Obsidian Energy Ltd (OBE) 2009 Q2 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to the Penn West Energy second-quarter conference call and webcast. I would now like to turn the meeting over to Mr. William Andrew, CEO of Penn West Energy. Mr. Andrew, please go ahead.

Thank you, and good morning, and welcome to Penn West's 2009 second-quarter financial and operating results conference call. In Calgary this morning with me and beside me is our President and COO, Murray Nunns; and also our Chief Financial Officer, Todd Takeyasu; as well as some of the other members of our senior management team.

And we are pleased with our operational and financial results from the second quarter, despite having to work with some of the toughest economic conditions seen in decades. Our production volumes for the first half of 2009 exceeded guidance set out earlier this year, and our risk management program helped to bolster our netbacks relative to weak commodity prices, particularly in natural gas.

We continued to actively look at the depth of opportunities we have in our asset base. Murray and the crew from an exploration and development side and operations side, we have made strong, strong steps over the last six months, and certainly over the last nine months in terms of getting our house fully in order after a couple of very large acquisitions. And we are continuing to take the prudent steps necessary to continue to improve our balance sheet going forward.

A little bit of information, Penn West Trust units are traded on both the New York Stock Exchange under the symbol PWE, and in Toronto 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 basis, even though the price conversion is certainly far from that ratio right now.

Certain information regarding Penn West and the transactions and results discussed during this conference call, including management's assessment of future plans and operations, may constitute forward-looking statements under applicable securities laws and necessarily involve risks. We direct you and ask you to look at our news release issued this morning, and that you in particular review the advisory notices contained therein.

You're also cautioned that theh included list of risk factors is not exhaustive. Official information on these other risk factors that could affect Penn West's operations or financial results are included in reports that are on file with the Canadian and US security regulatory authorities and may be accessed through the SEDAR website at www.SEDAR.com, the SEC website, www.SEC.gov.

And of course we encourage you and we encourage all investors to take the time to go to our website, www.PennWest.com. We've recently revamped it and made it I believe quite a bit more user-friendly, but all of the information on the operations of the company and certainly any other risk factors are on that website for your information.

In addition, during this conference call certain reference to non-GAAP terms may be made. Participants are directed to Penn West's MD&A and financial statements available on our website as well as filings available on the websites noted earlier, to review disclosure concerning non-GAAP items.

Following our review and update this afternoon, we will open up the phone lines, at which time we would be pleased to answer any questions.

With that, I'm going to turn the call over to our President and COO, Murray Nunns.

We will begin with a review of our operational performance, and then we're going to move into a couple of key financial results.

As Bill mentioned, we are pleased that our operational and financial results for the second quarter have exceeded guidance. We remained focused on taking Penn West forward with strategies and initiatives which we believe will position for attractive returns for our unit holders.

So now just looking at the operational items. Penn West averaged just over 180,600 BOE per day for the second quarter in 2009. We exceeded our first half 2009 production guidance of 177,000 BOE per day, which was net of A&D numbers. We surpassed production guidance due to drilling success at our Lower Shaunavon oil resource play in Saskatchewan and through production optimization.

Q2 production was roughly 58% petroleum liquids. Our liquid stream continues to be relatively light at approximately 30 API. Natural gas production averaged about 460 million cubic foot per day, making up 42% of our daily production mix.

On the capital side of the equation, we spent approximately CAD320 million on capital expenditures in the first half of the year. This is at the high end of our CAD250 million to CAD325 million budget for the first half. This reflects the impact of favorable spring breakup conditions, which did not significantly impede our development, so a portion of capital originally budgeted for Q3 was moved into later Q2.

And it's important to emphasize, early results from capital activities will greatly influence our allocation of capital over the next 12 to 18 months. We anticipate that our capital expenditures for 2009 in total will be between CAD650 million to CAD700 million total.

Results on our resource play to date have been encouraging. The remaining 2009 capital program will continue to be focused on advancement of select resource plays, additions through exploitation projects, and low-cost production recovery. At a minimum, we believe our 2009 capital expenditures will be at the high end of the spending range mentioned in our second quarter MD&A. Spending levels may increase should successful play development warrant and commodity prices improve.

We are currently forecasting 2009 average daily production to be in the range of 175,000 to 180,000 BOE per day, and at this level of spending we should be at minimum in the midpoint of this range.

Moving over to some key financial results. Our funds flow for the second quarter was CAD430 million or CAD1.05 per unit. Our netbacks averaged CAD25.64 per BOE, which included a CAD5.46 hedging gain.

Our oil price West Texas averaged CAD59.62 a barrel in the second quarter compared to an almost non-imaginable number of CAD124.00 per barrel for the same period in 2008 and CAD43.21 per barrel in the first quarter of 2009. This year over year decline in oil price was partially offset by a weakening of the Canadian dollar.

Penn West's corporate average sales price for crude oil and liquids over the second quarter was CAD57.75 per barrel, a decrease of 46% from the second quarter of 2008.

For natural gas our average sale price for the second quarter was CAD3.68 per Mcf compared to CAD10.20 per Mcf during the second quarter of 2008 and CAD5.37 per Mcf in the first quarter of 2009.

Since the beginning of 2009, Penn West has reduced debt including working capital by approximately CAD350 million. We continue to look at ways to diversify our debt. Penn West closed a private placement of senior unsecured notes with an aggregate principal amount of approximately CAD238 million during the second quarter. These 2009 notes have five- to 10-year terms. This brings our total private debt to CAD1.5 billion, with terms ranging between five to 13 years with an average rate of 6.6%. The proceeds of the 2009 note issue were used to reduce reduce bank debt.

We anticipate a payout ratio approximates 60% for the remaining quarters of 2009. We prefer a long-term funds flow allocation which sees approximately 60% of our funds being paid to our unit holders while investing the remaining 40% back into our asset base.

Looking at our hedging as part of our financial strategy. During the second quarter of 2009, Penn West continued its ongoing risk management strategies through the hedging of additional crude oil and natural gas volumes. We entered into crude oil collars during the quarter on 15,000 barrels per day of oil for 2010 at prices between CAD63.33 per barrel and $78.09 per barrel US. We also hedged 11% of our 2010 natural gas production with collars having floors averaging CAD6.50 per Mcf -- or per GJ.

We believe that these additional oil and natural gas hedges for 2010 support future funds flow during this time of commodity price uncertainty.

Penn West is based on a business model that centers on maintaining both a strong and diversified balance sheet and a high quality balanced portfolio of long-life assets. We are very focused on maximizing operating efficiencies within the existing suite of producing properties as we push our development agenda forward. This agenda includes the development of our tight oil assets, tight natural gas assets and broadscale field redevelopment through the applications of rapidly evolving technologies.

I would just like to take a moment to flag everybody that in addition to Bill Andrew, we have Todd Takeyasu, our CFO, on hand. And joining us in the room this morning are a number of other members of Penn West's senior management team. We have on hand Dave Middleton, the Executive VP of Engineering and Corporate Development; Mark Fitzgerald, Senior VP of Production; Hilary Foulkes, Senior VP of Business Development; Keith Luft, our General Counsel and Senior VP of Stakeholder Relations; Dave Sterna, VP of Marketing; Thane Jensen, Senior VP of Operations; and [Jeff Kern], our VP of Finance. So we've pretty much got the field covered for any questions you may have.

So with that I'll turn it back over to the moderator, and we can open up the lines for questions.

(Operator Instructions). Cliff Griffith, private investor.

Good morning gentlemen. This question is for Todd. When I spoke to you the last time regarding results for the first quarter, I believe you told me that the objective of the company as far as reducing debt is concerned is to reduce it by CAD500 million a year. Is that correct?

It is, and we have a lot of other -- Hilary might want to weigh in on this as well. But we have a lot of fans in the fire out there. And we've got -- we are reasonably happy with CAD350 million over the first half.

And I think the more important statistic here is, what I look at it is I look at our exposure really to bank debt from the time that we closed the Canetic deal till now. And we are talking -- we've moved away from the exposure to banks in the order of about CAD1.3 billion or CAD1.4 billion in that 18 of period. So we are pretty happy with that.

And Hilary Foulkes, who is our Senior Vice President of Business Development, has a lot of other fans in the fire, if you will. And that's still a number to which we aspire.

My next question is either to Bill Andrew or Murray Nunns. With regard to the Shaunavon area, southwest Saskatchewan, what is the reserve life there?

As typical, and it's early in the life of these types of projects, but generally we're looking at longer reserve life. After the initial flush production you're looking at a fairly steady base of operations, once you flush it out. So we generally expect it will be very much in keeping with the company average of a 10- to 12-year reserve life. Typical for that style of project.

Now, what is your next big pool of -- where's your next big pool of oil located?

Well, there is a whole variety of characteristics of our asset base, and we've discussed them at length with a variety of situations. Suffice it to say, a lot of our -- one of our key focuses on a go-forward basis is the oil we already own. A lot of the fields we have access to are long-standing production bases in western Canada, particularly in the Cretaceous, the Cardium pool at Pembina, the Dodsland at Viking. We're also looking at a Triassic pool in another portion of the western Canadian basin.

In all of these are existing pools with relatively low recovery rates. And what we are really looking at as a central piece to going forward is the application of horizontal technology and multi-stage frac'ing to those types of targets. And that's where the key thrust of our capital programs for the second half of this year are targeted.

So they would be legacy oil pools, would they?

They would be legacy oil pools. They are not the only applications and only things we have in the portfolio. But you were kind of looking specifically for the oily side of the equation. And that's where a significant chunk of that may come from.

Yes. Now, the end of last year, I believe the reserve life index was something like 11 years. As we speak, has that figure changed at all?

We report reserves on an annualized basis. So we have obviously interim updates that we look at. We cannot comment legally on where the reserve life index may go, but suffice it to say, I think if you infer from production, in the production performance, that you probably aren't going to see any shrinkage in that number.

Okay. Over what period of time?

We can only predict a limited amount of the future, but I would say it's steady as she goes on that side of the equation.

Yes. Plus given the type of plays that we are pursuing, it -- particularly in light oil, it lends itself to a longer reserve life. And it helps with to keep a reasonable RLI.

Yes. Okay. Now, if commodities don't go below what they are now, let's say for the next -- for the balance of the year and all of next year, will there be any change in distributions?

To change -- and I think we talked about this a little bit in the last quarter, that what Murray and the team are doing is basically over the whole spread of our portfolio, all the way from Waskada in Saskatchewan up into the Cordova Embayment in BC, we are busily working on projects, particularly in the unconventional area, and that's I think recognized by everybody as the place where this basin is going to produce growth over the next 15 to 20 years.

As we get up the curve on those plays, and we are getting up the curve, certainly the play in the Shaunavon is leading the attack right now, followed by the work that we're doing on some of the legacy oil pools and up in northern BC. As we work on those, there's going to be a need for more capital, because ultimately when we do move away from a trust model, which we have to do ultimately, we are going to need to spend capital. We're going to need to provide some growth in the vehicle.

So we will -- unless commodity prices go crazy, and you talked about a flat commodity price environment, it's probably going to be necessary -- or it will be necessary over the next nine months to a year probably to look at the distribution, look at taking a portion of the distribution and putting it into capital.

We are not doing that yet just because we are still getting confidence in our plays. Once we get full confidence in exactly where we are going, and we are damned close to that, then we will be looking at boosting our capital spending. In order to do that you either need stronger commodity prices or you need to reduce your distribution a little bit.

Now, for every penny on the distribution, it's about CAD40 million.

Every penny equals CAD40 million?

Yes.

That's a lot of money.

We've got some plays, and Murray and the team are very excited about what they are seeing. I think it's long been the story of Penn West that -- you guys have got a good portfolio of assets; I wish you would get a little more aggressive on them. And we've come through a period of a year and a half where we've folded a very large acquisition.

We were a little bit alone in western Canada in the type of acquisitions we undertook in the last couple of years. That's behind us now, and it's time to return back to what I believe that Murray and the team do very well, and that's to look at some organic growth.

Bill, you will be converting to a trust effective the 1st of January 2011; is that correct?

The 1st, yes. The 1st of January 2011, the CIF tax comes into being. So you've got to be in a position where if you remain in a trust, there is the additional taxation. And basically the overlying factors on the speed at which we move from a trust to a conventional corporation will be tax effectiveness. The quality of our portfolio and the stage of development in our portfolio, those things will dictate how fast we move. But any time after January 1st. And we've got, as we've talked about before, we've got until the end of 2012 to do it without any tax penalty.

So the end of 2012?

Yes. But it could come -- it could very well come sooner.

I see. Okay. Well, thank you very much.

Jonathan Fleming, Cormark Securities.

I wonder if you could clarify on the capital spending. I think, Murray, you said CAD750 million for the year. First, is that including the Reece acquisition? And then my second question, could you break down for the back half of the year the split between oil and gas with respect to capital spending? That's it.

Yes. The capital numbers don't include the Reece (technical difficulty) [acquisition]. That would be the first clarification.

The second one would be, on the oil side for the back half. And I'll maybe elaborate a little bit on the back half in general. But it will be primarily oil-focused, I would say over the 80% mark. It will focus on basically extending out some of the initial work we have done in Q2 and Q3 this year on the key targets we've iterated. We'll probably add a few more Cardium wells, add a little bit more at Dodsland, doing a little bit of testing down and Waskada as well. And again, the earlier we get those results, the more ability we've got to predict our 2010 programs. So that's going to be the primary focus.

We think it can both test out plays and deliver volumes with regards to our guidance as well. So we are comfortable that we are at a position to do that.

I think the -- in looking a little bit into 2010, we think the royalty change in BC may influence some of our thinking at July Lake and continuing on our testing there.

The other gas play that we're going to keep pushing on a little bit will be in eastern Alberta. We're out testing some of the tight Viking, and we'll have those results in hand shortly, but because of the leverage of that style of play and it being a relatively low-cost threshold play, we think that's one that we'll continue to push as well.

That's very helpful. Thanks.

(Operator Instructions). [Craig Wanchang], private investor.

My question is this. Penn West is not -- it doesn't seem to be well-liked by analysts, although it has high production volumes and at low cost. What is the company doing to correct this perception?

The biggest thing is just -- we've come through a, as I said earlier, we've come through a period where we did two very large acquisitions. We doubled the size of the company over two years, and I don't think you go through those type of transitions without some impact. And usually the impact is -- as was our case -- the numbers get away from us a little bit.

We've now got a lot firmer ground that we are running on. We've -- back to the style that we've had previously in the company, which is to make your numbers, put out good guidance, make the guidance move forward. And I -- so we've got to get back, our following back, is basically what has happen.

We've never been a company that you could say Penn West, and attach one type of play to it. Our landholdings are broad, they're throughout western Canada. As Murray indicated, we've got a tremendous amount of upside in our portfolio, and we just got to start doing that and working it and continuing to hit our numbers. And as that happens, I believe that the stock will respond.

To follow up on that, even when prices were very weak and Penn West, being a low-cost producer, actually had one of the better chances of survival and even doing well, somehow this wasn't emphasized.

Well, I think it was. You have to remember that the entity has been around, we've been around as a trust since 2005 but the entity has been around since 1992. I think we've -- historically we've been recognized as a good operator. Historically we've been recognized as a company that hits targets, and we just have to get that style back, and Murray and the crew are doing a hell of a job doing that.

Thank you very much. And all your efforts are appreciated. And thank you.

Richard Stuchberry, Blackmont Capital.

Could you just elaborate a bit on the hedge program going forward, which you have for the rest of this year and early next year.

And just a comment, if I may. Most of your callers are -- you can tell -- income holders and particularly interested in your distribution policy. And I wonder if it's not in the company's best interest to promote more the other alternatives rather than cutting the distribution to asset sales and other things that are at your disposal that you can also use, because the shareholding base is totally an income oriented shareholding base, and if you spook them, you're going to have a problem with the stock over the next number of quarters. So the hedge -- the hedging question is the one that I am directing to you.

Yes. I'll address the distribution just a little bit to start off. If you look at our distribution, we are -- the percentage of distribution is fairly high. We intend to make a dividend part of the formula going forward and to continue that. I believe there's good interest in that regard.

But there is no doubt as well that we've got opportunity to put some growth on the table, and we will do that. Certainly if you can achieve it with a kind of financing that's outside the box, there's less need to reduce your distribution. But the way we're looking at right now, as we sell some properties we intend to do a little bit more debt retirement. And this is what we have on the table right now.

We would make a fairly broad assumption that the distribution would come down somewhat over the next year to year and a half as we get more into a bit of a growth component with the company.

The second part is on the hedges. And I'll talk about -- it's getting close to 2010. I'll talk about the hedges that we've laid in for the winter of 2009 and through the summer of 2010. And it's a total of about 60 million cubic feet a day, I think 63 GJ's. The price on that, they're broad collars, CAD6.50 as the floor, CAD9.50 as the top, so if gas trades in the range between CAD6.50 and CAD9.50 a GJ, which for the uninitiated, on an Mcf basis is roughly CAD7.00 to CAD10.00 per Mcf. If it trades in there we just take the price. If gas is under about about CAD7.00 an Mcf, we would get that price.

On the crude oil, we did the same thing. It was a little bit of mitigation of risk. We put in a collar for next year of 30,000 barrels a day. That's basically a WTI price of about CAD58 on the floor, CAD73 on the top. What that means is that if oil trades under CAD58, we get to CAD58. If it trades in the range from CAD58 to CAD73, we get the price. If it is trading over CAD73, we'll have 3,000 barrels a day hedged at CAD73, and we will be getting full price over CAD73 on the other roughly 70,000 barrels a day production.

So it would be a strong win for where we were looking, certainly in the first few months of the year when we were looking at the possibility of crude oil prices, and we had predictions from some of the prognosticators in New York and Toronto talking about CAD20 and CAD30 oil. So we're just trying to basically lay a foundation to provide capital to the company and secure the distribution. That's the hedging we have done.

We will continue looking at gas. Gas is certainly not strong right now. It's a tough time to hedge on natural gas. And we continue to look at crude oil. There's a possibility that we will add a little more crude oil as we go ahead.

Just a follow-up question, if I could. Then what percentage of the distribution have you guys hedged?

Well, in terms of our production, about 50 million cubic feet a day of gas, which is about, roughly 20% of our sales gas; about 30,000 barrels a day, which is roughly 25% of our oil. So a little over 20%.

Okay, thank you.

There are no further questions registered at this time. I would like to turn the meeting back to Mr. Andrew.

I think we got one more on there.

George Burmann, Gunn [Annin] Financial.

Gunn Allen Financial. Good afternoon gentlemen. Thank you for taking my call. A quick question. You had made mention on distribution. It's been a lot a talked about. Looking at your portfolio report file this morning, you are only distributed about 51% of your cash flow, correct?

That's right.

And if, say, the oil and gas prices stay in the current level, maybe move up a little bit higher, you still foresee a need to cut the distribution further, huh?

What we talked about is basically at current levels and at current distribution, Todd and crew have got the ability to pay down some debt, which is -- which we believe is important. We want to -- we want some improvement on our balance sheet. And we've made strides, but there's still some work to be done there.

The second part of it is that we want to continue with play development. We think that a growth component, a return to some growth component is important for the company. We -- going ahead particularly -- and it becomes particularly important after the time when the CIF tax is introduced. So there is a time when certainly the level of -- or the percentage of income that is being received now it's going to be somewhat less, and we would augment that would grow.

The tax pools that you have set up, do you utilize them whether or not you're going out of the trust setup?

Yes. You have to -- after the CIF tax is introduced. We are continually calculating the taxes on the corporation. We've got the ability of the -- as an income trust to use the flow-through component to move that tax to the unitholders. As that closes, certainly there is more tax obligation on the company. But we've got CAD6 billion of tax pools, and Todd and then Jeff and Wendy and crew are all pretty reasonable financial people and accountants. We will make sure we've got good tax management.

And those tax pools would reduce your additional tax liability by those CAD6 billion then, right?

Absolutely. I think -- I have cautioned this before, it's not a direct sort of tax relief, it's not a case of saying, if we've got say CAD2 billion in cash flow and calculate the tax on that, we can do that over a certain number of years. The nature of the taxes -- some of the pools we've got the ability to use very quickly, some of them that are depreciation-type pools over a longer period of time.

Okay, thank you very much.

Wayne Jervis, Janco.

I was wondering, could you walk me through the acquisition rationale. It seems that there must have been a substantial reserve component there? Just from the purchase price.

Yes. We just missed one word. I assume that was the Reece acquisition you said?

Yes.

Okay. So the fundamentals behind the Reece acquisition was -- well, twofold. One, there is a tremendous resource in place typically in that Viking. And it was really was not suitable for vertical development. And Reece really had -- where angels fear to tread had marched in and applied the horizontal technology and proven that there was a good component there. I think vertical recovery is 4% typically in those fields. And they were easily doubling to potentially tripling that number with the horizontal technology.

So the underlying component to that was, it really was a complementary piece to what we are trying to do across the whole Dodsland field. We like the resources in place. We believe and we are continuing on from their programs, and we were working parallel on our chunk of the field, that this really can form a very nice strategic fit, and it was a good corporate piece to go forward with on scalable repeatable plays, which is what we are really trying to build the inventory on.

And what is that extraction cost for a horizontal?

Costs vary. I'll generally say we anticipate in that field something in the CAD14 to CAD16 per barrel range.

So around corporate average?

Yes.

And then what were the associated reserves, proven and probable?

We don't have that kind of detail on hand. It's -- we would have to reference back to the materials to give you the detail. I think if you want to get in touch with Hilary Foulkes afterwards --

I think Reece may have had something on their press release. We generally on that size of a deal, we don't release reserves.

Okay. And then given the financial crisis, I would've thought perhaps there would be more acquisitions in the pipeline. Can you comment on that? Or do you find that your balance sheet is constraining you at this point in time?

It's not. Hilary and crew are certainly looking around both on the acquisitions and divestitures. We -- Murray and I certainly felt that -- and we felt it very strongly towards the middle of last year that -- let's get some semblance of order in the house with the acquisitions that we had done.

So as we move through that and get back to the type of performance that we aspire to in the company and what we've achieved in the last two quarters, I think it's very possible that we'll start looking a little more aggressively at acquisitions.

We are doing acquisitions, and then Hilary and Hilary's group and A&D and the land group and also the engineering and development groups are very actively looking at property consolidation, and that involves both acquiring and divesting.

As far as large corporate deals, we are just not focused on that right now. Not to say it won't happen in the future, but not for now.

So primarily you're looking at Reece-size tuck-in acquisitions?

Yes, I would say that's fair. And the size would be anywhere from zero, I guess, maybe to a maximum 5,000 or 10,000 barrels a day.

Do you have a target leverage that you're -- relative to cash flow that you're looking for?

Yes. That's the million-dollar question. I think in normal times with normal bank conditions, I wouldn't feel horribly uncomfortable at about a 2.5 times cash flow for the company. One of the reasons there's been a fair amount of discussion certainly from our retail investors on our reversal of form on the distribution in the first quarter -- and I think people have to understand that that has really been caused in part because of commodity pricing in the first quarter, but even a bigger component of that is just the whole financial situation.

The banks, as everyone knows, are much more tentative on extending loans and much more tentative on the amount of money that's available. And so we think it's prudent and probably our -- where we want to go, we believe that the debt to cash flow probably should be a little closer to 2 to 1. That's why we talked about the target of moving CAD0.5 billion out this year. If we could do a little more than that, that would -- in our minds that would be good as well.

Sometime, and I don't know when, but sometime the banks are going to have to strongly get back into the business of trying to provide the financing so that we can grow not only our economy but the economy in the US. And right now that's not happening as much as the industry needs it.

So you think you're going to have to take off another CAD1 billion dollars in debt?

I think somewhere around CAD0.5 billion. But yes, CAD1 billion on the outside, CAD0.5 billion on the low side.

And at that point, would you use the money, is that incremental cash flow you're using to pay down debt, would you use that for CapEx primarily, or acquisitions, or distributions? How would that (multiple speakers)

A bit of the first two. If you look at the growth of the company, it's been a mix of exploration and acquisitions. We just went through a strategic couple of days in the company, and certainly on a go-forward basis we've got a lot more plays than we have money right now. So I feel that Murray will have a fairly strong demand, as will the teams, to move forward with projects that make good sense and provide us with strong returns. So I think it's fair -- I'm fairly confident that the additional monies would first be directed into growth opportunities.

And on your proven and probable reserves, year-end was 729. What is the breakdown between oil and natural gas?

About 63% oil, and about 37% natural gas.

Thank you very much.

Robert [Fallon], private investor.

I guess I'm a little concerned on the distribution here because it seems that -- I don't know, it's not given the impact it deserves. Every time the distribution has been reduced, the stock has taken a big shock. And I guess what I'm hearing now, that there will be some dilution of that distribution. What is to make us think that not only will we be getting a reduced distribution, but we'll also be getting less for the stock? It looks to me, with the cuts we've taken already, to go further is a lose/lose situation.

Yes, I think you have to look at the reaction the last time that -- on the distribution cut. There wasn't -- certainly we haven't turned around as fast as we should have in the first half of the year. I believe that this quarter will help a great deal.

As indicated in the press release, we are holding our distributions through November at that CAD0.15 per unit. During that time we're going to manage down the debt. During that time we've increased our capital spending to a little bit more towards the midrange of our original estimate, and that -- if we spend money as wisely in the second half of the year as we have in the first half of the year, then we will be adding not only reserves but restoring and adding production.

So it's a question of taking a vehicle that has been primarily distribution-based and replacing that with a vehicle that's got a yield component plus a growth component.

But the market seems to be valuing this stock mostly for its distribution, not whether it's a growing company or not. That appears to me.

Yes. And you're certainly welcome to that observation. Having been with the company for a long time, certainly I can point to instances in the past where we have done -- comparable to the size of the company where we have done large acquisitions where the stock took a dropping for the next year or so and then we were able to sail it out of there and get things moving in the right direction again and back into a strong growth component on the stock.

Last year, as I say, we took on some big acquisitions, we didn't make our numbers, and if you want to go in the penalty box, that's all you really need to do is miss your numbers for a couple of quarters and you get in the penalty box. And we're working as hard as we can, and Murray's got the teams going the right way. We've got we believe two strong quarters. We will continue quarter by quarter and build this company back up to what it was.

Well, I may be wrong on this, because I don't have my notes in front of me, but I had thought that in a past conference call that if oil stays above the CAD40 a barrel, that it was probably -- the distribution would probably be fairly stable. Maybe I am wrong on that. I thought I heard that.

No, I did say that. And I think the thing that went on between that statement was basically what's gone on primarily on the financial side. So we had -- at the time we had a certain level of debt. There is a level of debt that we are comfortable with, but when you meet with your bank and they talk about a level of debt, and you -- really you've got to react.

And that was the primary reaction. The primary reaction was to get the total debt down and get the bank debt down. And that's what we've concentrated on. Part of that was a reduction in distribution. And those are the decisions.

Things that are happening -- those that follow the financial markets and other things know that it's not that long ago when you could look at a stock and it wouldn't change the whole day. It wasn't that long ago when you could depend on what you're doing when you're talking to banks and you'd get very consistent answers. And you could -- if it was a blue-chip stock, it was a blue-chip stock. Now things happen by the hour, by the day, by the month at a lot more rapid rates, so that that is basically what -- where I was caught in the conference call.

Thank you.

The question and answer session has concluded. I'd like to turn the meeting back to Mr. Andrew.

This is Mr. Nunns. We look forward to talking with you again on the third-quarter call. As you can tell, we've tried to set a tone, and we think we have this year in terms of where our guidance is going, where our efficiencies are in achieving those targets. And we plan on doing that for the balance of the year.

You can also see that we are looking to find ways to strike the balance between distribution returns to our shareholders, to balance sheet management, and to building value with the inventory of the company on a go-forward basis. And that's the balance we really have to strike and are looking to strike in a very fair manner over the next 18 months.

But the outcome for this company in that period of 2011 to 2012 will be towards the E&P model. That will be the ultimate outcome, if the potential bears out the way we see it.

Anyway, with that we'll call the meeting and the call to a close. Thank you for your time and attention -- on behalf of myself, Bill, and the entire senior management team of Penn West.

Thank you. The conference call is now concluded. Please disconnect you lines at this time. And we thank you for your participation.