Obsidian Energy Ltd (OBE) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Penn West Energy Trust fourth quarter results conference call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions). I would like to remind everyone that this conference call is being recorded on Thursday, February 19, 2009, at 12 p.m. Eastern Time.

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

Thank you, and good morning. I would like to welcome you to Penn West's 2008 year end financial and operating results conference call. With me this morning Calgary is our Chief Financial Officer, Todd Takeyasu, and other members of our executive team. Our President and COO, Murray Nunns is in Vancouver presenting to an Energy Industry Investment Symposium, and so I will do my best to sub in for Murray, and we'll talk about our results for the fourth quarter, a little bit about year end numbers and a little bit about the future.

The last twelve months have probably been as dramatic and eventful in the markets as at any time in the memory of most investors. We referenced the marked increase and rapid decline in crude oil prices as they rose to record levels and fell almost as rapidly to current levels. In addition, natural gas prices were weak at year end, and reduced the ROR that was associated with the development of unconventional gas resources in North America to a whisper as drilling rigs were racked and service companies went to the sidelines. While these events played out in commodity pricing, capital markets around the world struggled as concerns about credit and the very well-being of some of our financial institutions began to weigh in the minds of investors. To relate, 2008 and into 2009, Penn West reacted to current capital market conditions and likelihood of continued market strain by taking proactive steps to minimize the impact of market conditions on the company. While we remain focused on the business at hand, we acknowledge the turmoil occurring in the marketplace, and we also remain vigilant in our effort to assure Penn West remains well positioned to weather this economic storm and also well-positioned to take advantage of current economic conditions.

I will go through a little bit of the standard wording and cautionary notes now. Penn West trust units are traded both on the New York Stock Exchange under the symbol PWE, and on the Toronto stock exchange under 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 basis. Now the long one. I will try my best, Todd.

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 security laws and necessarily involve risks. Participants are directed to Penn West's news release, which we issued late last night, and also directed to review the advisory note contained in that news release. Participants are also cautioned 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 security regulatory authorities, and may be accessed through the SEDAR website at www.SEDAR. com or the SEC website at www.SEC.gov. Our own website is www.PennWest.com, and while you're looking at that, we have what Murray is speaking to in Vancouver this afternoon, our latest presentation is also on the website.

Additionally during this conference call, certain reference to non-GAAP terms may be made. Participants are directed to Penn West MD&A and financial statements contained in our news release issued last night, as well as previous filings available on the website noted earlier, to review disclosure concerning non-GAAP terms. Following our review and update this morning, we'll open the phone lines at which time we'll attempt to answer your questions.

First a look at the financial numbers. Funds flow for the fourth quarter was $490 million. That's an increase of 40%, of the $349 million Penn West generated in the fourth quarter of 2007. Average sale price for the fourth quarter of 2008 was $46.79 per BOE, that's a decrease of 16% from the $55.44 we achieved in the fourth quarter of 2007. The average sale price for light oil and natural gas liquid was $53.72 per barrel during the quarter, and that's down from $76.99 during the same period in 2007.

Natural gas prices were a little stronger. They averaged $7.03 in the quarter. That's an 11% increase from the previous year. Production for the fourth quarter of 2008 averaged 184,908 BOE per day, that's an increase of 44% over the same period in 2007. Our production is weighted to light oil and natural gas liquids, and they made up 43% of our production or 79,115 thousand barrels per day. Heavy oil accounted for 14% or 26,529-barrels of oil per day, while our natural gas production averaged 476 million cubic feet per day. Corporate net back for 2008 was 39.85 per BOE, that's an increase of 26% from 2007. That's for the full year. On a year-over-year basis funds flow of 2008 was $2.5 billion. That's an increase of 90% over 2007. An increase in funds flow was due to year-over-year increase in production and also higher average commodity prices most notably oil prices.

Production in 2008 averaged 189,462-barrels of oil equivalent per day, an increase of 49% over 2007, pro forma production which includes kinetic and vault for the stub period at the beginning of 2008 was 192,000 BOE per day. Production was weighted 57% to oil and natural gas liquids, 43% to natural gas. Net income for the fourth quarter of 2008 was $404 million or $1.05 per unit basic. This compares with net income of $127 million or $0.53 per unit basic in the fourth quarter of 2007. Net income for the full year 2008 was $1.2 billion, that compares with $175 million in 2007. As prior to the proactive measures taken by Penn West to provide greater financial flexibility and capital certainty, we've hedged approximately 25% of our production at what our now to be considered attractive prices. We have one third of our 2009 crude oil production hedged using collars between $80 U.S. and $1.10 U.S. WTI and 20% of our natural gas production hedge weighted average collars between $7.88 and $11.27 Canadian per gigajoule at AECO.

A bit on distributions. Our distributions paid during the quarter totaled $392 million, equating to a payout ratio of approximately 80% while our payout ratio for 2008 was 59%. Recognizing this fact and as part of our commitment to prudent management of the balance sheet, Penn West reduced the monthly distribution from $0.34 per unit to Penn West's current monthly distribution of $0.23 per unit. While we did not take this reduction lightly, we do believe that's absolutely the right thing to do in order to ensure continued balance sheet strength and optimal financial flexibility in the days ahead.

At year end 2008 Penn West had proven plus probable reserves of 728.7 million-barrels of oil equivalent. Of this total 531.6 is classified as proven. A proven plus probable reserves are weighted 66% to crude oil and natural gags liquids and 34% to natural gas. Based on our average fourth quarter daily production rate our reserve life index at year end was 10.8 years. Our proved plus probable finding and development costs were $19 per BOE before the change in future development costs, $24.68 per BOE after changes in future development costs, recognizing that our 2008 capital program of slightly over $1 billion included $170 million in costs for land geological and R&D work. We do believe we turned a significant corner in our ability to develop reserves competitively, and restore your confidence in the exploration and development capability of Penn West.

In 2009 we anticipate a capital budget between $600 million and $825 million of which we'll spend between $250 million and $325 million in the first half of 2009. That's a reduction of approximately 50% from the first half of 2008. 2009, our projects emphasize low cost volume additions with a focus on production optimization, and low to medium risk drilling with a bias to light oil over natural gas and heavy oil. We'll continue to advance our emerging oil resource play in the Lower Shaunavon, located in southwestern Saskatchewan. Based on this level of capital expenditures, we anticipate our production volumes will average approximately 180,000 barrels of oil equivalent per day in the first half of 2009, and that's subject to impact, the impact of the closing of dispositions.

I should note that our current production is approximately at the level of the last quarter at about 184,000 barrels per day. We invested approximately $1 billion into our asset base in 2008 including just over $500 million in drilling alone. Penn West was active during the fourth quarter drilling a total of 52 net wells including 34 net oil wells and 11 net gas wells. As will be the case in 2009, our efforts were primarily focused on our light oil areas.

Talk a little bit about debt for a second. At year end 2008 our total debt was approximately $4.1 billion, and that's a reduction from immediately following the take over of Kinetic our debt at that time was about $4.4 billion, so we retired approximately $300 million through the year. We had hoped to do a little more but got caught with the soft prices in the last half of the year. However, we have been very aggressive through the first month and-a-half of 2009, and we're using proceeds from some assets dispositions plus our recent equity offering to further reduce debt and we're targeting debt to be at approximately $3.7 billion and by about the end of the quarter as we apply those proceeds.

Our debt structure consists of long-term senior unsecured notes of $1.3 billion. Those have maturities of 8, 10, 12 and 15 years, so there is nothing due on those notes for quite a long time. We have got 296 million in convertible debentures for the most part they extend until the end of 2011. I think Todd told me that there is about $6 million to $7 million due this year so very minor amount. As well, our major bank syndicate and syndicated bank facility is for $4 billion. As you can -- if you do simple arithmetic, you will see that by the end of the quarter, we will be drawing at a little over half of that total facility. The facility is not up for renewal until January of 2011, and I can assure the investors that we're well within the covenants on our bank facility.

In summary, while we have seen the economic environment sour, access to credit tighten, and capital markets struggle, remain confident that Penn West people, assets, balance sheet and strategies will allow us to weather this financial storm, and not only weather it but prosper in it. We also believe that oil and natural gas plays a key role in fueling North America and in continuing to fuel North America, and we believe strongly that our waiting to light oil and natural gas places us at the forefront to provide the much needed energy for North America's future. With that, I would like to turn this call over to the operator and open up the phone lines for questions.

(Operator Instructions). Our first question comes from Andrew Fairbanks of Merrill Lynch. Please go ahead.

Good morning, Bill.

Hi, Andrew.

Wonder if you can talk about your Wild Boy drilling plans for the year and views with longer term prospects.

Sure. Basically those of that may not be familiar with the play, we have a play at Wild Boy that we have been developed over the last 15 years, primarily in the period of 1998 to 2002. Our peak production in the area was close to 150 million cubic feet a day, so we've got tremendous facility infrastructure in there including a line that connects that part of northern British Columbia into the Alberta export system. We also have a tremendous amount of land in the area, and as we looked at through our land over the last couple of years, we looked at the potential in the gas shales in the Wild Boy area. We call it the Cordoba embayment. It is a mirror play to Horn River on a bit smaller basis aerially. We have drilled and completed our first well in the area, completed it last summer.

We planned to have a couple more rigs we're working on them right now, a couple more wells finished this year and completed. Original plans were to do a development in the area this winter and to put on somewhere in the order of 8 million to 10 million cubic feet a day. That got kind of knocked off the table when gas prices went south, but we will be aggressively pursuing this area when gas prices come back. We're quite excited about it. We've got a very, very good land position in the area. We think we've got a leg up on almost anybody pursuing the play because we have about 60 to 70 million cubic feet of spare capacity in our plants. We've got a pipeline that goes right into the area because we're producing gas from a shallower horizon, and we've also got the export pipeline into Alberta.

That's great. Thanks.

Thank you.

Your next question comes from Adrian Day of Adrian Day Asset Management. Please go ahead.

Yes. Good morning. I wonder if you can address this, a lot of conventional analyst wisdom seems to be that your company is much better positioned than most of its peers or all of its peers for flat marketing or down markets, but the analysis of the consensus also seems to be you have less potential on the upside. Do you think that's a reasonable assessment?

No, I don't think. I have been running this kind of vanilla flavored company for seven years now, and I have seen the flavors of the month go in and out. We built a strong asset base. We take our time. We're conservative. I believe in assets of this company, and we'll get there. We do prosper as well in tough times because we generally try to keep the balance sheet clean, something that I was taught by our previous Chairman to keep the balance sheet very clean, and we attempt to do that and move forward, so we think we're well-positioned, just I think analysts tend to get caught up a little bit in the flavor of the day and sometimes if you're a bit of a complicated company which we are, a large and complicated company with lots of attention, lots of opportunities, it is not as easy to grasp onto as a company that may only have one thing going for it.

Okay. That's super. Thank you.

(Operator Instructions) . Our next question comes from Chris Griffith, a private investor. Please go

Good morning, Mr. Andrew. On the third quarter report on page 38, it said total long-term debt is $3.679 billion. I know you forecast by the end of the first quarter this year the long-term debt will be $3.7 billion, so the debt is being increased.

Cliff, the number that you speak of includes drawings on our bank facility at the balance sheet date plus it includes our long-term unsecured notes, but it does not include a couple things which Bill is talking all in, a couple things that are not included in that number that you reference, convertible debentures and working capital efficiency.

That is still long-term debt, though, isn't it?

It is separately disclosed on the balance sheet under the accounting rules.

At the end of that quarter, Cliff, we would have been talking about debt of about 4.2 or 4.1.

That would have been a more accurate figure, then?

Yeah, just the way they put it into the -- accountants have their unique way of putting it into the MD&A, but when I talk about total debt, it is everything we owe and the number at the end of the third quarter would have been about 4.1 or 4.2.

If the convertible debentures had to be included.

The convertible debentures and then we generally run a working capital deficiency or we have a little bit positive balance in the bank, so with everything in it would have been probably a shade over 4.1.

Okay. So all right so it will be down a little bit then by the end of the first quarter this year?

We'll have it down about $400 million from the beginning and as I say from the time of Kinetic, it will be down some, since the Kinetic acquisition some $700 million.

Okay. Now, if commodity prices remain the same, from now until the end of the year, they probably won't, but for the sake of this discussion, if they do, are you prepared to say that distributions will remain the same at $0.23?

No, I am not. We're basing our $0.23 on an average for the year of about $45, and so at $35 or where they are currently, I think they were 35 or 36 when I got up this morning, probably down now, but we would have to look at the distribution again.

Okay. So that's based on $45 oil. What about gas?

I think the thing to remember is that I think there is some sense out there if oil went down another $10 or $15 we would virtually nil cash flow and that's not the case. We believe we would still have money for, even at $35 we would have still some money for distribution and be able to go forward with a pretty good capital program.

At $35?

Yep. It is just that it would be tough to keep the $0.23 up with $10 less on the oil side.

What about the price of natural gas?

Natural gas not quite as important for us because it is only about 25% of our revenue, but so we can take a little more shock on the natural gas side. But it really, for to us get sensitive on the natural gas side, you would have to have gas slip down into the $3 range.

Okay. With regard to acquisitions, are you still acquisition minded?

Not really. Hillary is with in the room here and she is always acquisition and disposition minded, because that's her job, but we're doing a few smaller ones here and there. Hillary and her team sold some assets through the fourth quarter and into the first quarter this year. We're just doing a small deal right now that's about 2,000 barrels a day, but it is going to be basically fit within our current budget level, so we're certainly on the lookout, but we're not -- and I will tell you this. I don't have an appetite to take on another Kinetic right now, so we would look for something smaller and obviously something that fits our long-term plans.

Is there any possibility that you could acquire land in the Bakken area?

No. We believe we have got a tremendous play in the Shaunavon, and if we look at the results for the Bakken and results for the Shaunavon, we're pretty happy with what we have there, so we don't think we need the Bakken.

Is that light oil?

Yeah. Medium gravity like the Bakken. Bakken is a little lighter. Ours is medium.

Okay. Thank you.

Thank you.

Your next question comes from Gordon Tait of BMO Capital Markets. Please go ahead.

Good morning. Just following a bit on the last point, if the price of oil does increase or does recover mid-year towards the end of the year, where in your asset base do you see the best prospect for growing your oil production the next twelve to eighteen months?

Well, certainly, Gordan, the Shaunavon play in Leechville is one that where we have an inventory of locations. We've got between 300 and 400 locations. If we were one trick pony, we would be spending all of our money there, but we're trying to measure it over a number of plays. The 2 main areas that we're working on are both in light oil or the three areas we're working on first is in the Shaunavon play in Leechville, and that would be our principal expiration play. The other two areas are our areas where we're taking horizontal multi-frac technology and one is an area a little farther north in Saskatchewan in the Kindersly area, and we're pursuing the Viking zone there. We've had some success, and we've just in the process of completing an acquisition that will give us even more of a foothold in that area. That type of area we're looking at wells on a vertical basis that would have been in the five to ten barrel a day range, and we're able to increase those rates 10 fold, fully 10 fold by going horizontal, so we're pretty excited about that one.

We also are working with pressure maintenance on our fields in the area, using horizontal again. The other area that we started working on and we're going to get going at a lot harder is in the Penn at south and utilizing the same technology, and what we've seen from an injection point of view, we've been able to take wells that would be strained to take 50-barrels a day of water at high pressure, and we can put in 10 times that amount of water under vacuum initially, so that is -- and we're seeing pressure support. We're seeing increase in rates around the first pilot well we drilled in the area. We've also drilled a pilot and completed multi-frac producing well in an area that was watered out. We produced water for about a month and-a-half and it is making oil now and it is up in the range of 45 to 50-barrels a day and seems to be climbing every week, so we're quite excited about that play and what we can do with horizontal technology in a field that is as big as Pembina.

When do you think you'll be prepared to make a decision if the results are good and how much --

We're ready to roll on that. It is just a question of budget and where to place our money, so I would think you will see us start to get more aggressive through the summer and much more aggressive next winter and particularly if oil prices say recover to the $50 level, we'll get very, very aggressive there.

Thanks.

Thank you.

Your next question comes from Jonathan Fleming of Cormark Securities. Please go ahead.

Bill, in your prepared comments you mentioned turning the corner with respect to F&D costs. I wonder if you can add more color around that and give us direction where you think F&D costs might be heading in 2009?

Sure. I won't take credit for it. I will put a lot of credit on our new credit forward on new President Murray Nunns, not only on him but the whole team. I think part of it was just the way we emerged as a trust from our old days as an E&P company. Our focus initially was much more on optimization and tends to help on the capital efficiency and fining costs and last year 2007 was a real struggle and 2008, we just , with Murray we focused on fewer areas, non-conventional plays, shale gas, utilization of the horizontal drilling in more of our areas, and we were just able to do a better job of finding oil and gas. For next year, our target is to push it down -- I will get Thane Jenson is sitting at the table here. I will probably get him mad at me, but I would think our target is somewhere in the order of 17 or

That's really good stuff. Thanks, Bill.

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

Thank you very much. If there is any questions, you can give me a call in Calgary, 403-777-2502 or feel free to call our Investor Relations group and thank you for listening.

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