Obsidian Energy Ltd (OBE) 2009 Q3 法說會逐字稿

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

Thank you. Joining me in Calgary this morning are Murray Nunns, our President and COO, as well as our Chief Financial Officer, Todd Takeyasu, and we have a number of our members of our management team here today as well. Penn West is traded under the New York Stock Exchange under the symbol PWE, and on the Toronto Stock Exchange under symbol PWT.UN. All references during this conference call are in Canadian dollars, unless otherwise indicated. And all conversions of natural gas and barrel of oil equivalent are done on a six to one ratio.

I'll talk a little bit about 2009, Murray will talk a little bit more in depth, but as an overview, I think two things to really underline are the fact that to date in 2009, and through the third quarter we continued to exercise good financial prudence and also excellent operating efficiency. As a result, we've achieved what we think are excellent results over a very modest capital program. We remain at the upper end of our production guidance for the third straight quarter, and we're confident we can continue that trend through the future. Our focus in 2009 has been and will continue to be, identifying areas that offer significant growth opportunities as we prepare for the inevitable transition from a income trust model to a conventional corporation over the next couple of years.

As we move towards the conventional corporation, we're going to move to a future strategy and a model that will focus on total shareholder return. This will consist of both growth and dividend income. The growth portion will be achieved through allocating a larger portion of cash flow towards reinvestment back into our portfolio of assets. With the identified resource potential and continued focus on execution, additional investments in our key resource place will mean significant value for our shareholders.

Now a couple of words for the lawyers in the crowd and on the disclosure. 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 that necessarily involve risks. Participants are directed to Penn West news release issued this morning, and are also asked to review the advisory notice therein. Participants are also cautioned that the included list of risk factors are not exhaustive.

Official information on these other risk factors that could affect Penn West operations or financial results are included in reports on file with Canadian and US regulatory authorities, and may be accessed through the SEDAR website at www.sedar.com and the SEC website at www.sec. gov or at our own website, and encourage all investors to go to www.pennwest.com, not only for this information but for up-to-date IR slide shows that we have, and also all of our financial metrics and reports. 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 websites, as well as websites noted earlier to review disclosure concerning non-GAAP items. And following our review and update this morning, we're going to open up the phone lines at which time we'd be pleased to attempt to answer your questions. With that, I'll proceed with the guts of the call, and I'll turn it over to Murray Nunns, our President and COO.

Good, thank you, Bill. We will begin this morning, with a review of our operational performance, and then move on to our key financial results. As Bill mentioned, Penn West year-to-date results continue to meet and exceed expectations. We remain focused on taking Penn West forward with strategies and initiatives which we believe will position us for attractive returns to our unit holders. On the operational side of the equation, Penn West averaged just over 178,000 BOE per day for the third quarter, and approximately 180,000 per BOE per day for the first 9 months of 2009. This is at the top end of our full-year production guidance of 175,000 to180,000 BOE per day. Our strong operational results to date are due to effective use of capital,, and our continued execution of production and operation plans. Q3 production was roughly 60% petroleum liquids. Our liquid stream continues to be relatively light at approximately 30 API. Natural gas production averaged 441 million cubic feet per day, making up the balance of our production.

On the capital side of the equation, Penn West spent CAD171 million in the third quarter on capital programs. Year-to-date development capital spending is CAD492 million. We expect full-year 2009 development capital spending to be within our guidance of CAD650 million to CAD700 million. We're pleased with the results from our capital program. We are investing in near term light oil projects which has a potential to create significant value for investors. We are currently in the process of finalizing our capital spending budget for 2010, Next years more aggressive drilling program will focus on utilizing the horizontal technologies on our expanding inventory of a light oil opportunities. We anticipate spending to be between CAD800 million to CAD900 million in 2010. We believe this will result in production of approximately 170,000 to 180,000 BOE per day, prior to acquisitions and dispositions being taken into account.

On the financial side, moving to our financials and the financial results, our funds full for the third quarter was CAD349 million or CAD0.84 per unit. West Texas, WTI averaged $68.29 per barrel. In west Texas averaged $68.29 per barrel in the third quarter compared to $118.13 in the same period 2008. Penn West corporate average pricing for crude oil and liquids over the third quarter of 2009 was CAD62.75 per barrel, a decrease of 41% from the third quarter of 2008. For natural gas, our average sales price in the third quarter was CAD3.13 per MCF, compared to CAD8.49 per MCF during the third quarter 2008. Since the beginning of 2009 Penn West net debt, including working capital has been reduced by approximately CAD600 million.

Debt reduction and debt diversification remain a priority, as we believe a strong balance sheet will allow us to fully capitalize on opportunities generated by our capital programs. Looking at hedging, subsequent to the end of the third quarter, Penn West entered into crude oil callers for 5,000 BOE per day, or barrels of oil per day, for the calendar year of 2010. This brings our total amount of crude oil hedged in 2010 to 35,000 barrels per day at callers averaging between $60 and $75, approximately. We believe that these additional oil hedges provide greater funds flow and capital spending certainty in 2010. Just a note in closing, and then we'll get to some questions, Penn West continues to build for the future through increased focus on capital reinvestment and aggressively developing our light oil resource in place plays. Development of these plays, while maintaining a dividend income stream will provide an attractive return for our unit holders.

In addition to Bill Andrew and Todd Takeyasu, our CFO being present, also joining us from the Penn West senior management team, and the people who are truly responsible for delivering the good and the excellent results we've been generating are David Middleton, our Executive VP of Engineering and Corporate Development, Mark Fitzgerald, our Senior VP of Production, Hilary Foulkes, our Senior VP of Business Development, Bob Shepherd, Senior VP of Exploration and Development. Keith Luft, General Counsel and Senior VP of Stake Holder Relations. Dave Sterna, VP of Marketing and Jeff Curran, our VP of Accounting and Reporting. And now I'd like to turn this call over the operator, and open up the phone lines to the callers.

Thank you. (Operator Instructions) Our first question is from Gordon Tate, BMO Capital Markets. Please go ahead.

Good morning. A couple of questions, first of all, in your Op cost, do you see any give on Op costs going forward? Do you see any -- we expect Op costs to stay where they are, do you see any reason for them to improve going forward?

I'll take this, it's Murray. . I think -- in a general sense we expect them to be approximately range bound. The general cost structure of our operation, given the nature of it, we don't see a lot of give-take. We think over the longer term, as we develop -- as we develop these oil plays, a lot of these are taking place in existing fields. They are existing fields where we have a fixed cost base. But there is a lot of infrastructure capacity. And the variable costs per unit of additions, we believe, will start to bring our Op cost down in a lot of these key operating areas. So that, we see as the next logical step and we think that can bring a 10% to15%, maybe 20% compression on Op cost. But it's not going to occur in the next six to nine months, it's something in the next two to three year time line.

Okay, and in terms of capital spending. Next year you're guidance level is up a little bit, and your production numbers guidance is pretty stable year-over-year. I mean, are you putting more money into some projects that are not expected to yield immediate production? Is that why the spending increase without a commensurating piece in production? What would be the explanation there?

Two key areas, Gordon, I would address with that one. One is yes, we're putting some into select long-term projects. But the second -- and the second area that I would draw your attention to< is that on an overall basis we're looking to weight the capital a little bit more to the second half of the year. We want to see a little bit more results in terms of our light oil plays, before we really put the pedal down on the capital side for those. So that's the other key factor. So it tends to back-weight our production adds, and leave our average sort of just solidly in the expected range that we provided as guidance.

Okay. And that leads to my last question, which is can you tell us a little bit about the results you're getting in horizontal drilling. I think you've done some now in the Cardium. Can you tell us what kind of results you're getting there?

I'm going to turn that question over to Bob Shepherd and let him address that. We probably would not touch too much on the Cardium at this stage. We're at the early stage of results maybe selectively, but I think there are key points that Bob could touch on.

Sure. Gordon, I guess we'll start with Leitchville, where we've been long -- operating a long time. And we're seeing consistent results there in that project that keep coming in in the 100 to 130 barrel a day IP range, in that area wells that still look like we expect to get 125,000 and perhaps as much as 150,000 average per barrel in, that area. The other area we've gotten started in and we're a little reticent to talk too much about it, is eastern Alberta shallow gas, but we're certainly encouraged by what we're seeing out there.

We're also -- in the Dodsland area, we're beginning to drill. And we've got upwards of 27 wells that we bought from Reece that have -- that those wells have appear to be -- appear to have the potential in that area of coming on in the range of 70 barrels a day, and then and coming in and generating roughly the similar 60,000 to 70,000 barrels per well. Cardium, it's a little early for us. We've been focused early on here in the water flood portions of the field. And we're going to be taking more of our activity in the near term out into the less developed areas of the field.

When do you expect you might have some results from Cardium horizontal wells?

I think midyear, next year, we'll have a decent story. But it will probably be closer to the end of the year before we have an average that meaningful.

I think Gordon, Bob is a good modest engineer. Basically we've taken the Leitchville concept, and we're moving very quickly with it. The first area from the east is Waskada, where we're following up on what some competitors have been doing in the area. We have a very large land position, as we outlined in our Investor Day. Our initial test results indicate we're certainly in the guts of the oil trend. And we'll be following up very quickly with horizontal results in there.

Dodlands is an area -- both Dodlands and Waskada, we're looking at light oil, which is a little bit of a bonus over the Leitchville, where the oil is a little bit heavier. We're following up on Reece's activity there, with their own wells. The other thing we're doing in a similar type of formation is going after the gas side, as well on both sides of the border. And we've had good results there. And we have a ton of land on both sides of the border. Yes, and I think the -- probably the biggest change well be once we get into the groove, we'll be Penbima because as Bob talked about, we spent a fair amount of time and energy on the EOR side of the water side.

We'll continue to do that, but just watching what is going on with our competitors around what we call, the halo or the edge of the play. If you look at our land base, our land base goes through Garrington, and up through Silver Lake, and [Leedgram] Wilson Green, all the way up to Strachan on on the west side, through the guts of the Penbima field, off to the east side of the Penbima field. We think we have an advantage of 6 to10 fold over most of the operators in the area in terms of potential for land. So that's where we're planning to stick the bit fairly quickly, and through the winter time. And when Bob talks about results, that's primarily results we're going to bring to the market. The other place where we continue to work is in central Alberta, north central Alberta, up in our Swan Hills, [Mitsu] and north of that into the [Nipisian] and [Kotter] country. And we're using the same type of technology, they are both on in field wells and some of the tighter, smaller plays and with good results to date.

Okay. Thanks.

Thank you. The next question is from Menal Patel from National Bank Financial. Please go ahead.

Hi, good morning. I'm just curious your 2010 CapEx guidance, what commodity price price would that be based on?

We're fairly modest. We're running oil at about CAD75 and our GAAP is about CAD5.50.

And FX rate in that?

92

CAD0.92.

CAD0.92? Okay. And I guess what is the give and take on your guidance between the CapEx and distributions? I think as I'm reading between the lines in a weaker environment, it's the latter that would move first, as you transition?

Yes, probably, and I think the pure model that we have without a range, we take a mid range on our guidance on using those numbers. And I think at current distribution we probably have a GAAP of somewhere in the range of CAD100 million to CAD150 million between funds flow, and what we'd have to put out with distribution on capital. So to that -- that extent, the distribution, if commodity prices stay where they are, distribution looks like it's not bad, the big thing for us is to continue to pay down debt a little bit and we will do that. We're trying to do that from outside the box. Hilary is being -- Hilary is being fairly creative and trying to do a few things for us that we think can create a bit of a win-win. So we want to get the balance sheet just a little bit better.

The other thing is that with the implementation of multi-frac technology on horizontals, and picking up for light oil, this thing is just bursting so fast, that we're just watching where we can spend it, where we can aim our capital. And I think there's a very strong case, I know Murray is very convinced of that. And I didn't need any convincing, that we've got a lot of places to put the bit. So it will be a balance between the capital side and the distribution side. When we talked about moving towards a total return model, that's what we're talking about as well. And if you treat the distribution of the dividend, then there's a balance between the growth we can provide at reasonable risk and also dividend. But for next year, there is a little bit of a gap based on our commodity pricing and our funds flow, that -- that at a CAD0.15 distribution, but it's not enormous.

And then second question, just on the CapEx budget there, you can provide a bit more of a detailed breakdown of which of your core resource plays that will be directed to?

I'll give a -- sort of a broad general framework to it. Overall, what we did -- we've identified -- six key core projects. Five of them are near time oil -- one is near term oil, and one is a near term gas. Bill gave a run down. They're all plus or minus getting approximately the same levels of capital treatment for next year. All of them are really in what we describe as the first and second phase. Tested, made sure that the technology works, the second is refinement of the applications, which is why we're going a little slower on the front end versus the back end. So that concentration is going to take up to 50% to 60% of our capital, focused on those projects. We anticipate drilling plus or minus 200 to 225 wells on these plays. We've probably weighted 80% to 85% to oil. And then the rest, the balance of the budget is select plays of just good logical development pieces, key optimization and explanation pieces within our operating base. So that's the balance of the overall budget in terms of how it looks.

The other thing for next year, and Gordon touched on it as well, is that we're putting in about 10% of the capital is going to be on exploration, so we're wrapping that side up quite a bit. We've strengthened the team, we think a lot over the last six months with a couple of key hires, and the senior geologist and the senior technical people, in both geology and geophysics.And they'll -- and I know Murray will give them a little bit of a free rein to have a look at the basin, and see where else we can apply this sort of technology.

Okay. Thank you.

Thank you. (Operator Instructions) Our next question is from Fergal Kelly from RBC Capital Markets.

Good morning, guys. Just have a couple questions. First just wondering if there is anything else you can say on asset dispositions?

Not much to say. I think -- those that listened to the Investors Day, the philosophy is the same. We have one in the hopper right now, that is about a quarter of a million dollars. And we'll probably have an announcement on that sometime before Christmas. It's basically papered. We're just going through the final work on it and there will be a change in operatorship. That's a disposition that we have in -- in eastern Alberta, eastern Alberta heavy oil area.

The other things that we're working on. And Hilary continues to work on are just selective dispositions. We've targeted -- when we went to our Board early in the year. We had targeted disposition somewhere between a half a billion and a billion dollars. We'll get a little ways up the curb with what Hilary has done to date. Or a fair ways up the curb. But we think there's another half a billion to three quarters of a billion that would really get our balance sheet very, very polished up. And allow us to move forward with the type of -- I guess the type of strategy that both Murray and I are used to, where we would in addition to having a strong exploration development component, we would have the ability to reach in with selective acquisitions. And that's -- that's been lacking a little bit, while we got the balance sheet polished up. So there is a little bit more to come, and that's about all I'm going to say, or I'll get shot.

(Laughter) Okay. That's great. Second, I'm just wondering what you guys have to see to really ramp up CapEx to a level, that will drive production growth whether it's a gas price rebound, or more drilling results in your light oil well plays or Wildboy? And when you think that will happen, if you're going to revisit it sometime in 2010 or is it 2011 or later?

The overall indicators, I think first off I'll address from an inventory point of view. We're definitely weighted toward the oil side. I mean we're the -- the largest producer of light crudes in western Canada. We got the second highest reserve total in Canada in terms of light crude. So that's going to be the fundamental base. So we're really not that sensitive to gas price in terms of our capital deployment. That's the first part.

The second part in terms of results. As we said, the one thing with resource plays, you go too quickly, you can blow them up. Go too slow, and you fall behind the curve fairly rapidly in terms of competitive position. So what we're trying to do is move all of these plays forward. And also simultaneously, we have an advantage that almost nobody else in the industry has. We get to look at half a dozen of these plays simultaneously in the results, and pile up the best of the our information and best of applications. We think by mid next year, we'll be at a point with enough information in hand to start to pick and choose where we really want to put the emphasis on the capital. And be able to move and accelerate towards sort of a growth model that supports the E&P side of the equation, a full E&P model.

Okay. That's great. And you can just expand a little bit on what your plans are for -- Seal next year?

I will touch on Seal, and maybe one or two of the other resource plays in general. We have looked at seal and have on the books some selective assessment of the resource continuing. We have a small portion of primary development ongoing. And for the latter half of the year on the books right now, we have a thermal test pilot project scheduled. What we're looking at overall for both Seal and some other select resource plays that are longer term pieces, is looking at the potential for a joint venture opportunity. We believe there is significant asset there, far beyond what our cash flow capabilities are, for developing in the longer term. But in the interim, we want to keep going up the curve. We want to keep collecting the information that is essential for the development of those. So we think there will be selective opportunities for joint ventures on projects like Seal as well, beyond the capital programs we're considering.

Okay. That's great. Thanks a lot for your time, guys.

Thank you. The next question is from Brad Borggard from CIBC. Please go ahead.

Hi, guys. Thanks for taking my questions. I have a couple for you. I was just wondering, you guys mentioned the release in the focus in 2009 on optimization and recompletions. Can you provide some color on how much of the 2009 budget that type of expenditures would encompass, relative to standard drilling recompletion activities? And how that might compare to say, last year, and what you're planning for 2010?

What -- maybe what we put into optimization wasn't a heck of a lot different. The -- about 15% to 20%. One of the top reasons that's our top costs are up a little bit is because I think the hours that the operators have been putting in behind the windshield, and out at the wells, just keeping things on the -- one of the great things to me when I look at the production is how well our gas is held up. And I'll guarantee most of that has been working with wrenches. And just the operators working a lot smarter than they did last year. We had a -- as many know, we had a tough year last year. I think it's been getting the message down to -- to optimize -- our normal optimization budget would be somewhere in the range of 15% or 20% of our capital. And that's about the same this year.

It's just been -- I think just a lot sharper focus from our field staff, and a hell of a lot better job than we got done last year. We spent most last year still trying to integrate. And we had operators that weren't used to fields, and weren't used to how they operate, and we've got over that. We got over that about last October, November. And this year it's been very good, and that's just basically the -- what we will accept as the standard behavior in the future, where we will continue optimization -- at a pretty strong optimization budget. And I think there is always the thought that, if the low hanging fruit can be nailed, there's probably a touch of that, but I think it's more just there's a lot better operating efficiency. We looked at down time last year, and we were running somewhere in the order of 10% to 12% down time. Mark and his staff in the field, we targeted down time much more in the industry, average, which is about half of that and that's where we are this year and I think the results are showing.

Okay. Great. Thanks, Bill. And then another question I had was, I know that the CAD200 per meter credit under the Alberta royalty is not that material to you guys, but what kind of range would you expect annually for that to impact? Is it CAD10 million a year, CAD20 million a year? What kind of range are we looking at?

Generally anticipation based on budget as it currently stands, it's in the CAD30 to CAD60 million range, depending on exactly where we deploy our dollars on particular programs, there is a some impact to it, on an overall basis.

And the last one I had was more of a clarification based on what Bill said. So the disposition that was referred to as being in the hopper, that is about a quarter of a billion, is that right?

Yes, and I'm going to shot, if I talk much more. We have one that we're basically going to involve now, a change in operatorship towards the end of the year. But we haven't -- there's been no announcement on it.

Okay. Thanks, guys.

Thank you. This ends the question-and-answer session for today. I would now like to turn the meeting back over to Mr. Andrew.

Thank you very much, and thanks Murray and the rest of the staff. We encourage those that are listening to the webcast to go to our site, and have a good look at the quarterly report. And thank you very much.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.