, congratulations on an excellent quarter and an excellent year. We have been shareholders through some of the companies that you acquired like Petrofund that we've held for -- which was NCE Petrofund for many years ago.

But, just -- and your report explained a lot of the -- dealt with a lot of the questions that came up in my mind here. But, I have three quick questions.

First of all, the acquisition of Canetic and to a lesser extent Vault, I have done a lot of reading and maybe I missed it. But do you plan to -- usually when acquisitions are made, it is driven partially by economies of scale. I couldn't find anything directly, and I probably missed it, as to what sort of cost savings you are looking for as a result of the acquisition of Canetic and Vault, basically on a forward basis, that might positively affect your netbacks etc.? That is my question number one.

Okay, I will take a run at that one. I was down in [Astavan] recently talking to our field operations staff down there. We have done a little bit of an interesting thing in that we have combined the staffs of the companies that were acquired. We have workforce right now of approximately 1,800 people. Particularly in the Western Canadian Basin, good employees and strong employees are difficult to come by. There is a dearth of people that are available, particularly in technical areas and also good strong operators.

So we have not -- as is normal maybe in the case of some acquisitions where you take the sword out and slash, we haven't done that. We believe that there will be efficiencies as we look to the pure synergy where we are operating in the same area, where we have consolidated interest. There is obvious efficiencies there.

It allows us to direct our staff from having two people on one project to allow the staff to go on to work on two or three projects. We believe that is very important particularly when one looks at our finding and development costs over the last couple of years.

The other part of efficiency, we believe, is to provide good consistency with regard to replacing our production barrels. Again we are going to aim for that with the combined staff.

So there is nothing -- I'm not going to immediately point and say we're going to slash a bunch of jobs and reduce G&A. Rather, we want to sharpen our focus on our exploration and development. We want to, with the help of Dave and Eric Obreiter and the field team, continue to sharpen our focus on operating costs. And we believe that the efficiencies will come that way.

Okay, I get the message. It's a little bit different than the mergers that I'm used to here, down in the States, basically. But I can see on the field staff and so forth, important.

But on the G&A side or multiple investor relations, I mean, you've got to keep an eye on some of those costs basically.

Maybe it is easier if you make a small acquisition to achieve more economies of scale. But anyway that is my comment.

Number two is, when I read the release this morning, you mentioned the outlook for natural gas appears weak. I have to question that a little bit here. Unless that is -- just thinking about it, the demand for fertilizer, of which natural gas is an important component; the fact that the oil and gas ratio and equivalent energy base is about 11-to-1; the fact it is a cleaner energy; the fact that Boone Pickens down here in California as using see CNG to fuel fleets, etc.

The main thing is the fact that on an equivalent oil basis, basically, it is about $50 to $60 per barrel. I was a little surprised to see that.

Are you seeing something else, or is there better way to market your natural gas? Or can you just shed some light on that here basically? Realizing the [NMG] hsa moved up a little bit, and that is my second question.

Sure, I'm not going to duck you, but what I've going to do is Dave Sterna gave me an anxious look that he wanted to deal with this one. Dave has got an extremely good line on what is going on in the markets. I think he will be a pleasure for you to listen to. Dave, go ahead.

Well, I think our view on natural gas prices is that we are somewhat surprised in the last two months how well natural gas markets have turned around. However, we're still cautiously optimistic. The reason that we are cautiously optimistic is that we feel that, much like the oil market, that there is a bit of a speculative bubble right now on the gas market. And that the gas market could be prone to somewhat of a selloff.

When we look at the fundamentals, we see a situation whereby as much as we have drawn down inventories substantially year-over-year, we're still at levels that are above the five-year average. We are going to be going into the injection season with pretty much near the end of winter here, and we will enter the injection season above the five-year average.

As you had mentioned, that there is, with increased demand for ethanol, that there is increased industrial load. However, we have seen declines in other sectors of the industrial sector. It may in fact be a bit of a wash here.

So we sort of feel that the natural gas markets this year have been more of a supply story than a demand delivery. We see incremental supply coming on through additional drilling, mostly south of the border in the United States.

We also see additional production coming on through certain infrastructure debottleneckings like the Rockies Express Pipeline and Independence Hub.

So to sum it up, I guess we are pleased with what has happened in the gas markets over the last two months, but we're still cautiously optimistic. We don't thank the gas markets are out of the woods yet, and that they are susceptible to a possible selloff still.

Okay, great, thanks for shedding light on that. I appreciate that insight and I understand where you are coming from.

The last question is thinking out of the box a little bit, so hang on to your hats on this one. And correct me if I am wrong, because I am not an energy analyst. I used to be a telecom and software analyst; but I am late in my career here, basically, after 41 years here.

But anyway, on the Peace River or Seal project basically, 7 billion -- I think it is 7 billion approximately potential barrels of oil, which you might recover 10%, 15%, 20% over a period of years. As I understand it, the price of that sort of oil is maybe $50 per barrel currently, $49 or $50. Maybe it costs $20 or something like that per barrel. I may be off $5 either way.

But the margins on that and the level of investment required to bring fruition, whereas with $99 conventional oil with maybe cost of $111, $112, $113 or whatever it is per barrel, the margins are so much significantly higher.

You know, I can understand in terms of long term and so forth. But with prices so high and so forth, does is make sense basically? With the margins on the heavy oil and the heavy investment and what you seem to be moving gradually -- it sounds like you need a partner or something like that on that, because of the heavy financing really to pull the oil out more quickly and develop the infrastructure.

If I have got a -- if you have got a 90% margin on conventional oil and a 50% margin on heavy oil, and it's got a value -- I don't know what the value. Maybe it is valued at $3 billion or $4 billion, $2 billion, $3 billion, $4 billion. I think there has been some recent deals that have passed along those lines. I can't remember what the company was.

Doesn't it make more sense -- and the shareholders sitting here -- to sell the bloody project off here basically? And maybe realize $10 a share or something like that; pay some of your debt off basically; and just get a dividend to shareholders; and just function and just focus on the conventional oil basically, etc. etc.

I am just wondering. I am looking at the margins. If I have got a business where I am only going to get 50% margin on one product line and I can get 90% on the other, why should I move there? Why shouldn't I sell it off and use that, pay down debt, and also to distribute a hell of a dividend to the shareholders in light of the change that is coming up in terms of taxation, etc. etc. and the royalty etc.

That is my thinking out of the box question. I look forward to your response here.

I think the primary thing to remember with regard to particularly light oil, is it's a difficult product to find. Particularly from an exploration point of view.

We do, we do and we are targeting a portion of our capital towards enhanced recovery. We think we are the best positioned company not only in Canada but one of the best positioned companies in North America for that effort.

But as far as straight exploration, yes, C$90, C$98 oil is wonderful. But finding the light oil is another story altogether.

There is no doubt when you look at Western Canadian Basin, when you look at the world, it is no accident that the majority of impressive capital numbers that are going into oil exploration and development activities in North America and even worldwide are going into the oil sands in Alberta.

Why is that? It is because of the size of the resource and the ultimate size of the resource. I think you have got to get away from looking at differentials today and costs today. There is no doubt that as we continue to develop the heavy resource we are going to continue to add refining capacities; and those are going to narrow the differentials.

What you are looking at, at C$45 or C$50 oil today, will increase as those refinery capacities are added. So basically in our case, we look at 300,000 acres. We look at a position where we have made our first acquisition of land on the Oil Sands I believe mid 2004, late 2004. We were acquiring land aggressively through 2005 and early 2006. We really, really just got started on the drilling in 2006. Took a little bit of a stutter step backwards in the first quarter of 2007, and we think we're starting to get things moving in the right direction right now with how we are completing the wells and how we are exploring.

We are seeing in areas where we have put our strat tests, we are seeing good accumulations of sand in a lot of the area where we have land. We believe it is a question now of saying, okay -- and as I pointed out in the call, we think we have got sort of three options.

We've got some land that you will need to go to thermal on; and very much like the Shell project that they have up there, where you go straight into thermal. But you are looking at significant pay thickness. You're looking at significant oil in place, and a lot of oil recovery with thermal.

We have got other areas where we will be able to go to thermal; but initially we've got the opportunity to produce them because the oil produces conventionally. It is just like any other heavy oil. Very similar viscosity; very good pay; tremendous areal extent; and we want to do some primary recovery and primary production. That is the number we talk about where we're aiming at 15,000 to 20,000 barrels over the next three or four years.

The third area that we are working on, and this is primarily in the Northeast part of our land, is where the pay thickness is not quite as robust, but it still you are looking at pays in the 10- to 20-foot range. We have got good viscosity there that matches the viscosity of projects that are -- other projects that are producing in Alberta and in Saskatchewan. We have got a multileg lateral in that area that is producing 400 barrels a day right now of reasonable quality oil.

We think we can go after that on primary and then utilize waterflood and polymer injection. I guess, the mirror type property to that would be Pelican Lake that EnCana and Canadian Natural have successfully been exploiting for the last number of years.

So I think it is way too early to talk about selling something when you are just in the stages of identifying what you have. And that is basically where we are coming from.

The other thing is that if you look at what the others are doing -- and I have a tremendous amount of respect for senior independent and integrated companies. They have been around a long time and generally they know what they're doing. Where are they putting their money? In the Oil Sands, in refining. That tells me that that is a good place to be.

I appreciate the transparency you provided and that was a great response. I guess when you get older like myself, I'm 69 and I guess you guys must all be in your 30s or something like that (multiple speakers).

Not quite.

Thanks a lot. Good luck. Great quarter, great year, and we look forward to an exciting future. Thank you so much.

[Bruce Robinson], a private investor.

Good morning. I tell you what. Sort of as a follow-on to what the first gentlemen was talking about, when you were commenting on the -- looking at natural gas being above trend line or whatever characterization you might have put on it.

Is this a time where you are exploiting hedges to hedge forward? Could you just sort of extrapolate and broadly discuss your hedging strategy at this point in time?

Sure, I will flip this one over to Dave Sterna as well, and he can -- if you're okay with that, Dave?

Yes.

Yes, go ahead.

So, the focus in our hedging strategy is to be consistent, to have a disciplined hedging program. The purpose for it is to, in times of volatility with prices, is to provide assurance to our cash flow projections so that we can ensure our capital program and our distributions.

As you are probably well aware of, over the last couple of years we have come through an unprecedented period of volatility for commodity prices. So we feel that the most prudent strategy is to continue with our disciplined approach towards hedging. We feel that it is prudent because we put a lot of effort in this Company to try and control operating costs. We have put a lot of effort in trying to control G&A cost. And we should also put the same efforts towards trying to mitigate risk exposure on the pricing side.

In terms of natural gas, specific natural gas hedging transactions, we have been fairly active in the market recently. As I said to the previous caller, we're quite enthusiastic about what we have recently seen with natural gas prices. But we're still concerned that they are susceptible to a downturn, a possible downturn.

With that we have taken the opportunity to leg out into next winter, which would be the period of November '07 to March '08, the winter season.

We have recently entered into hedges for about 150,000 GJs a day. That represents about roughly 40% of our total gas production. We have done it mostly through collars, although we have done some fixed-price transactions.

The summary of the actual pricing terms that we have entered into is currently been updated and our Web page, if you would like to take a look at it there.

Thank you.

Ted Macuch from Scott & Stringfellow.

Thank you for the opportunity. I came in late to your call so I may be asking a question that you have already addressed. The question I have is that there has been some deterioration in the debt-to-cash flow ratios. If we do have -- I know you have got things based on $80 WTI etc.

But what are your plans to get that ratio back more to historical levels?

I've got three main components of that. One is -- this is very apparent -- is with more robust commodity prices (inaudible) on the oil side, that would result in more cash flow. Our tendency would be to apply some of that extra cash flow towards our debt.

We recognize where our debt is. We would like to, I think ideally we would like to trim C$200 million to maybe C$500 million off that debt and I guess dry up the powder a little bit in the Company.

Second thing that we are doing is -- and we have been doing this for about three months, more focus on it in the last month. That is looking at our property portfolio. Murray Nunns will be invaluable in doing some direction there with our exploration and development folks, to say, basically, -- what are the properties that are we going to need going forward?

We have got a pretty good handle on that. But we have got some properties that, quite frankly, are better off in the hands of others, either on a fire mode or a sale. Don Robson and the land team will be working on that. So the proceeds of any dispositions would be applied to towards the debt.

We would be targeting dispositions somewhere in the range of a couple of hundred million dollars. You need a buyer on the other side, but there is money coming into the Basin, primarily private equity. Then we look for the opportunity to sell some of our property.

The third thing is basically the deal with the debt that we have now, we will be in all likelihood doing some terming of our debt. While we do appreciate the syndicate of banks and the bank debt lines that we have, we believe it is much more prudent -- it is prudent as well to have some long-term debt on the books.

We do have US private placement money on the order of C$475 million; and we would in all likelihood in the second quarter be going back to those markets and looking to secure probably another C$0.5 billion of long-term debt.

So those are the three things that we have planned. We do -- we are very aware of the debt-to-cash flow ratio. But I will qualify that by saying we see it sort of as a mid-pack ratio with our peer group of companies on both sides of the border.

However, based on where we have been historically, we would like to lighten up the debt just a little bit.

As far as going at the debt markets longer-term, what would be your cost of capital there would you estimate? Some kind of range.

My CFO is telling me about 6%, so I think 5.5% to 6%.

Okay, wonderful.

I don't want to prejudge the market if we are heading that way. If it can be 5%, that would be good.

If it could be 4% that would be better.

That would be better, right.

Thanks for your help, so much. Great call.

(OPERATOR INSTRUCTIONS) Jonathan Fleming of Cormark Securities.

Hi, Bill. I wonder if you could address the finding and development costs a little bit more and your strategy to reduce those costs a little bit. I know you have talked about a 10% reduction. I wonder if you can just as a little more color on how you might get there.

Sure, I will flesh that out a little bit and I read through our press release a few times and I just can't remember exactly how much detail.

There's two parts of finding, development, and acquisition. As you know, the finding and development are the organic part and the acquisition part. When we are looking at our costs that are in and around the C$25 range, the acquisition side was running about C$20 to C$21. The organic side was running C$29 to C$30.

So we know that to be competitive in the Basin, you have got to bring that number down. So we would be targeting on the organic side a reduction to below C$25. We would be looking at an all-in with acquisitions that we would bring our C$25 number and then push it down much closer to C$20.

How would we do that? Sharper focus. I think we took a step in the right direction when I convinced Murray Nunns that there was a spot for him at Penn West and that there was a need for a lead explorationist in the Company. We have had great response to his arrival.

We are -- even before Murray came, though, we were changing the way we looked at things. If you look at our spending profile for 2008 versus our spending profile in 2006 and 2007, you'll see that we limited a little bit some of the money that we are putting into the Oil Sands and CO2; and we are pushing a little bit more of that money towards some of the lighter, particularly the light oil assets that we have in the Company, as well as looking at tight gas.

We believe both of those strategies will help bring our FD&A in line. Basically, it is just a little bit sharper focus.

We have had -- I guess we are a little bit a Trust that doesn't quite act like a Trust in that we have had significant land acquisition programs over the last couple of years. We have had a significant program of exploration, lead exploration work in Peace River Oil Sands. We at a position right now in the Peace River Oil Sands where we can start adding some realistic development wells that make commercial sense. As we start to tighten up on our program there, we will start booking some reserves.

I look down the street at others that are involved in the same area, much smaller land position, and have bookings 4 or 5 times our bookings in the Peace River Oil Sands. So I think naturally some of that will evolve.

, Okay. Is the story the same on the operating costs side? Costs have been creeping up a little bit. But you think if you just focus on those costs you can start to bring them down a little bit, as well as by ramping up production from the Peace River area?

I think if you look at our costs over the last two or three quarters you can see that we are flattening things out.

With the acquisition of Petrofund in 2006, with our focus on light oil, there is a -- as we meld in the light oil acquisitions we have a tendency to increase operating costs. As Dave and Eric and the people in the field focus on things, we start flattening those costs out.

On the other side of the equation, you have lifting costs, sure, of a little north of C$11. But you have got a product that is weighted towards light oil, and you're looking at very good netbacks and very good margin.

So there is a little bit of balance there. But we are very aware of the cost pressures; and I believe that we're doing a good job. I believe we can do a better job, and the better job is just continue to increase our efficiencies. Operational efficiencies is one thing.

Last question. How far along the path would you say you are with regard to building the Canetic and Vault assets into one entity with Penn West?

I think from an operational point of view, we have one accounting system, we have one IT, it works 99.9% of the time and has been working very well for the last couple of weeks. It was a pretty daunting task and we had a lot of people, particularly on the accounting side and our IT side, that put in a heck of a lot of hours getting it working.

But you come in -- everybody comes in on Monday and we're able to book our production. We're able to pay our bills. Able to answer the phone, use our computers, so that part is going quite well.

On the operational side, we have drilled 50 wells to date. It is interesting that -- and that was a conscious choice on our part, that we wanted to look at some of the opportunities that were brought on board from the various companies. So we are skewing our first-quarter program maybe a little bit towards the Canetic, Vault, and Titan assets.

We have drilled 50 wells to date. Vic Noble and his crew in drilling is doing a good job. Mark Fitzgerald as the senior VP of Engineering is making things happen. So we think from that point of view it is going.

The other soft side is you have got 1,800 employees, about a little over a third of whom have not worked with each other before. So we're getting used to each other. We have all got one goal, and that is to build the Company. So that part is coming. The operational part I think has come very well.

Had the opportunity and then Dave has had the opportunity as well to get out to the field and talk to the people that are involved there. We all want to head in the same direction; that is improve efficiencies, be a good Company, and that is happening.

Good stuff. Thanks, Bill.

[Ralph Manton], a private investor.

Yes, thank you. Are there not tax credits that may extend the involvement of SIFT until after 2011?

That is very correct. They are listed in our press release, in the letter to the unitholders. We have got current tax pools as we call them in Canada, or credits, in access of C$5 billion. We anticipate that that number will grow as we move towards 2011.

Basically it is like any other taxpayer; if you have built up credits through past activities that you have done -- for example, exploration work we have had or the way that we write off some of our expenditures -- we have got the ability to apply those credits against future taxability.

Right now, when Todd and his crew make their projections, we have got the ability to continue distributions past 2011. I will qualify that to say that a lot of things can happen between now and 2011 with regard to commodity prices and other things that can happen from a fiscal point of view in the world. Interest rates and all those variances.

But basically, if you took a flat projection of today's commodity prices, today's volumes, and our tax pools, we've got the ability to go through 2011. We think go through 2012. We would start at that point to look at where our distributions are.

We believe that we would be able to continue with a pretty significant distribution even through 2014.

Thank you very much.

[Brad Fowler], another private investor.

Thank you. As regards the Oil Sands acreage, is there appear to be any potential buried in the Petrobank in situ technology?

It is one of the things that we will look at. I will caution everybody that the technique that Petrobank is using is shallower in the Basin in a different zone than the Peace River. Where their operation is, is much closer to Fort McMurray.

We will look at -- we believe one of the good things about the Peace River Oil Sands and the quality of the crude oil is the fact that it is not bitumen; it is heavy oil. To that extent, we will look at conventional heavy oil techniques -- SAGD, cyclical steam. A lot of that work has been pioneered.

But as well, we will look at things that are going on right now. We are very aware of the technology that Petrobank is using. We're also aware of some of the technology that being applied by Shell and others directly in the Peace River area that include some things that are not really in the public sphere right now.

So there's lots of -- I guess the old expression is there's lots of ways to skin the cat, and we will look at different ways of doing it.

Thank you.

[Dave Berstein] from [Dot] Financial.

I noticed on your statement that you have that reserve for future tax for C$100 million. Since the tax isn't applicable till 2011, how come that was set up?

I'm going to turn that over to my CFO. He can explain it and share--

That is a good question, Dave. Essentially, what you have to do in modern accounting for future income taxes, as none of it is cash, but you have to extrapolate it into the future and try and determine when your differences between your book values and your tax values will change, and what years those occur.

So, what you have to do is apply the tax rates that are applicable but legislated into the future. When tax rates for the future change like they did in the fourth quarter, it then changes the calculation.

That is why you see the approximately C$100 million reduction in the fourth quarter.

The easy answer is it reflects the legislation that was introduced and I think passed, where corporate tax went down in Canada. So we have to book that.

The second question I have is that you personally don't have a have a share buyback. You talked about paying back debt of C$200 million to C$500 million in the current year. Wouldn't it be better to utilize that as a share buyback and it would be accretive to you earnings?

It is not -- there is really no cash there. It is really just an accounting concept that tries to make provision for the differences between your accounting values and your tax values.

So you can't actually ask the government for a check or something like that and pay down debt. Although it would be great if we could.

No, that is not what I was referring to. You actually think in terms of your cash flow for this year that you're hoping to pay down your own debt between C$200 million and C$500 million. All I am saying is, wouldn't that be better to utilize that as a share purchase, as a repurchase of shares, which would be accretive to your earnings?

I think you have to -- I guess I don't want to give you a long-winded answer, but I [think] much the same and a little bit of the same tone as when we were talking about pursuing heavy oil versus light oil.

It is difficult to look at things at a single point in time. So we believe on a go-forward basis, it is prudent to have a little bit less debt and a little smaller debt-to-cash flow ratio.

So it may not be absolutely perfect in terms of the ideal thing to do right at this particular moment. But we think as far as for planning and going forward that it is best to put it towards the debt right now rather than a share buyback.

Thank you.

Ted Macuch from Scott & Stringfellow.

Sorry, gentlemen, I forgot one question I wanted to ask. Again, you may have addressed this one already.

You said that you have hedged somewhat your natural gas positions. Would you review what your hedging is for WTI and how much of your oil has been actually hedged?

I will turn it over to Dave. He is greatly evolving into the second star on this show. So, go ahead, Dave.

So in terms of our crude oil position, for the calendar year 2008 we have hedged roughly about 41% of our crude oil production on a before-royalty basis.

So what that equates to is an average of 43,750 barrels a day. We have done this through a combination of swaps and collars, although it is primarily collars. 42,000 of it is collars.

They were all done on a costless basis. The average price was a floor of $65.60 and a cap of $81.68.

In terms of 2009, we effectively don't have anything on right now. We have a small amount of transactions that we inherited through the Vault deal that equate to a grand sum of 375 barrels a day.

So we are at this point in time just establishing what our target levels are and what our hedge levels that we want to transact on for 2009 are at this point.

Thank you very much.

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

Thank you very much. Again, our number in Calgary is 403-777-2500. My direct number is 2502.

As well, our investor relations group will do their best to answer any questions that you may have. Certainly feel free to give us a call or put a question through on our website.

Thank you all very much for your attention during the call.

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