Obsidian Energy Ltd (OBE) 2008 Q3 法說會逐字稿

Welcome to the Penn West Energy Trust third quarter results conference call. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded Wednesday, November 12th, 2008, at 3:00 p.m. Eastern time. I would now like to turn the conference over to Mr. William Andrew, President and Chief Executive Officer. Mr. Andrew, please go ahead.

Thank you, and good afternoon. I would like to welcome to you Penn West 2008 third quarter financial and operating results conference call, and sharing the call this afternoon with me is our President and COO, Murray Nunns, who will review the quarter in more detail and also provide a little bit of color on our operations and a little bit on our strategy going forward. During the past several months, we've seen a sharp decline in equities and in commodities, as the problems brought on by the global credit crisis have shaken the confidence both of the stock markets and of the consumer. And we do know that many of you have been caught by this devaluation are looking for return to more stability and more certainty in the markets. As managers of Penn West, we feel that we need to be aware of the global market and financial situation. However, we cannot become transfixed by the day-to-day news that is assaulting the market. We will continue to focus, prudently managing Penn West through this market downturn and maintaining a strong company that will not only weather the current crisis, but also be positioned to capture value and to seize opportunities.

Our units, Penn West Trust units, are traded on both the New York Stock Exchange 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. All conversions of natural gas to barrels of oil equivalent are done on a six to one conversion ratio.

Certain information regarding Penn West and the transaction, 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 risks. Participants are redirected to our news release issued last night, as well as to our MD&A and financial statements which we filed on SEDAR 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 U.S. securities. Regulatory -- securities regulatory authorities and may be accessed through the SEDAR website. That is at www.sedar.com. And the SEC website at www.sec.gov. Our own website contains all of this information, plus additional information about the Company, and I would urge investors to frequently visit our website at www.pennwest.com.

Additionally during this conference call, certain references to non-GAAP terms may be made. Participants are directed to Penn West's MD&A and financial statements filed on SEDAR and our news release issued last night, as well as 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 at which time we'd be pleased to at least attempt to answer your questions. I'll turn it over now to Murray Nunns who is our President and COO.

Thank you, Bill. We'll start off with a quick look at the financials, or some of the highlights of the financials. First, looking at some of these numbers, funds flow for the third quarter was $662 million, which was an increase of 91% over the $346 million that Penn West generated in the third quarter 2007. The average net sales price for the third quarter was $71.54 per BOE, which is an increase of 33% over Q3 of 2007. This primarily due to the realized prices for light oil and natural gas liquids which averaged $110 and change per barrel during the quarter. Natural gas prices averaged about $8.50 per MCF for the quarter which was a 45% increase from the previous year's quarter.

Corporate net-backs for the third quarter were $43.33 per BOE, an increase of 33% from Q3 in 2007. We maintain our hedging philosophy of managing our overall exposure to the downside on commodity price while also positioning to retain upside price potential on a majority of our production. We have managed our downside exposure in this environment of softening energy prices through hedges entered into earlier this year. We now have almost a third of our 2009 crude oil production hedged using collars between US $80 and US $110 on West Texas oil. Approximately 20% of our natural gas production is also hedged with weighted average collars between CAN $7.88 and CAN $11.27 per GJ at AECO. Moving on to distributions, our distributions paid during the quarter totaled $388 million, equating to a payout ratio of approximately 59%, and a year-to-date payout ratio of 54%. Penn West's current monthly distributions are CAN $0.34 per unit. We are pleased to announce that the Board of Directors, subject to the usual caveats of current forecasts of commodity price, production, and planned capital expenditures have approved a continuation of the current distribution levels for the months of November, December, and January of 2009.

Looking at operations, during the third quarter of this year, production averaged 190,177 BOE per day. Reported crude oil and natural gas production averaged 106,898 barrels per day, and natural gas production averaged approximately 500 million cubic foot per day. Production for the quarter was impacted by a number of events, primarily related to unplanned maintenance activities. We now forecast that our pro forma average 2008 production, which includes the kinetic and vault production from January 1, will be slightly below our previous guidance of 195,000 BOE per day.

Now, in looking at our capital programs, we invested $232 million into our asset base in the third quarter bringing our total investment to $757 million on a nine month basis. That's excluding corporate acquisitions. Penn West was very active during the quarter, drilling a total of 98 wells, including 46 net oil wells and 40 net gas wells. Approximately 20% of our 2008 capital budget will be directed to projects which have the potential to add significant future production and reserves, but however produce no immediate cash flow or production volumes. Our strategies are focused on balancing conventional asset development with enhanced oil recovery and resource exploration. We look forward to releasing more details about these programs on an ongoing basis. We will continue to prudently manage Penn West by focusing our capital program on short-term high net-back development and continuing key exploration programs. We have the people, the assets, and the balance sheet and strategies in place to weather this financial storm and prosper in the future.

Just before we turn the call back to the operator, on hand with me this morning are several members of our senior management team. We have Dave Middleton, our Executive Vice President of Engineering and Corporate Development. We have Todd Takeyasu, our Executive Vice President and Chief Financial Officer. Hilary Foulkes, our Senior Vice President of Business Development. Dave Sterna, our Vice President of Marketing. And Keith Luft, our Senior Vice President and General Counsel and Stakeholder Relations. So with that, I would like to turn this call over to the operator and open up the phone lines to callers.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from Gordon Tate of BMO Capital Markets. Please proceed.

Good afternoon. Just drilling down a little bit more on your CapEx program, it looks like it's coming down, spending about $1 billion or so, or just under $1 billion this year. We would expect, and then next year, $800 million. Murray, you mentioned that you are going to concentrate more on shorter term projects. Can we assume that you are going to focus on maintaining your base production and some of that reduction will be from your long-term resource development?

In a general sense, looking forward to 2009, our intent is to continue -- obviously we're going to focus on the short-term value-add propositions within our conventional development program. We're not going to lay down all together, though, on the broader efforts on EOR and resource plays. We may narrow the field a little bit. Originally, we were starting off looking at testing eight to twelve concepts by end of Q1. We may narrow that down to five to seven type major concepts that we'll drive forward with.

And by concepts, sorry, you mean what?

I can broaden that if would you like and give you a little bit of a description on the plays if that would be of interest.

Okay.

Some of the key -- there's a couple of key conventional areas we're focusing on, in primarily Cretaceous and Triassic targets across western Canada. Four, in particular, would be in the [Leach field] area. We will be continuing with that program. There's a couple of Cretaceous, Triassic targets in central Alberta that between industry activity and our own, we are continuing to pursue. There's a select portion of the [Montney] that's already developing around approximately 20 sections of our land near the Peace River Arch that we will be pursuing. So, on the conventional side those will be the key focuses. On the resource side of the equation, we're continuing testing on a couple, or one particular shale gas play, and one tight sand multi-zone project in eastern Alberta. And then on enhanced recovery, we'll be looking at key waterflood projects in Pembina, [Doddsland]. Those will be two areas in particular that we will see attention. And the last project would be a thermal pilot of cyclical steam in Seal. It should be underway by Q2 '09.

I didn't hear you say anything about the CO2. Is that kind of on the backburner? (inaudible) at this point?

At this time, we think we've got enough piloting information and enough knowledge about our reservoirs. We really have to see how the CO2 unfolds in the industry in a broader sense. In terms of how much pressure there is for capture, and how far they go on the CCC projects at this stage. It's not that we're walking away from it. We're just waiting to see how that unfolds in the market in the next six months or so before we commit further dollars to long-term.

One last question. Any progress on your disposition program? I think you were looking for tenders for the middle of October.

That's correct. This is Hilary Foulkes here. We are currently in negotiations, and it still remains a confidential process. But we are expecting to be closing transactions late this year and early part of next year.

Okay. And was that for, I think, for 16,000 BOEs a day? Is that right?

We had released up to 16,000 barrels a day for review and potential transaction, yes.

Alright, thanks.

Your next question comes from [Cliff Grifikay] of Penn West Energy. Please proceed.

Hi, Murray. When are you going on BNN again?

No current plans today.

Oh, no plans today. Because when you go on, ratings go way up. What is the ratio of debt to cash flow, and what is the ratio of debt to capital employed?

Debt to cash flow is about 1.5.

1.5?

Debt to capital employed is -- I recall it's in about the 25% range. Very comfortable. That's probably why I don't know the number.

That's a lot higher than Husky. Husky is down to 11%.

They're very underlevered, I would say, Husky.

Alright. Number two. If oil and gas stay at the present levels, would you say distributions are safe for next year?

Everybody is looking at me, so I'll do that one. We are caught in a funny period right now, because commodity prices have come off sharply, and the capital costs, the operating cost structure hasn't reacted yet. We're firmly convinced that the capital cost side will react, and that we'll see a reduction in capital cost. We'll see a reduction in operating costs. If we go back through the history of our distributions and look at 2005 when oil was in the $45 to $50 range. Natural gas was at about $7. We originally pegged our distribution at $0.26 per unit per month, and we've raised that consequently up to $0.34 over a two-tiered approach. If prices stay where they are, if the cost structure stays where it is, and we don't expect that. Then certainly there's going to be pressure on the distribution because we do not intend to run a company over any length of term where we're having to incur debt to pay distribution.

Basically, every cent on the distribution is worth about $50 million, and so if we are assuming that the cost would stay at about the same level, if prices stay about where they are today. Recognizing that we've hedged a reasonable amount into 2009. Then I think a shortfall in where we absolutely want to be with our cash that we can convert to capital would probably be on the order of $250 million. Which would be roughly $0.05. But we're going to look at it over the next three months. We're just going to see where prices do settle. Whether it's up or down. And everything that we need to look at over the next three months, and part of what we're doing right now in the first part of November is lining up our services for next year and continue to line them up. I can guarantee you that when we're going to the service companies, we're not going to them to ask them to raise the cost of service for next year. We're going to them to ask them to lower it. So that, I guess, is the easiest answer I can give you.

so there is a possibility, if things remain the same, there could be a decline in distributions of $0.05.

Basically to give you a number, I don't want to hang my hat on any number, but certainly we've got -- we wouldn't continue to operate in a position where we were borrowing money from the bank to distribute to the shareholders.

Okay. And number three --

Right now we're at about even.

Okay. The distribution rate, vis-a-vis cash flow, is about what? 54%, 59%?

59% the last --

That's pretty healthy.

yes.

Number three, has management come close to making a decision with regard to the structure they're going to be at, and can you avoid going the corp route right up until January of 2013?

Effectively what we're looking at right now is we feel that we're best to remain as a trust. That's with the current legislation that's on the books, and assuming that we're moving ahead in that regard with the SIF tax introduction the end of 2010. We would look at remaining as an energy trust until the end of 2011. After 2011, in all probability, and when I say in all probability -- very, very high probability -- that we would retain a sizable dividend in the Company, even on conversion to a conventional corporation model. We do have, rolling into a period after 2010, we feel like we'll have somewhere in the order of $6 billion or $6.5 billion in loss carry-forward and pools available to offset future tax. So we'll utilize them, certainly aggressively over the first four or five years. So we expect to be able to maintain a good yield, certainly through the time period you talked about, which is 2013-14.

Even becoming, as we become taxable and as we incur income taxes in the Corporation, with Murray and the gang continuing to explore and continuing to run an active business, it's not a case where suddenly you are faced with having to pay taxes at 25% or 28%. You use the write-offs as they're available. You use depreciation, and for that reason, even after that period and certainly through quite an extended period, the dividend may be trimmed a little bit, but we'd still intend to operate as a Company with a -- certainly comparable to where the E & P companies are today. A very sizable dividend.

So, the dividend yield, come January 2012. I know you are not going to give me a number, but could you give me a ballpark number? 6% or 7% yield?

My crystal ball is not that good out in the future. We feel that we would have to be competitive with the conventional E & P companies, and we've seen the rates of growth. I do recognize that part of that growth that the conventional E & Ps have seen have been share buyback. Generally, we've seen a number in the 6% to 10% range. Our feeling is that if we can provide yield in that range and provide self-sufficiency or sustainability from a corporate point of view, and also have a good strong conveyor of new projects coming into the Company to maintain it, that we would be competitive.

Yes. The pipelines, for example, [Pobenask], has a yield of between 9% and 10%. Okay. Well, thank you very kindly.

Thank you.

Your next question comes from George Burmann of Gunn Allen Financial. Please proceed.

Good afternoon, gentlemen. Congratulations to a good quarter.

Thanks.

I've got a question. The current very volatile currency markets, in particular the U.S. currency, strengthening of the U.S. the dollar. How, if at all, does that affect you and your profits? And or costs?

Each cent that the U.S. dollar gains against Canada over a one-year forward look for us is about $27 million of cash flow. And what we've done to try and -- we tried to capture a little bit of that, of the recent Canadian dollar weakness by entering into Canadian to U.S. dollar swaps. And so far we've gone off $180 million at $1.27, and we figure that works really good with our $80 floors to give us something on those dollars in the range of CAN $100 for our light oil. On the cost side, it's generally more of a localized market.

So in other words, all of your costs are in Canadian currency, and you sell the oil in U.S. dollars.

That's correct.

And the current 25% drop against the U.S. currency should augment your future profits quite well, especially if you've hedged them now.

I should caution you on one thing, and that is that the local costs, our overhead, or our salaries are certainly all Canadian. A lot of our services are Canadian. However, some of the major supplies that we do secure, and we're talking about pipe and large engines, large process equipment. Some of that we source in the U.S. and abroad. And so it's not quite as insulated, but that would account for less than 25% of our capital.

There is a long-term relationship, though, between the Canadian dollar and the price of oil. And that is obviously a key relationship that we are keeping an eye on. If oil stays in this range, we would generally expect some retreat of the Canadian dollar and we would undertake further activities to what Todd had previously described.

Okay. And then you had mentioned in your initial remarks that about 30% of your oil and 20% of your natural gas for '09 are hedged at higher prices than currently.

Yes. Dave Sterna here. That is correct. For Cal 9, about 30% of our oil is hedged. The average price for Cal 9 is using collars at $80 by $110. In terms of natural gas, we generally hedge by season, by the winter and the summer season. So we have about 170,000 GJs hedged for this coming winter, meaning from January through March, at $738 by $976 a GJ. That represents about 33% of our production. And then for the summer period of April through October '09, we have about 100,000 GJs a day hedged at $825 by $1237 per GJ, and that represents 20% of our production.

And then further out, you're open.

That's correct.

Okay, great. Thank you very much.

Thank you.

Your next question comes from [Don Beein] of BMO Nesbitt Burns. Please proceed.

Hey, guys. In bull markets, we all see wonderful things getting done, and then when we roll into the bear market we really find out where the bad deals were done. And in bear markets that's where smart guys make out for the next cycle. Can you talk a little bit about where you see current opportunities looking forward?

I'll let Murray talk about the operations. I'd say on a corporate point of view, anytime you see a crest and rise in the crest, there's a lot of people that are doing a lot of interesting things. And then as markets come off hard as they have now, and you've got a lot of the world in a recession. Basically, if you can maintain a reasonable balance sheet and stay strong through it, there's going to be quite a few people to help out of the ditch. And we've, with the Company over the last 15 years, we've probably been a Company that tends to operate a little better in a downturn than in an upturn. So we see opportunities primarily on where Hilary is going to be working, and that would be in acquisitions. We have to be always cognizant of our balance sheet, and how we would do these acquisitions. But that acquisitions consolidation would be the one area. The other part I'll let Murray talk about, the relationship on land sales and things like that. I'll let him go.

Yes. Obviously the acquisition side, and Hillary can probably lend a little more color afterwards to that that Bill has touched on. We see -- key advances you can make are, one, in cost structure. We think, we believe the cost of adds can come down substantially, especially as oil sands rolls back its effects on the labor pool. That's going to lend some possibility for that on the services side. Land sales, we see a logical extension there. Where, as we prove out some of the strategic thrusts, we can continue to consolidate around those, be it with new land or be it with asset purchases. We think that is there. We think there has also obviously been structural damage to the junior market in Canada that's going to extend for a considerable period. We also think with the debt leverage of some of the U.S. players that there may be opportunities in that realm as well. But I'll let Hilary provide a little more color on that side of the fence.

Really, just to add to what Murray mentioned, I think with the number of opportunities that everybody anticipates coming up in the next little while the key is going to be discipline and maintaining focus in terms of what our acquisition appetite actually looks like. We are going to stay focused on our core areas, our three components of our business. Our conventional production, our EOR, and resource [plays]. So that really is the fundamental principle behind our drive towards acquisitions.

Okay. That's good. Thanks, guys.

Your next question comes from [Ken Rees] of AIG Financial Advisors. Please proceed.

Good afternoon.

Thank you.

The reason I'm calling, just couple questions. You mentioned the distribution rate is 59%. Does that include capital expenditures at all, or no?

No.

The reason I'm saying that, is when (inaudible) reported the other day, another company that is fairly conservatively run like yours. The CapEx numbers took the numbers up so much to the point that, based on their hedging program, they had to cut their distribution. Obviously, you are keeping yours the same which is wonderful by me. But, my other point is that, since I'm in the United States, when you are just talking about your taxes, depending on the corporate structure, which happens in 2011. Based on your earnings, less your depletion and your depreciation. What would your effective tax rate be right now if this was 2011?

It would actually be zero in 2011 and 2012. As we get out to, because our pools certainly at these commodity prices are more than sufficient to shield all of our taxable income. However, as we get out into 2013, 2014, our models indicate that our effective tax rate falls into that 8% to 10% or 11% of cash flow sort of level. Based on our long-term projection. we seem to flatten after we exhaust our tax-free period at about that range.

Do you see that low tax rate as a major detriment to your capital ratio where you would have to cut your dividend?

Not really. The models that we were running were $150 million a year of cash tax, way out. It depends what else is going on in 2014.

I just saw an interview with T. Boone Pickens. He's looking for $100 oil this time next year. So, if that's any consolation.

He's got our vote.

It's to the point that he's cutting back on his wind programs right now, too. Thanks for your time.

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

Well, thank you, everybody for joining us today. If any of you out there have a cure for the common cold, I've got a President and some Vice Presidents that need it. Sorry we were a little bit nasally on the phone today, but we've got some people suffering here. If you have any questions please give me a call or Jason or Murray, and the other is through our website. We'd be happy to answer them, Especially if there are some private investors that may not just have come up with a question but have a question later. If you have any questions please give me a call or Jason or Murray, and the other is through our website. We'd be happy to answer them, especially if there are some private investors that may not just have come up with a question but have a question later.

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