Obsidian Energy Ltd (OBE) 2008 Q2 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by. Welcome to the Penn West Energy Trust second-quarter results conference call. (Operator Instructions). This conference is being recorded today, Friday, August 8, 2008.

I would now like to turn the conference over to Bill Andrew, CEO. Please go ahead, Sir.

Thank you and good morning. And welcome to the second-quarter financial and operating results conference call for Penn West. With me this morning is our Chief Operating Officer and President, Murray Nunns. Murray will review our quarter and also talk a little bit about what's going on right now at Penn West. He will introduce some of the members of the management team that are here with us this morning. After, I have to do a little bit of requisite housekeeping.

Penn West units are traded both on the New York Stock Exchange and under the symbol, PWE, and on the Toronto Stock Exchange under the symbol, PWT.UN. All references during this conference call are in Canadian dollars unless otherwise indicated, and 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 our assessment of future plans and operations may constitute forward-looking statements under applicable securities laws and necessarily involve risk. Participants are directed to Penn West's news release issued last evening 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 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 or the SEC website at, www.SEC.gov or through Penn West's website. And many of you know what our website is, www.PennWest.com.

Additionally, during this conference call, certain reference to non-GAAP terms may be made. Participants are directed to yesterday's news release and previous filings available on the websites noted earlier to review disclosure concerning non-GAAP terms. Following Murray's review and update, we'll open the phone lines. We do have a number of the management team here and they will assist us in answering your questions.

Thank you. I will turn it over to Murray.

In the first two quarters of 2008, Penn West, we've successfully continued our strategy of acquiring and integrating high-quality conventional assets weighted to light oil that have the potential for future exploitation using new completion techniques and enhanced oil recovery.

Starting with the Petrofund acquisition in June of 2006 and continuing with the Vault and Canetic acquisitions in January of 2008, Penn West has acquired approximately 425 million barrels of proved plus probable reserves weighted approximately 60% to light oil. These deals were funded by the issuance of equity and the assumption of debt.

The economics of these acquisitions were based on an average West Texas oil price of US$70 per barrel and an average AECO natural gas price of CAD6.50 per GJ. These acquisitions in conjunction with increases in oil and natural gas prices to date in 2008 has led to record funds flow and an increase in Penn West's long-term value and potential.

Turning to some of the financial numbers and taking a look at the financial numbers, we had, as we indicated, record funds flow of CAD753 million in the second quarter of 2008 and this equates to an increase of 131% over the CAD326 million realized in the second quarter of 2007.

On a combined basis, the average net sales price for the quarter was CAD75 and approximately CAD0.60 per BOE. This is an increase of 44% over Q2 of 2007. This is primarily due to realized prices for light oil and natural gas liquids which averaged CAD111.88 per barrel during the quarter. Natural gas prices averaged approximately CAD10.20 per Mcf for the quarter which was a 35% increase from the previous year's quarter. Our corporate netback for the second quarter of 2008 was CAD47.84 per BOE, an increase of 52% from the second quarter of 2007.

During the first half of 2008, we continued to actively hedge a portion of our production volumes. It's important to note that approximately 60% of our 2008 production remains unhedged. Approximately 75% of our 2009 production is unhedged and slightly over 90% of our 2010 production is unhedged. We maintain our hedging philosophy of managing our overall exposure to downside commodity price while positioning to retain upside price potential on the majority of our production.

Our distributions paid during the quarter totaled CAD383 million, equating to a payout ratio of just over 50%. Penn West's current monthly distributions are CAD0.34 per unit. And we're pleased to announce that the Board of Directors, subject to the usual caveats of current forecasts of commodity price, production, planned capital expenditures, have approved the continuation of the current distribution levels through October of '08.

Turning to the operations side of the business, during the second quarter of this year, production averaged 190,500 BOE per day. Reported crude oil and natural gas production averaged approximately 109,500 barrels per day and natural gas production averaged approximately 485 million cubic feet per day which translates into production weighted 57% towards -- to liquids and 43% to natural gas.

Production was down slightly from our pro forma Q1. We were impacted by a reduction of approximately 8000 barrels per day by planned maintenance and plant turnarounds. The most notable of which was at the Spectra McMahon gas processing facility in Northeast BC.

Our productive capacity on June 30, 2008 was approximately 198,000 BOE per day and we stand by our production guidance of 195,000 to 205,000 BOE per day on a pro forma basis which would include the Canetic and Vault production from January 1.

Looking at capital expenditures, in the second quarter, 2008 capital expenditures were CAD247 million. Penn West's full year capital development budget is forecast to be approximately CAD1 billion.

Internal generation on the strengthening of our drilling prospect inventory is one of our most important strategic initiatives. This initiative is driving activities particularly in terms of land and A&D. We're pushing forward with expanding our suite of conventional development resource plays and enhanced oil recovery projects. The groundwork we're laying now on our development prospect inventory sets the stage for active use of the drill bit on scalable, repeatable projects through Q4 and on into 2009.

Assuming commodity prices of 180 -- $118 per barrel West Texas and CAD8.43 per GJ at AECO for natural gas and a par exchange rate on the US/Canadian dollar, Penn West's funds flow is expected to be in the range of CAD2.8 billion to CAD3 billion for this year. Given the current forward strip, our payout ratio will remain below our targeted payout ratio range of 60%. This lower payout ratio affords us the opportunity to apply additional funds to debt repayment in 2008 and thereby strengthening our balance sheet for the future.

Just before we turn this call back to the operator, on hand this morning are several members of our senior management team. I would just like to take this time to introduce them. We have Dave Middleton, our Executive Vice President of Operations and Business Development; Todd Takeyasu, our Executive Vice President and Chief Financial Officer; Thane Jensen, our Senior Vice President of Exploration and Development; Hilary Foulkes, our Senior Vice President of Acquisitions and Divestitures; Dave Sterna, our Vice President of Marketing; and Jason Fleury, our Manager of Investor Relations.

With that, I would like to turn this call over to the operator and open up the phone lines to callers.

(Operator Instructions). Cliff Griffith.

Congratulations gentlemen on a good second quarter. I have a couple of questions here. Assuming oil stays above $105 a barrel for the rest of the year, how much debt will be paid off between now and the end of the year approximately?

The second question is, will the Company consider increasing distributions sometime this year?

The third one is for you, Murray. What time are you going to be on BNN this afternoon?

I will answer those in the reverse order. I think Jason, what time am I on BNN? 12:40, that would be Mountain Time. Lucky me.

On the second topic, I will start with first the debt reduction this year. We estimate within our current projections that we would be -- we would have a debt reduction of about CAD400 million to CAD500 million this year. And, we believe given the credit situation with the banks that it's very prudent for us to stay in a mode of debt reduction for this year.

As we move forward into 2009 and if prices persist in terms of your question around distributions, we would -- we have a series of options that we will look at and I think consider on an ongoing basis that would include the potential for a distribution increase. It could also be continued debt reduction. It could be moving dollars into the acquisition/divestiture side or back into the capital budget or even potentially share buybacks or unit buybacks theoretically.

All of those options are available to us. I think we'll be crossing that bridge sometime after the start of 2009. We'll see how the prices unfold. We'll see how our programs unfold. And those decisions will be made by the Board in conjunction with the Board at that time.

[Rudy Bees], [Stinger Bees & Company].

If I sound a little frustrated, I do apologize. I'm going to quote from a statement in the release that says, "Penn West hedged a portion of its production to protect our balance sheet as well as planned distribution and capital programs." My frustration comes from, I'm looking at risk management. And I see that in this quarter, Penn West incurred about a CAD1 billion loss from risk management and I'm wondering how that protects us.

And two, I'm wondering if we continue with the present risk management program as is outlined as to the number of hedges that we have for 2007 and 2008 -- I'm sorry 2008 and 2009, I'm wondering what the impact would be on earnings if gas prices stay the same.

And lastly, in this regard to the hedging, I'm just wondering. Since we are all in the oil and gas business and because we believe that in the future oil and gas prices -- we believe they are going to go up, I'm wondering why we use hedges at all, especially when we consider that we've got what, here, almost CAD1 billion -- around CAD1 billion in the first -- in the second quarter and year-to-date, we've got CAD1.3 billion of hedging losses.

I think sometimes it may be to oversimplify when you look at a point in time rather than look at a program over the long term. I will tell you having been in the business for a long time that crude oil prices and natural gas prices are volatile. And the volatility can be both upward and downward.

We have with Penn West for a lot of years used a hedging policy. The hedging policy does effectively two things. One, we use it to protect capital program. We use it to protect acquisitions. We use it as prudent management to assure that we're around for the unitholders to continue distribution. We also use it as a bit of a smoothing tool where we'll engage in calendar hedges and smooth out prices over the year rather than go through the quarter-over-quarter volatility. So, it's primarily from that point of view.

I guess we have to remember as well that accounting regulations require us to mark-to-market hedges. So, we basically take a point in time, take the price of those products at that point in time and then take all of our future hedges and say, what is the lost opportunity? Or what is the price that we will not realize?

So, the CAD1 billion that you talk about it, which is a book entry, it is a loss but it is a book entry. By the end of July effectively or certainly by the end of last week, we had reduced that number by about CAD350 million. If we look at natural gas for instance, our natural gas hedges have gone from being underwater to being above the board right now.

And I will say this as well on the hedge program, we've got more of our product unhedged than we have hedged. So, while I don't like to see hedge losses, I don't mind them. We don't mind them when prices are high because that means most of our product is getting very high prices.

And we just -- particularly with the acquisitions that we had been doing and knowing that we were involved at that time with the Canetic acquisition, Canetic acquisition brought with it debt.

I've seen too many companies take the risk, fall under the thumb of too much debt and not be around. And we were just not prepared to do that. So, that was the hedging strategy and we will continue to try and manage the best for our unitholders.

Do you have any idea at all, just approximately where we could be for -- for the next two quarters if prices just stay about the same?

I will leave it with Dave and I think Dave's got a mark-to-market if we use the prices right now on a gross basis or where we would be by the end of the year.

So, the mark-to-market changed dramatically from June 30 to July 31 because of the selloff in commodity prices. And, so the CAD1 billion that we're talking about at the end of June 30 was actually, for the entire period of all of our hedging positions, reduced to CAD682 million. So, it was actually a CAD550 million decline.

When we break that out in terms of the remainder of this year, the majority of that CAD682 million will be incurred in 2008. So, oil and gas combined of that CAD682 million, CAD410 million of that is incurred before the end of this year.

All right so, what I'm trying to get a handle on is if, as we look into the next two quarters -- in other words when I looked at this last night, we had hedging losses in the first quarter. And I thought okay, so, the first quarter was like CAD300 million. And then I see this one is like CAD1.045 billion and I go, wow.

Again, I know you don't know the future. But, if numbers stayed where they were today, what type of hedging losses or gains might we see for the end of the quarter ending in September and December?

I think that's what he gave you was the CAD600 million for the year.

I see, you would be down to a net of CAD600 million.

Correct. And again, you know (multiple speakers) loss is the accounting term. We have the oil. So, we sell the oil at the high price. But what happens is that we've got basically another -- the companies that we've done the hedges with have a put on them at a lower price. So, our realized prices is reduced.

Understand. So when I look at the six months' end, I see revenue of almost CAD1.2 billion and then I see CAD1.2 billion before the royalties. And then we're looking at -- no, that's a year ago -- CAD2.7 billion. I'm sorry, CAD2.7 billion for six months and then there's almost half of that was lost from hedging. Am I reading that correctly?

Again, it's -- and I'm not going to belabor this anymore and I will let you go to our website and suggest that you call me later. But, it has to do with accounting procedures and mark-to-market of the total hedge book rather than what happened in the quarter.

All right. Well, I appreciate it. Thank you.

[Lawrence Fisher], Penn West Energy Trust.

I'm just trying to figure out how the market -- all of this is very involved. But, the individual stockholder, I hold 5000 shares of Penn West. How this is explained to the market per se. You have two brokerage companies out of Canada which in the last month have put up the following figure. One says Penn West will go to CAD40 and the other said Penn West will go to CAD42.

Now, it's great that we get this type of return on our money based upon the price that is now today's price where it's 14%. But if it went to CAD20, we would be 20% which is fantastic.

But, when you own the stock at prices of CAD32 and CAD35 and you look at CAD28 and change and these people are projecting, how are we going to get to those numbers? Or are they entirely wrong? Or don't they understand what we are doing?

I'm not going to comment on individual investment firms' analysis and their target projections. They use a certain price forecast and they run our numbers into that price forecast. They look at relative valuation of other oil and gas companies. They look at relative valuation within the whole financial market and they pick a number. So (multiple speakers) --

They just don't pick a number out of the air.

Basically what they're saying is that if it's business as usual for our Company, and we get certain price expectations and production expectations, and our cost of doing business stays the same that our share price should be higher than it is. And other than that, I can't comment anymore on what individual analysts have come up with.

But at this point, we have no way of getting this price up because we are incurring the kind of losses that we have.

I think you need to look at the broader market and what's going on right now.

I look at ExxonMobil, shows $11 billion profit. So, I don't say we made $11 billion but there was a profit and yet we're a substantial loss for this quarter. When will we show a profit in our quarters from your projection?

As we roll through the hedges.

But, that's going to take years at this point.

I don't know why you are saying years, but anyway. I think we've been through that. Thank you.

Okay. Thank you very much.

Gordon Tait, BMO Capital Markets.

Just to comment a little bit more on your operations. Can you maybe discuss what your plans for Seal are this year? What sort of spending you're going to do up there, how many wells you will drill, that kind of thing? What stage will you have it at by the end of the year?

I'll turn that question to Thane Jensen. Thane?

Okay. Right now, I see over -- we've actually been on a little bit of a winning streak in the last 12 months. The current situation is we've identified a new primary development area we call Harmon Valley South.

At this moment in time, we have a horizontal well in there making in the 180 to 200 barrel a day range. We've got 3-D seismic over about an eight section block. We've delineated the thing with strat tests and we've got a rig on site. And we're going to start drilling horizontal wells starting right now and through to the -- that rig will sit there right through first quarter and probably into the third and fourth quarter of next year.

The other thing we're doing right now is in an area we call Seal Main. We're preparing to implement a thermal pilot in Seal Main. That will be sort of a horizontal cyclic steam pilot. And that's really the forward-looking kind of key to the place.

The potential here on primary production recovery factors are typically in the 3% to 5% range. And if we can make this thermal pilot work, that's where we are going to find the bigger recovery factors on a per well basis. So by the end of the year, we're currently -- our productive capability is probably in the 3000 barrel a day range. And by the end of the year, we'll see that up over 4000 barrels a day.

Thank you. It sounds like 180 to 200 barrels a day for that well. That's an improvement over where you were. Is that (multiple speakers)?

Absolutely. And that's not a -- that well has been on production now since Q4. So, it's not an initial production rate by any means.

Okay. Then secondly, on the commercial CO2, I know you have to still get a deal with the emitters and so on. But where exactly does that -- the CAD2 billion government funding. Where does that fit into the project or into this whole process and (multiple speakers)?

I'm going to turn that over to Dave. Because as you know I'm on the council that is working on that, so I better -- in the interests of legality, I better turn that over to Dave.

The CAD2 billion that's earmarked is for carbon capture which is off of either power plants, off of coal-fired power plants, off of oilsands facilities, polygenic natural gas plants. Anything that's emitting CO2, the government wants to improve. Also, the money is going to be earmarked for pipeline infrastructure.

So, the objective here of the government is to capture up to 5 million tons a year of CO2. That's about a quarter Bcf a day of CO2 and have that going into the ground by 2015.

Now just to be clear. Is the CAD2 billion available to whoever it is that spends the money? In other words, if it's the emitters that spend capital to build trains and so on to capture and clean, did they access that CAD2 billion? Or if it's the producers, how do they -- who gets to access that? How does that money get split up between emitters and (multiple speakers) --

It's going to be based upon some submissions. A Request For Proposal is coming out and companies are going to put forward their ideas of how to use the money whether it's going to be offset for capital or operating costs associated with the carbon capture. So, right now, it's going to be -- the money is going to be going towards emitters in the pipeline infrastructure. What that does for us as an EOR producer is that lowers the cost of CO2.

One of the biggest problems here is that what we can pay for CO2 and what the companies can pay to capture it, there's a gap. What the government has done is provided an incentive -- an area to close that gap to allow us to have I'm going to say a marriage between the emitters and the EOR producers such that these projects can move ahead in an economic fashion.

And then, just a last question, what would a company like Penn West be prepared to pay for CO2? How much -- what would your maximum amount be that you're prepared to--?

Well I'd be disappointed if we didn't take about half or 60% of the CO2. I think we have two projects that would probably take about a megaton each that would be in the Pembina area. And in the South Swan Hills areas as well, we have two pilot projects that are running there. One of them is South Swan Hills and we also have the Pembina project running for over four years. And, we have the confidence now that a megaton or 50 million cubic feet per day per project.

Then to get to your question, the cost basis for the CO2 -- I guess depending on the project and the ability to inject it, I'll say on the high end it would probably be in the order of CAD2 per thousand or about CAD35 a ton. And we're much happier obviously with a lower price than that on some of our projects. But that would be -- sort of the upper end would be CAD2.

All right, thanks.

[Lawrence Fleischmann], Private Investor.

Could you discuss a little bit where your average hedge is for the balance of 2008 as well as for 2009, 2010 being somewhat irrelevant because of the amount of it.

And secondly, could you discuss the magnitude of the effect on cash flow if the 2011 tax structure were to have occurred in 2008?

I will address the hedging question. So, for the balance of 2008, we have 43,500 barrels a day of crude hedged. Of that, 42,000 of it is hedged using collars, and the collars have an average price band of CAD66.43 floor by a CAD79.85 cap on it. The other 1500 BOEs a day is a swap at CAD72.47.

In terms of the gas side, we hedge our gas by season, not by quarter. And so, the Q3 and Q4 is not the same volumes or the same prices. So, for Q4 we had about 240,000 GJs -- Q3, we have 240,000 GJs hedged. Q4, we have just under 200,000 GJs hedged. The majority of it has been using collars. For Q3, the average price is CAD6.09 by CAD6.94. And, for Q4 it's CAD7.01 by CAD8.94.

You had asked about calendar 2009. In terms of crude, we have 30,500 barrels a day hedged. All but 500 of it is in collars that have a band of CAD85 by CAD110.21. And in terms of gas, we have 101,000 GJs a day hedged. That represents about 20% of our expected forecast production for the year and the average price is CAD7.88 per GJ by CAD11.27 per GJ.

Thank you. Also on that related, before we get to the tax, given that the levels that you've hedged at provide the protection you wanted for the Canetic acquisition as well as for operational needs, payout distribution, whatever. Given that that worked at the $60 to $80 level BOE, why not hedge more of 2008 even at today's prices going into 2009 and potentially 2010?

You may end up with a higher price and show that temporary book loss. But that's kind of irrelevant. What you're really doing is pre-selling.

We did certainly count into 2008. And as prices started to move and then those of you that follow the price will know that it moved up almost as rapidly as it has fallen in the last month or so. As it was moving through $60 and looked like it was going a little bit higher, there was certainly temptation to hedge the whole thing from a management perspective and a Board perspective.

We went back to the way we've operated the Company before which is generally that we don't like to be more than 50% hedged. And, we -- the Board has also adopted that as a policy on behalf of the unitholders. So, that's the upper limit that we go to. That allows us to have a percentage of our production that basically rides the wave up and down on commodity prices.

On the shift tax, if it were enacted in 2008, that would mean that distributions which we would be paying of about CAD1.5 billion to CAD1.6 billion in 2008 would essentially not be tax deductible. However, being an Alberta-based trust under proposed but not quite law proposals, we would be subject to essentially at the Trust level a maximum of 25%; out in 2012 it goes to 26.5% and then to 25%.

However, given that within all of our corporate entities, we have a total of about CAD6 billion worth of tax pools as we speak. And we incur about another CAD1 billion dollars at least per year of capital expenditures which create further tax pools. We would only pay in 2008 -- in 2008 in reality, we would pay zero because we would have the tax pools to shelter it. But as a maximum, it would be a small percentage of the 25%.

[William Rosan], Private Investor.

My question goes back to the hedging policy. I just want to make sure I understand it. Is that -- is the loss really a theoretical loss of what could have been made if you were selling at market prices? Am I correct in understanding that?

The accounting rules are -- generally if I was to summarize it and one of our directors summarized it very well the other day and what the accounting world has done is, it's tried to take more of a balance sheet approach. So, a lot of the charges that come through the income statement are really, really related to the periods other than the period we're reporting on because the accounting world is trying to stress the balance sheet.

So really, some of the big numbers that we're throwing around are really overstated. The actual effect of the hedging programs in for example the second quarter were more like about CAD200 million, not the CAD1 billion which -- the rest of it being a non-cash charge to sort of true up the balance sheet. So, I think that's something that's important to keep in mind here.

Well, I guess really what I'm getting at is, for the individual investor, I try to follow these things and I know that Pengrowth had a large charge also. So, what this does for the individual investor, they see this loss and they think, oh my God, the Company is losing all this money.

So, I guess my -- what I'm saying is, it would be better and I know you can't really control this. I guess there are laws telling you what to do. It would be better for the market perception or the investor perception to state it differently. That's one --

The trouble is, there's rules on how we (multiple speakers) things and then there's rules -- for example I think there would be some confusion because we started talking about funds flow rather than cash flow. It's because the powers that be in the accounting world said it's no longer cash flow. It's funds flow. That's all it is. And then investors say, what the hell is funds flow?

Right. Well, okay. I know that kind of seems to me like a morass that's impossible to make it better.

But my other question is, I know that James Kinnear at Pengrowth made a statement saying that they would continue as a trust until 2013 because they have the extra -- the tax surplus to carry them through that. In other words, they made a definite statement. I assume that if there were a statement, you would make it.

We've made it before.

You have made -- you have said that you would stay as a trust until 2013?

Yes, we said that in the last conference call.

Okay, I didn't hear that call. Thank you very much.

Cristina Lopez, Tristone Capital. She has cleared herself from the queue. [Bob Sharon], Private Investor.

My question has to do with the unhedged portion of the revenue. Assuming that oil were to pull back to say $100 a barrel, how would that impact the overall value of the Trust per unit and/or how would that impact the overall profitability of Penn West going forward?

I think probably the easiest answer to that is that as far as the value of this Trust, I think it's quite common knowledge that a lot of oil and gas companies right now are trading at a WTI price of about $70 to $80. So there's significant discount in the market already. So, the $100 would be we think a bonus to the existing value. I will flip the second part over to Murray.

The second thing that would be highly achievable under that world is we could continue to execute the type of capital programs that we want, to set the tables for the future in terms of growth. And we'd be able to sustain distributions at the same level. So we continue to sort of be able to establish the whole potential value for the market at that type of pricing level.

You're saying it would not be a threat at that point. So we can relax (multiple speakers) --

Not at all.

No, don't -- Relax.

Okay. Thank you very much, gentlemen.

(Operator Instructions). [John Edling], Private Investor.

Two quick questions. One is the operating results. The 8000 BOE that you've disclosed here as an operating issue I understand that maintenance and downtime and things like that will ripple through and affect you. Just a comment from an investor here. A little more transparency would be appreciated.

I do back of the envelope calculations like the rest of the folks here. And, that was the unhedged portion in my mind that got nixed. So I didn't see any previous disclosure that you were looking at those kinds of declines or I should say those kinds of misses in the operating numbers. Don't know if it was within the range of what you had discussed in Q1 but again just a comment on the operating transparency.

Yes just to answer that question and then you can pose your second question. There's no -- first off, there's no linkage whatsoever between the physical barrels that are off-line and the hedgings.

On a second level in terms of transparency, we built this -- these type of maintenance and turnaround numbers into our projection guidance. So this is an anticipated number on our behalf. We believe that we can still achieve within the range of the 195,000 to 205,000 given the first quarter had 202,000 and given our current production capabilities.

So, we would have to go into a fair bit of detail to provide more disclosure on that. If there is any interest, again we're happy to do that off-line from here. And you had a second question?

Yes and just a strategic question I guess. It seems to me that the collars are pretty widely employed as a hedging mechanism. But, as an insurance policy, it just seems to me that puts would be a lot more predictable. Can you comment on that?

In hindsight, it may appear that puts might have been a better strategy. However, what you have to appreciate is that we are hedging our production out into the future. And an option -- the value of an option is based upon volatility and the time value of that option. And, the -- especially with the volatility that we've experienced in commodity markets over the past two or three years now, puts are a very expensive strategy to employ.

Not only that, the price of the put you don't pay-as-you-go. You have to pay the full amount upfront.

So, we do look at puts. It is one of the things that we do consider when we're trying to determine what is the best instruments to use on our hedging program. We look at that and compare it to when it's appropriate to use a swap and when it's appropriate to use a collar. And unfortunately, just because of the cost associated with the puts when we were doing the transactions, we didn't feel that it was prudent to do puts at that time.

I can certainly understand it. It just seems that to the investor and perhaps to the business, the upfront cash hit may be an appropriate burden to bear in order to lock in more predictability in the future. And again, it's just a comment. And I know you straddle and you do a lot of things with your analysis. But, with these prices for the commodities, it doesn't seem like the premium is excessive at this point.

Thank you.

[William Sorrow], Private Investor.

I have a question. There's been a lot of emphasis put on reducing the debt level because of these past mergers with CNE and so on. And I understand that. But at what point do you think we're going to get where those debt levels, barring a major new acquisition or something, the debt levels where you're going to be satisfied with this? Is it going to be the end of the first quarter of next year or whatever? Thank you.

Basically and then to give a quick answer to the current price strip, I would think sometime probably end of Q1 into Q2 we'd be at a point where you need to have some debt on your balance sheet. You don't want to be sort of underweighted towards debt.

So we would be looking -- and we'll be looking as part of getting the budget ready for 2009 at price expectations exactly what we're going to do. And Murray laid out the options and the options are increasing distribution, increasing capital program, reduction of debt which would be highly unlikely, a further reduction of debt after a certain point. And the other would be a buyback of units which is probably a little less likely as well.

So, really you're left with two options, raising the distribution and increasing capital. And it would really depend on how we're utilizing our capital and the type of bang for the buck we're getting versus an increase in the distribution for the unitholders. So we would make a decision or the Board would make a decision at that time.

Because I know as a unitholder, there's a little concern -- it seems like oil prices have been -- they're down right now. But they've been very strong and it doesn't seem like as the unitholders we're getting much benefit of that yet. I understand the need to get debt down and all. But on the other hand, like ERF did, they passed some through to the shareholders here the other day where they increased for the next quarter. And it seems like we're missing out on that.

I think you have to look at the broad -- you have to take a broader overview. And if you look at the acquisitions that were made in 2006 and 2008 with Petrofund and with Canetic, they changed the face of what was Penn West. We've become now a company that's very weighted towards light oil.

Light oil as you do realize, you've seen the very severe volatility in natural gas. There's been some volatility in light oil but light oil is still a preferred product. So, we find ourselves with a weighting towards light oil. We find ourselves with the ability to do those acquisitions. And with the high price, we've reduced the amount of -- or will reduce and continue to reduce the amount of debt load that we have.

So I believe that our unitholders will be left in quite good position. And the market not only looks at what you're doing today but they also look at the whole company and they look at your debt levels. They look at your reserves. They look at your prospects. And that's all part of the valuation.

[Cliff Griffith], Private Investor.

Gentlemen, of the total outstanding units, what percentage does management own?

Approximately 1%.

1%? That's not a very high ownership.

That's what it is.

When you put it against a market cap of CAD16 billion it's substantial.

I thought it would be higher than that. Okay, thank you.

[Philip Carol], Private Investor.

Yes, I'm a private investor. I have a question sort of in the same line as the last few. On page 7 of the report, you say, "We continue to see a significant disconnect between the inherent value represented in Penn West and the value of our units in the market." Now, I sort of sense a bit of bewilderment in that statement in that apparently, the Board doesn't seem to understand why the units are behaving the way they are.

As a private investor sitting here from my perspective of the market, I see the units were paying the 34% -- CAD0.34 per month two years ago. And they've continued to pay CAD0.34 a month with oil trading at record levels. And, when questioned, the Board about -- when the Board is questioned about when distributions might increase, we hear a lot of mumbling about well, we will look at debt and we will look at a few other things and perhaps at some point distributions will increase. I'm wondering if you have ever thought perhaps distributions might have some effect on market value?

Now, secondly, let me continue in that vein. I wonder if you've ever thought about the fact that if the units were trading at a higher value, the units themselves could be used in acquisitions instead of incurring debt.

I'll answer your question. This is the last one we're going to answer like this. It's just you can't -- this is a CAD16 billion company. It's a very complex energy company. When we make a statement as we made, we were talking about the general markets as related to oil and gas.

Oil and gas companies are generally trading now at a 30% to 40% discount of net asset value. Net asset value has always been a determining factor of what you trade on the market.

Our -- we believe that our distribution is prudent. We believe that how we're using our cash flow to pay down debt for the long-term is also prudent. So, it's very difficult to sort of put a pin in the wall right now and say, why don't you jump your distribution up to CAD0.40? It will jump your stock. Yes, it probably would jump the stock but it would reduce our ability to pay down debt. It would have long-term implications for the Company.

So we felt as management, as the Board that prudent management was to leave the distribution at CAD0.34 per unit per month which is still quite a healthy return for investors.

I will remind investors as well that we've had a consistent distribution for a period of two years, that we increased our distribution twice since we became a Trust. And I think you have to bear all that in mind. And that's about as far as I'm going to go on that. Thanks.

[Mark Warner], Private Investor.

Excuse me. But I did miss the beginning of the call. I apologize for that. But the gentleman who -- the individual investor who asked earlier about the effect of how the reporting of the net loss figure would affect someone who's probably not an accountant, I believe Enerplus had some hedging losses as we did, as Penn West did, but they seem to have reported it differently than you all do.

Everybody reports the same. Some of the companies will put a line in and say without the hedging losses, where would we have been? But we -- I guess we're following the letter of the law and you report what -- as Todd talked about earlier, you report what the ledger sheet looks like at the end of the quarter. So, that's what we've chosen to do.

The rules -- there are no -- there's not one set of rules for Penn West and one set of rules for other trusts or one set of rules for Enerplus and one set of rules for Canadian Natural Resources. All of us that operate in Canada and in North America operate under the same accounting guidelines and the same reporting.

Right. I understand that. But we all know that the press is going to pick up whatever negative thing is in the report even though the Funds From Operations were from what I can tell excellent.

I'm not concerned that this Company is going to be crushed by one report of -- in one paper.

Right. What is the (multiple speakers)?

You have to look at -- I believe you have to look at the long-term. You have to look at the inherent value of the Company and I think it gets -- I'll go back one more time. If you look at one point in time and because of accounting rules that we have to record potential future hedging losses, if that's going to drive a company in or out of business, we're probably in a sad world.

Right, okay, I understand that. And I know you all take a lot of heat on it.

Thank you.

Don't want to dwell. But listen, one last quick question. What is the current payout ratio?

About 50%.

Okay. Well gosh, that's outstanding. So thank you.

Kam Sandhar, Peters & Company.

I have three questions. First of all, just wondering, what's your productive capability when you include the Endev acquisition and once everything is back up and running after all these turnarounds?

The second question, when do you plan to put out your asset packages and have you decided as to how big or small those will be?

Then the third question is, on your resource play strategy, when you would be able to communicate to the market what progress you've made on that and what areas I guess you guys are looking to expand into, given you have been active in land acquisitions?

I'll answer a couple of those questions and then I'll turn one of them to Hilary. In terms of with the Endev piece in, we would probably be just a snick under the 200,000 barrel a day mark in terms of capability.

In terms of the resource plays, we are already obviously moving ahead on strategies on select plays as well as obviously on our enhanced oil recovery projects in terms of testing certain capabilities.

Our intent at the beginning of this year was to select up to a dozen projects where we were going to start testing concepts. Basically, we're there. We're going to -- obviously I don't want to drive with my nose right on the windshield. So, we're going to let the test results bear out through a couple of quarters before we're talking publicly about anything significant. So, that's with regards to the resource plays.

And then on the A&D, I'll turn it to Hilary Foulkes for that.

We anticipate an introduction of the package by the end of September to the public. And it will be in the neighborhood of 17,000 barrels a day.

[Matt Hellmann], Private Investor.

Thank you for taking the call and for listening for so long to all of us private investors. Just my comment on the hedge is, it's really up to us, to the investors, to understand what that means. So I think it's fine everything the way you had explained it and the way it's written. By me, there's no issue there just so you guys know as a private investor.

But my one question is, why do you not publish your payout ratio? I calculated it myself as best as I could but that's a really, really common statistic to publish in reports. And it's just not there in your reports, curious to know why.

No particular reason. In fact, I think we could and probably should add it. I thought it was in there. But we're thinking consistency of distribution is just as good for investors as a more volatile one that goes up and goes down. As Bill pointed out, we're coming up to about our 30th consecutive distribution of CAD0.34 and we think that's a good thing.

Our payout ratio is around 51% for the second quarter. We like that. We generally try to keep that below about, as a target, 60%. But we accept that there is -- commodity prices are volatile. As long as we're kind of averaging above that level we think that's right for our Company at this time.

I think that's fantastic too. The little calculations I did, I came up with 55%. But in private investor circles, people actually look at that number and it was omitted. So, in my circles, we were talking about what it was. And just my two cents is I think it would be just fantastic with such a great number there to have that specifically highlighted in the report. That's all.

We appreciate it. Thank you.

There are no further questions at this time. I would like to turn the call back to management for any closing remarks.

This basically brings to conclusion our Q2 conference call. We're happy to entertain any calls. We'll probably direct them to, of course, Jason Fleury, our Manager of Investor Relations. And his information is available on our website. So, thank you all for your time and attention.

Ladies and gentlemen, this concludes the Penn West Energy Trust second-quarter results conference call. If you would like to listen to a replay of today's conference, you can dial 416-640-1917 or 877-289-8525 and enter pass code 21276122 followed by the pound sign. Thank you for your participation. You may now disconnect.