Obsidian Energy Ltd (OBE) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Penn West Energy Trust first-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, Wednesday, May 7, 2008 11:00 AM Eastern time. I would now like to turn the conference over to Mr. William Andrew, Chief Executive Officer.

Thank you and good morning to everyone. I'd like to welcome you to Penn West Energy Trust's 2008 first-quarter financial and operating results conference call. Penn West Trust's units are traded both on the New York Stock Exchange, and that is under the symbol PWE, and also 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. Please note that all references during the 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.

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, www.sedar.com, or the SEC website at www.sec.gov. Also, we have a website and there will be a replay of this conference call available on the website. Our website is www.pennwest.com.

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 disclosures concerning non-GAAP terms.

Finally with that over with, the purpose of today's call is to review our first-quarter financial and operating results, as well as provide you with an update on recent activity. Following the review, we will open the phone lines, at which time we would be pleased to answer your questions. We always appreciate questions and feedback from our unitholders, and we encourage you to contact us via telephone or e-mail at any time.

By now, particularly analysts, you've probably noticed that the MD&A report is not yet filed on SEDAR. We had originally intended to do our press release on Friday, May 9, but due to travel commitments more than anything, we decided to push ahead with the press release last night, go with the conference call this morning. The MD&A will follow, and we are hoping to have it posted by the original scheduled time, which is Friday. If we can't do that, it will be very early next week.

With me today in Calgary are Murray Nunns, our newly appointed President and Chief Operating Officer; Dave Middleton, our Executive Vice President, Operations and Business Development; and Todd Takeyasu, our Executive Vice President and CFO.

With us as well are a number of members of our senior management team. And one that you may hear, depending on questions, is Dave Sterna, who is our Vice President of Marketing. Also, we are very pleased to have Hillary Foulkes, who recently joined our team as Senior Vice President, Acquisitions and Divestitures.

I would like to just take a second to introduce Murray Nunns, who has joined Penn West as President and Chief Operating Officer. Murray brings a wealth of experience as a geologist and senior executive who has worked on exploration and strategic direction in western Canada and internationally. His enthusiasm and knowledge and his strong leadership skills have already made an impact on Penn West and we look with great anticipation to our future together and for Murray's direction with the Company.

And I would like to hand things over to Murray and let him run through the first quarter.

Thanks, Bill. As many of you may be aware, there has been a considerable amount of change in activity here at Penn West during the first quarter of the year, and we will cover that in a few minutes. Before that, however, there are two events to which I would like to speak.

The oil and gas industry is full of potential hazards. Our aim at Penn West is for our employees and anyone who works on a Penn West site to go home to their families the same way they left them in the morning. We do our best to manage those hazards in the interests of all stakeholders. Sometimes, however, events conspire against our best efforts. Unfortunately, in mid-April, Jeffrey Johnson, a young service contract employee, passed away from injuries incurred from an accident on a Penn West job site. All of us at Penn West extend our condolences to Jeffrey's family, his friends and co-workers, both in Alberta and in Newfoundland.

Stakeholder concerns regarding the environment are of high importance to us at Penn West as well. I would like to comment on an incident which recently occurred on April 30 relating to Penn West's operations. A pipeline leak was detected in the Otauwau River near the town of Smith in North Central Alberta. We estimate that the leak, which coincided with the ice breakup on the river, caused approximately 100 barrels of oil emulsion to enter the watercourse.

Penn West, in a cooperative effort with Alberta environment, local authorities, and residents, has worked to minimize the environmental impact of this spill and to provide full and complete disclosure to anyone impacted by the event. Penn West believes that it is incumbent upon us to maintain the highest environmental standards for all of our operations, again, on behalf of all stakeholders.

Just before we get into operations and financial details, I would just like to touch on the recent acquisitions before moving forward. With the acquisitions of Canetic Resources and Vault Energy, we have expanded our asset base significantly. The expanded Penn West portfolio has consolidated our industry-leading foothold in western Canada's highest-quality conventional oil pools.

We believe this presents Penn West with a unique blend of conventional enhanced oil recovery opportunities and a number of nonconventional growth opportunities, including oil sands, tight oil, and shale gas plays.

Now, moving to the Q1 results. The following pro forma figures include -- I want to emphasize include -- the 11-day stub period prior to the closing of Canetic and Vault acquisitions. Pro forma production volumes were approximately 201,800 boe per day for Q1 2008 compared to approximately 128,000 boe per day in Q4 of 2007. Pro forma funds flow for the quarter would total C$655 million.

All other Q1 information will be based upon reported figures. Reported figures exclude the 11-day stub period prior to the closing of the Canetic and Vault acquisitions.

Crude oil and NGL production averaged approximately 109,000 boe per day, while natural gas production averaged 500 million cubic foot per day. Our production during the quarter was weighted 57% towards liquids and 43% to natural gas. The reported realized commodity prices for the quarter averaged C$68.35 per boe, and this is about a 36% improvement over Q1 2007. [Blend] oil and natural gas liquids pricing averaged C$88.77 per barrel during the quarter, which equates to an increase of 49% on a year-over-year basis.

Quality differentials have narrowed since the fourth quarter of last year and are now in line with historical averages. In light of this, our conventional heavy oil pricing was strong, with realized sales prices of C$66.64 per barrel for the quarter. This is a 62% improvement over the same period for last year. Natural gas prices averaged C$7.98 per Mcf in Q1, an increase of 5% from the previous Q1 -- previous year's Q1.

Penn West hedges a portion of production to protect capital budgets, to ensure planned distributions, and to support the economics of acquisitions. Approximately 40% of our oil production was hedged on broad collars through Q1, with -- 60% of our production was sold at market pricing. During the first quarter, we secured additional hedges to fix the cost of electricity at our oilfield operations. This hedging improves our ability to control operating costs and netbacks.

Operating costs for the first quarter of 2008 were C$11.64 per boe, and our combined netback for the first quarter of 2008 was C$40.57 per boe. This represents an increase of 37% from C$29.51 per boe in the first quarter of 2007. In the quarter, we drilled 115 net wells with a success rate of 96%. About 80% of our drilling capital was directed towards liquids-related projects.

Now we will look at the financial results from Q1. Reported funds flow for the quarter was C$632 million, or C$1.76 per unit basic. This represents a year-over-year increase of 103%. Net income decreased 19% from the prior period. This was due in part to a onetime future income tax recovery of C$106 million resulting from tax rates changes. We expect -- we can pass over that next point.

First-quarter 2008 capital expenditures were C$278 million, compared to C$211 million in the fourth quarter of 2007. First-quarter capital expenditures represent roughly 44% of the funds flow for the quarter.

Our distributions paid during the quarter totaled C$337 million, an increase of 33% year-over-year. The total does not include distributions paid with the units issued from the distribution of reinvestment program, or DRIP. Penn West's current monthly distribution is C$0.34 per unit, and we are pleased to announce the Board of Directors approved continuation of the current C$0.34 per unit distribution level for the next three months.

We would also like to announce we have priced a proposed offering of notes to be issued on a private placement basis. This placement consists of $480 million of US notes and C$30 million of Canadian notes, which again is subject to the completion of due diligence and the satisfaction of other customary closing conditions.

The note offering is expected to close on or about May 29, 2008. The notes will be unsecured and rank equally with Penn West's bank facilities and Penn West's outstanding senior notes issued in May, 2007. The 2007 notes had an aggregate principal amount of C$475 million. We intend to use the proceeds of the note offering to repay a portion of our bank debt.

Looking forward at the future in Penn West, the forecast 2008 capital development program all of C$960 million includes approximately C$170 million for optimization activities, C$65 million for CO2 and waterflood improvements, and C$60 million for our Peace River Oil Sands project, and an additional C$50 million for environmental activities.

Prudent guidance is for pro forma production volumes to average between 195,000 and 205,000 boe per day for 2008. Assuming commodity prices of US$1.07 West Texas for oil and US$8.50 per GJ for AECO for natural gas, and an exchange rate of US$0.98 to C$1.00, Penn West funds flow is expected to be between C$2.7 billion and C$2.9 billion for 2008. This affords Penn West the opportunity to apply additional funds to debt repayment. This will strengthen our balance sheet and provide financial flexibility in pursuing opportunities that fit our corporate strategies.

A couple more comments in closing, and then we can open the floor for questions. One key point -- greenhouse gas emissions are increasingly moving to the floor on the political agenda in Canada, both federally and provincially. This signals a significant step forward as both governments and CO2 emitters seek a means through which they can reduce the amount of greenhouse gases released each year.

Penn West is actively working with all stakeholders to secure appropriate and adequate CO2 sources for our growing enhanced oil recovery projects. We are pleased to announce that our CEO, Mr. Bill Andrew, has been appointed to sit on the Alberta Carbon Capture and Storage Development Council. This Council will develop Alberta's plan by the fall of 2008 to move ahead with carbon capture and storage projects throughout Alberta.

Penn West's strategy is to continue to build our conventional drilling inventory, to establish the potential of our resource play land base, and to confirm the enhanced oil recovery potential of our extensive production base. It follows that we will look to concentrate on opportunities which present the most potential to expand our footprint into similar geotechnical settings. We are committed to realizing the full potential of Penn West for our unitholders.

We are now available to take questions, and I'll turn it back to the operator.

(OPERATOR INSTRUCTIONS) [Cliff Griffith], private investor.

Mr. Nunns, could you please tell me what the parameters are for hedging for '09 and 2010? Also, please let me know what your plans are -- how much are you going to reduce the debt by in '08, '09, and 2010?

I will preface the hedging question with our fundamentals for hedging are to ensure that we have adequate cash flow on a floor basis to cover our distributions, one, and to ensure that we have capital for our programs, two. So that is the underlying premise for all our hedging programs.

I will turn it to Dave Sterna. Maybe he can just quickly comment on 2009/2010 in terms of hedging.

Yes, for 2009 and 2010, currently what we have hedged is, on the crude oil side, we have for 2009 about 30,000 barrels a day hedged through the use of costless collars. The average floor price for that is C$85 a barrel and they cap out at about C$110 a barrel.

On the gas side, we generally hedge our production by season, so we hedge it either by the summer or the winter season as opposed to calendar years. And what we have hedged for summer, this coming summer, I believe, is about 180,000 GJs a day hedged, using collars. And -- let's see if I can pull those prices out for you.

So for this summer, we have 240,000 GJs a day hedged at an average collar rate of C$6.75 floor and C$8.09 ceiling. For next winter, which is November '08 to March '09, we have 170,000 GJs a day hedged at an average floor of C$7.35 and an average ceiling of $9.76 a GJ, all priced off of AECO.

What about 2010 -- 2010 for oil and gas?

(multiple speakers) no gas hedged for 2010, but we do have some oil hedged. And what we have hedged is 10,000 barrels a day, again, through the use of collars, and the average price for 2010 is C$85 floor and C$129.87 caps on those.

What percentage of the production is it?

That -- assuming current decline rates, that 10,000 barrels a day represents about 10% of our production for 2010.

Are you going to hedge more than 10%?

No, it's 10%.

Are you going to hedge more than 10%?

We will have to see as we get closer to 2010.

Okay, what about gas?

The question you had on the debt, effectively this year, as we indicated in our press release, we would be looking to retire between C$400 million and C$500 million on our debt. At that point we've got a balance sheet that I believe is very sharp.

So going into 2009 and assuming we have still got a robust commodity environment, we are left with three choices. And what we would probably do would be a mix of any two of the three or three of the three. One would be to continue to apply a little bit against the debt. Secondly would be to use additional funds for additional capital for projects that we are working on. And the third would be a potential bump in distribution or a special distribution.

And part of it will depend on taxability within the operating company, opportunities that we have going forward. So this year, the plan is pretty firm to put the money against -- I guess the debt. We wanted just to polish up the balance sheet a little bit. Next year, it's a little more wide-open.

And then are you going to reduce the debt even more in 2010?

We will see how it goes. I don't think there is really any necessity to do that by the end of the year. With putting C$400 million to C$500 million against the debt, we are in a very good group as far as debt to cash flow or debt to fund flow.

What is the ratio as we speak?

It is about -- forecast of about 1.1-to-1 by year-end.

1.1 to 1 --?

By year-end, yes.

Okay, thank you very much.

[Lawrence Fisher], private investor.

Yes, I would like to get your feelings. There are 12 analysts that cover Penn West, although CIBC just raised their outlook to $33. But the average of the 12 analysts is that they have Penn West on a hold. Do you feel it is because of the size of the debt we have at the moment, because with oil prices, it is strange because I own other oil stocks and none of them are on a hold at this point? So I would like your thoughts on that.

I believe you can check all the major shops that have analysts, they sort of run a bell curve. They have got a number that are on hold, a number that are buys and a number that are strong buys, and they always have a certain number of (multiple speakers) --

The average is hold, the average of the 12 is on a hold. So I would tend to believe that is the predominant thought of the 12 that are covering us.

Why do I believe that we are on a hold right now? Probably because of the Canetic acquisition. They want to see how the merger plays out over this quarter and over the next quarter. I believe with the numbers we've put out for the first quarter, we have allayed some of the potential concerns.

As Murray works his way into the company and we move forward with our exploration and production efforts through the year and with the staffs I am confident that we will move off hold on a lot of those.

Also, is the tax situation for 2011, that the Canadian government has passed, is that now set in stone that this is going to be a fact as such?

It is -- the legislation has been passed. There hasn't been any -- we are still waiting on full details on the legislation. But basically, the SIFT tax will be imposed, which is a tax on the producing entity, or on Penn West petroleum in our case.

We are in very good position, we feel, not only on our own account, but certainly relative to most of the trust world with regard to the tax pools or credits that we've built up over time and will continue to build up until 2011. Our pools right now are about C$5.5 billion. We expect by 2011 they will be in excess of C$6 billion, maybe closer to C$7 billion. That will give us a lot of free rein.

The plan as we speak right now is to certainly run as a trust or a trust-like structure with a very -- trying to maintain a high distribution. We can do that because of the tax pools that we've accumulated. So basically, we do not expect to pay cash taxes for at least a couple of years after 2011. And then and after that point, you're into 2013 and '14, the amount of cash taxes would be minor.

Well, we will have to let my children worry about that. Thank you very much for your answers. They've been very prompt and courteous. Thank you.

Ted Levy, Excel Securities.

Thank you, gentlemen. Excellent report. Good job. Just several questions. I am a little bit surprised, Mr. Nunns, in your presentation. I guess you are sort of new on the block here. You didn't go into the Seals, the oil sands basically, which I think offers to a lot of investors potential hidden value on the balance sheet.

So if you could flesh out the status of Seal and how you are progressing here, the potential effects of the Kitimat pipeline when it comes, and also some expansion of other [end branch] pipelines. I didn't hear any of those dynamics and I sort of missed those. And I would suggest in the future presentations you sketch that out a little bit basically and get a little more excited about that, which excites me as an investor and a long-term investor in a lot of the companies you acquired. That is one specific question.

If you could outline exposure in the Montney area, which got some lead headlines in the Toronto Globe and Mail and so forth. So I'd like to just -- and the last thing is basically what is the net asset value of the company currently as the most recent quarterly balance sheet there versus -- what sort of discount to net asset value and does that include the valuation of the Seal properties, etc.? I would just like to have some light on that. And Bill, hi. Thank you.

I will start off and I am going to flip it over to Murray. We kept it a little short. We felt that there would be questions on the resource plays, and on Seal. I will let Murray not only go over Seal right now, but we'll talk about [Leechfield] a little bit. We will talk about a well that we drilled into the shale play in Northeast B.C., where we feel that our land fits with some of this nonconventional technology. So that will be the first part.

First, I will comment on the status of Seal. Our overall view of it has not changed in terms of its potential. Just on -- I will provide the resource commentary first. We had Sproule do an independent resource evaluation of 20% of our holdings at Seal. So not the entire area, but just 20%. And they came up with an estimate of 1.6 to 1.7 billion barrels in place.

What we have been doing at Seal is when you're dealing with an area of 300,000 acres, what we are progressing with is laying out a net of stratographic wells to give us an evaluation of the property and identify the areas that we can go into primary production on it. We're looking at overall that -- our current plans would call for us to drive between 10,000 and 15,000 barrels a day at Seal in approximately a three-year timeframe on primary production.

We are also looking at the potential for the area of applying low-intensity steam injection, either cyclical steam or huff and puff -- is the other term that is used for us. And we have plans on the books that would drive the area to 40,000 barrels in approximately a five-year timeframe.

I will just refer back, then, to that Sproule number of 1.6 to 1.7 billion barrels. That, when we project it out over the whole area, gives us a resource of 6 billion to 7 billion barrels to work with. In terms of actual booking on the books, there is a very limited amount of value from (technical difficulty).

So that covers Seal. I will move ahead then on to our exposure to other resource plays. One of the key things -- I am a geologist by training -- one of the key things that attracted me to this position at Penn West was the potential of the land base, dealing with over 8 million acres of both developed and undeveloped land. Penn West has significant exposure to a variety of resource plays.

Bill referenced that we'd done some additional initial tests on the Muskwa play, where we have approximately 50,000 acres of land in July Lakes, which is adjacent to the Horn River Basin. And we did our initial test work in there this winter on a vertical [core] and we are now assessing that.

On the Montney play, towards the North end of the trend, we have approximately 50 sections of land with rights that we are deciding where it fits in our overall resource play inventory. Moving across, we have significant positions in the Mannville Coal. They're of particular interest. It is a play that maybe hasn't seen quite as much sunshine in the last year or two, but we think still has the potential to be significant.

We have got a major Colorado shale position in East Central Alberta that we're looking forward to testing and some junior companies have taken into a commercial position.

The other resource play I would like to touch on a little bit is another one that is fairly advanced in its progress, and it is a tight oil play in Southwest Saskatchewan, which the Canetic acquisition, along with their acquisition of Titan, consolidated for us. And Penn West already had a base position. This is a horizontal multistage frac play in the Shaunavon formation. Typical verticals would be -- have been borderline economic at 15 to 20 barrels a day.

We are now approximately 25 wells into the project. We are very comfortable with its results to date. We've got about another 15 wells to drill this year, and at that point we think we will be able to go into full commercial mode over the next two to three years in terms of bringing it to production there. And that is -- again, one of the key focuses for the midterm is the continued assessment of the resource land base of the company.

I think the third question was with regards to NAV --

We dug the number up. Between C$36 and C$38 a unit, and that is about a PV7 or 8.

Got you. And that does not include the Seal, right? Is that correct?

That includes just the Seal that we've booked to date.

And the bookings have been minimal.

Okay. Well, thank you for shedding a little bit of light on these and spicing up the presentation a bit and maintaining the excitement level of this investor. We always look to better share prices because it lowers cost of capital, that's for sure. And since someone mentioned that the average rating on the stock is hold, maybe we can get some improvement there. But thank you so much and good luck --.

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

Okay, thank you very much. We are available all day. Murray is going to make a television appearance sort of mid-day on BNN , and investors who watch that show will be able to see his face and put a face to the voice, which is very good. He will undoubtedly get a chance to go into a few more of the plays and the strategies of the company going forward.

Thank you all very much and we look forward to doing this next time.

Ladies and gentlemen, this concludes your conference call for today. Thank you for participating. You may now disconnect your lines.