Obsidian Energy Ltd (OBE) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Penn West Energy Trust first 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, and good morning to everyone out there this morning from a very wintery Calgary. We are paying the price this morning for what's usually the advantage for living so close to the Rocky Mountains. Welcome to the Penn West's 2010 first quarter financial and operating results conference call. With me this morning in Calgary is our President and Chief Operating Officer, Murray Nunns and our Chief Financial Officer, Todd Takeyasu. And as well, we have got other members of our senior management team around the table.

Penn West Trust units traded both on the New York stock exchange under the symbol PWE and under the Toronto stock exchange under the symbol PWT.UN. All references during this conference call are in Canadian dollars unless otherwise indicated, and all convergence of natural gas to barrels of oil equivalent are done on a six to one conversion ratio.

Today we are pleased to report our operation results for the first quarter of 2010, and before I hand the call over to Murray for a much more detailed review of the quarter and as well as some discussion, I just wanted to take a few minutes and sort of set the table for Murray a little bit on what I foresee as some of the highlights. Firstly, something we want to make very clear is that our focus over the past five years with Penn West, is becoming a lead oil for light oil production and exploration in Canada and indeed, in North America. From a strategic point of view, this involved two large oil weighted corporate acquisitions consolidation in key areas, and the adaptation of the technology that really has sparked the shale gas revolution in North America, as presently fueling a stampede to light oil plays in North America. We believe this positions us extremely well, and Murray will talk about that a little bit and highlight some of the plays that we are pursuing and exactly how we are positioned in light oil relative to most of our peers in North America.

Secondly, we will highlight the very significant progress that we have made on debt reduction. And also, we'll highlight the renewal of our syndicated banking facility, which occurred very recently. Thirdly, we will talk a little bit about conversion. We are going to convert from an income trust to an E&P within the next little while, targeting toward the end of the year, and we are very excited about rejoining the ranks in North American E&Ps. We have got a weighting to light oil, that is correct puts us in a favorable position. We believe the depth of our prospect inventory, particularly aimed toward that light oil, is second none in North America. Over the next six or seven months, as we move towards conversion, we will be providing more details on an expanded capital program focused on our light oil-rich oil resource [plays] for how we intend to blend growth with yield.

Certain information regarding Penn West and the transactions and results, discussed during this conference call, including management's assessments of future plans and expectations may constitute forward-looking statements under applicable securities laws that necessarily involve risk. Participants are directed to Penn West news release which we new issued this morning. They are asked to review the advisory notice therein.

Participants are also cautioned that the included list of risk factors is 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 securities regulatory authorities, and may be accessed through the SEDAR website at www.sedar.com or the SEC website at www.sec.gov. And of course at any time, and all the time, we encourage you very much to visit our website which is www.pennwest.com. And Jason and his group in investor relations do a good job in keeping that site up. We have got our latest investor presentations, we usually have some news clips with Penn West staff and management on it, as well as some of our interaction with the media. All of our financial results are on there as well as some of our operational information, and we do encourage you to go there and just have a look at what we think distinguishes Penn West from a lot of the pack right now.

During this conference call, certain reference to non-GAAP items may be made. Participants are directed to Penn West MD&A and financial statements available on our website as well as filings available on the website noted earlier, to review disclosure concerning non-GAAP items. Following a review and an update this morning we will open the phone lines, at which time we will be pleased to answer your questions. With that, I am going to turn the call over to Murray Nunns, our President and COO.

Thank, Bill. First off, we will take a quick run through on some of the financial results and hit some of the highlight facts. The funds flow for the first quarter was CAD344 million, or CAD0.81 per basic share. This reflects the impact of some of the property dispositions in the first quarter. Early in Q1, we closed an asset transaction in which we exchanged the position at Leitchville, and the Shaunavon, played four positions in two core light oil resource plays, the Viking at Dodsland and the Cardium at Pembina and, also cash included in the deal at CAD434 million. In addition, a private placement of unsecured senior notes was closed in March, bringing the total private debt level to approximately CAD1.6 billion. Penn West also closed its -- we also closed our renewal of our unsecured revolving syndicated bank facility for the three years with an aggregated borrowing limit of CAD2.25 billion in April of this year. We now have approximately CAD1.1 billion of unused credit capacity available to us.

On the operations side of the equation, as expected, we exited the first quarter with daily production averaging roughly 165,000 BOE per day. Our production was weighted to crude oil which makes up almost 60% of our production. We have been actively high grading our portfolio of producing properties, selling those asset which is don't fit with our long term strategic direction for Penn West and also to streamline our operations.

In looking at the capital side of the equation, and we will dwell on this for a moment and give a little focus and a little color to the oil plays as we walk through, Penn West spent CAD263 million on the first quarter, which excludes the A&D activity we previously talked about. The capital budget guidance for 2010 is projected to be between 700 to 850. We have been targeting about 750 mark right about now. We anticipate spending the bulk of this budget in the second half of the year as we accelerate our development into the third and fourth quarters. I would now like to provide some of the highlights of those key resource plays.

Let's first look down in the southeast -- southwest corner of Manitoba at the Waskada play. We are currently producing from ten wells. The full characteristics of those ten wells are in line with the industry type curves. We anticipate drilling an additional 35 wells on this play before year end, finishing appraisal and starting into full development on this play. We plan on ramping up into full develop mode in 2011 as we march forward on this play. We are really happy with our results to date here.

In Dodsland in southwest Saskatchewan, on the Viking play, with 50 wells currently producing on this play, we have a well defined type of curve and expectations of results from it. We have also brought our costs into line where we are very happy and pleased with the rate of return on this play overall. Our plan calls for the drilling of an additional 50 wells for the balance of 2010, and we will continue to move the play both east and west while we fine tune the applications of the technologies on this play.

Moving on to the largest of our light oil plays, the Cardium, we have the dominant industry footprint in this play, with more than 875 sections of exposure. We have quickly ramped up our expertise having participated in over 30 wells to date, and the industry in total is at approximately 125 on the key oily portion of this play. The production curves from our wells are consistent with the industry average. One key for us is that offset competitor activity continues to validate our land. Basically, every time somebody puts a drill bit in the Cardium, they're proving up land for us. We plan for an additional 30 to 40 wells for the balance of this year, and then ramping up into next year's programs. Our capital program this year has an obvious light oil emphasis as we prioritize development projects towards higher netback products. The broad take away is that in 2010, we will continue to appraise our deep inventory of development and exploration projects, in anticipation of our conversion to an EMP. As and EMP, Penn West will provide a combination of organic growth and dividends which will position us with senior independent North American oil and gas producers, and we can compete with the best of them.

Just before we take some calls, I would like to let everyone know that in addition to Bill Andrew and Todd Takeyasu, joining us this morning in the room are a number of members of Penn West senior management team. People who make the wheels turn at Penn West, Dave Middleton, the Executive VP of Engineering and Corporate Development, Hilary Foulkes, Senior VP of Business Development, Bob Shepherd, Senior VP of Exploration and Development, Keith Luft, our General Counsel and Senior VP of Stakeholder Relations, Thane Jensen, our Senior VP of Operations, Dave Sterna, the VP of Marketing, Jeff Curran, our VP or Accounting and Reporting. And with that, I'd like to turn the call over to the operator and open up the phone lines to the callers for any questions they may have.

Thank you, we will now take questions from the telephone line. If you have a question, (Operator Instructions). Our first question is from Andrew Fairbanks from Banc of America. Please go ahead. Your line is now open.

Hey, good morning, guys. I was curious as you roll out the development at some of your tight oil plays, do you have a sense for what kind of cost reductions you should be able to achieve over the next 12 or 16 months as you get into more efficient sort of industrial development, pad drilling and what not at these plays.

The general pattern in anticipation as we scale up to a manufacturing model on these plays is fundamentally that we generally tend to see a 30% to 40% cost reduction from initial tests of the plays, and we believe we can achieve that. On some of them, we believe we have got some of that in the bag. On others, we will add that as we scale up our projects. The other side of the equation is that we also tend to -- you tend to see an improvement in the upfront deliverability on the wells as you go through the play and evolution of the application of the tool, and we tend to see a 30% to 40% uplift on productivity. We don't think we have realized all of that yet. We think some of that is still ahead of us as we scale up our operations and as we fine tune our approaches to the reservoirs.

The biggest -- I think the one thing we lean on the most, and the fellow is not in the room today is Mark Fitzgerald, our senior VP of Production, he is out, doing what he normally does, out in field shaking the production up. But the -- basically, what we learned -- what was learned at Kinetic and what we learned at Penn West on the Shaunavon play in southwest Saskatchewan was that we could take costs that were initially CAD3.5 million to CAD4 million drilled complete equipped and get that price down by 40% to 50%, by the end of the term. So we were drilling wells much closer to the CAD2 million than to CAD4 million within a year and a half or two years. We are seeing the same type of thing, and Thane is experiencing that with drilling operations and completions, and we are starting to see the kick in as well in our facilities. As you do more, it becomes -- I hate to use the word manufacturing process because it is not, but it is really, it really becomes a much more process driven and logistically driven exercise, and that certainly helps costs.

No, that's great. Thanks. And how do you feel about the existing conventional base? Is it right sized given the outlook, or would you look to do any additional asset sales going forward?

We have got, we think we have got the best A&D person in Canada working for us and Hilary Foulkes, and Hilary likes to buy and sell.. We will sharpen this base up quite a bit yet. It is not a perfect time for divestitures, but we will pick our place for that. We have always been a company, the original model for the Company, and I am certain that something that we will as an E&P is that we will compliment our organic growth with some key acquisitions and some complimentary acquisitions. So, with Murray providing the direction on where to focus, the type of plays to focus on, we feel we have got the balance sheet in shape, and they're getting into it better shape. So we will be in the A&D world.

That's great. Thank, Bill.

Okay.

Thank you. Our next question is from Jonathan Fleming from Cormark Securities. Please go ahead.

Hey guys. I wonder if you can you give a little more color on your Cardium drilling and contrast how the drilling is going in the water flooded part of the pool versus the halo part of the pool. And then, if you can talk to how much CapEx you are spending on each of those components here in 2010, as a percentage.

Okay. Thanks Jonathan, it is Murray. I will field the basics on that one. fundamentally we started the initial work actually using horizontal applications in the water flood area four or fiver years ago, long before people were thinking about horizontal completions in those areas. So we have an initial body of information that extends back an extended period, and we went in and actually refracked some of those old horizontal wells with a limited number of programs. Results today, when we look one year out, let's move away from the initial information, when we work one year out, essentially, those are on the curve with any other part of the field. In fact, some of the front end areas where the pressures far can exceed -- well exceed what the front end areas of others parts of the field become. So we are quite comfortable that the center of the pool can deliver at the same levels as the exterior parts of the pool.

In terms of where the balance point forward is, about 20% of our holdings are in the pool center, about 80% are either on the perimeter of the halo. We are going to be focusing on more appraisal work and setting up development programs around those parameters, the perimeter areas of the pool. That's going to be the focus for that midterm. That's where we are setting up the balance of our plays, whether it is on the east side of Pembina or on the west side, as well as down into Willesden Green. We are also looking at areas at Leafland where we have large holdings. So we will be doing a series of appraisal work throughout those areas to set us up for really scaling up the project for next year. So we are quite confident that we can operate in both areas. We know enough about the water flood area now, and it will compete. But we will now continue our appraisal in the perimeter and the halo areas.

That's a good summary. On the Viking, how far along the development curve would you say you are there to the completion methodology? I know that when I talk to guys that are doing more smaller fracs, and I just wonder which inning aer we in here with respect to finalizing how we are going to drill up these wells, or is it still changing and we're still theoretically finding better ways to go ahead and frac these wells?

Jonathan, as we have looked -- and as you look at how this technology evolves and on every one of these plays, the pattern seems to following the same thing, is that we don't bust up the rock enough. So what we are doing is continuing to move out the spectrum of more, smaller fracs, exactly as you indicated. I think we are in about the fifth inning now. We are can get the wells down quickly. We are as efficient as anybody and probably more efficient at getting the wells down. In terms of busting up the rock, we're continuing to push out. Whether it's going to be 14 fracs or 20 fracs, that's in the fine tune to close up the economics and add to the upfront delivery a little bit. We are comfortable with the economics now. I would say a little bit more fine tuning on that methodology of just the number of fracs and bringing the cost structure of that down, and then we are pretty much at the optimum point.

The other thing is how close the wells have to be. How close can we put those fracs on one well bore, how close can we put those well bores together? That means a little time on the production curve. But again, all that's going to do is add more reserves net on the game in the long run.

Yes, it also makes sense, Jon that we re going to try some different methods and some different lengths and amount of fracs. It doesn't matter where the resource play, because generally what we are finding is that we have got an excellent acreage position, so lots of room to move. So it makes sense that, for the size of operation that we anticipate in each one of those of those resource plays that we would do some work to try to find the most optimal rate. I think sometimes engineers get stuck in a little bit of a groove, if something works, don't change it. And certainly, that's a good thing to do if you've got a small operation and you don't want to make a mistake. But when we're looking at the potential of these areas and the size of the operation, it makes sense, as Murray says, we can get in and crack that rock up a little more, maybe look at some -- drilling more than one lateral from a location and getting up and down in the zone itself. All those things make sense, and we're working on all of that.

Okay, good stuff. Thanks guys.

Thank you. Our next question is from Greg Shaw from TD Securities. Please go ahead.

H, guys. Just a couple of quick questions for you. First off, on the well drilling activity through Q1 as well as Q4, where do you stand on tie in of those wells? And secondly, as you are looking to ramp up your capital program in the second half of the year? Maybe you can walk through the conceptual allocation of that over the Q3/Q4 and timeline between drilling and bringing on production from Dodsland, Viking and Waskada.

If I looked at it with the early breakup, Greg, it looks like we have got about 65% tied in of what we would like to have tied in. Breakup caught us, like everybody else in the industry, a little flat footed on finishing up some of those tie ins. In terms of overall cycle time, we are putting out a target to ourselves of 60 days. So 60 days from spud to on stream. That's the challenge we are laying out for ourselves. We believe we can get there. We have now got the scale and the logistics in the concentration of efforts, and we also have tied up unsecured equipment to carry us through Q1/Q2 next year. So, we believe that's an achievable goal, and that will be our ultimate aim. In terms of the distribution of capital over this period, I am going to indicate that about 60% to 65% of our capital will go into these key plays for the balance of the year.

We have got some other plays we are testing as well, that we are not actively talking about in the market and we want to keep under the radar screen. We -- so in a general sense, that will be how we distribute the capital. And in terms of the capital over the balance of this year, I would say of the CAD500 million, roughly, that we have still got to spend, you would see it ramp consistently from Q2 to Q3 to Q4. We want to be accelerating our development towards the end of the year as we convert. We don't want to be pushing out early and then having a lull in Q4.

Thanks a lot.

Thank you. (Operator Instructions) Our next question is from Clifford Griffith, who is a private investor. Please go ahead.

Good morning, gentlemen and Hilary. You should all be in Barrie, where's it's lovely. It's sunny and 20 degrees.

We wish we were, Cliff.

We all agree right now, Clifford.

I would like to zero in on the cash flow, CAD0.81 in the first quarter. Now last year, your average was CAD0.90. Why the decline?

I guess it is the old scales of balance, Cliff. We -- as you know, one thing that Todd and the crew have been really working on with Hilary is we have done some dispositions. We have brought in some cash and we've paid down debt. And certainly, if there was an overhang that cause Murray and I to lose some sleep latter part of 2008 and early 2009, it was the amount of debt that we had. And Todd's crew and Hilary's bunch, they have done a wonderful job. So really, Cliff, with are down on volumes, and those volumes are primarily volumes that we sold to get the debt down. So that's pretty much why the cash flow is down.

Okay. Now the netback was CAD28.34 for the first quarter. Last year it was CAD26.32. Do you anticipate a much higher netback by the end of the year?

Yes, as you know, we are very much an oil-weighted company and I want to see, I think for the sake of everybody in the industry I would like to see gas prices recover a little bit. That will put some downward pressure, continued downward pressure on our netbacks because we are producing about 40% gas So roughly 20% or 25% of our revenue is coming from gas. About the other 75% to 80% from the oil. So if oil stays where it is -- where it has been in the last little while, we expect that netbacks to remain pretty much where they are. The other thing we are doing, we are not going to see as much impact to this this year as we will next year when the crew gets out and really starts going on the horizontal wells. But as we replace the higher operating costs of vertical wells with horizontal wells that are relatively cheaper to operate, that will help get the operating costs down, and that will improve the netback as well. So something that we want to be able to position the Company back to where we can get some efficiency in operations, better efficiency in operations so that we are not just dependant on commodity prices for our netbacks.

Okay. How much debt do you expect to are pay off between now and the end of the year?

Well, we -- I think ideally -- and something that when Murray and I are speaking to a group of people or something that we have been fairly plain about, and I think if the people listening to the call want to go back and listen to some of the discussions that Murray's got on BNN and other places, I think we have always said that ideally, if we had another CAD300 million or CAD400 million off the debt, that would probably position us very well with almost anybody that would be a representative peer in North America. So we are quite close, considering where we have come from. We are down to the stage where it is the little bit of the fine tuning right now.

So you are looking at between CAD300 million to CAD400 million.

Yes, and we will try not to do that all in one event, if we can, we'll see what we do. But Todd and Jeff Curran and his guys look around to where there's some cost saving,s and they really help Mark and the people in the field that make the Company run, and we're looking at little bits of efficiencies. You get to the point where CAD0.10 or CAD0.15 in operating costs, that's starting to throw a little more cash back into the Company and things we can use to repay debt. The other part, of course, is that Hilary is constantly receiving phone calls and talking to people about acquisitions and dispositions, so that opportunity probably will avail itself as well before the end of the year. So we will just take it one day at a time.

Yes. Well, one way to reduce cost is shop at Wal-Mart.

Yes. I think so.

My last question is why was 35% of this year's production hedged at prices ranging from CAD75.72 down to CAD60.11? That seems like a pretty low price range and a pretty high production level to hedge.

I'll answer the same way that I did -- if you recall, about a couple of years ago in 2008, and I was the dummy that pushed the hedge. When we made the hedge last year, oil prices were -- had been in the CAD30 to CAD40 range, and they were starting to improve a little bit. So we started to layer in some hedges. We are quite pleasantly surprised. I have always said to the board, I am happy when we are losing a bit on our hedges as long as we don't have it all hedged. We are about 40-odd% hedges. When we're losing a little bit of money on the hedge, that means that Dave and the marketing group are selling the rest of the product for more than we anticipated the price would be. So basically, that's the answer. And I believe certainly as an income trust, it was prudent to hedge a portion of that production.

Okay. Now Bill, when you convert to a corporation, has it ever crossed your mind to go completely unhedged?

We did that in the two or three years leading up to conversion, and I know for a fact that when Murray was COO of Rio Alto, they were unhedged a fair bit of the time. So we -- you have got to balance -- we are not gamblers, and we will hedge a portion of it. We don't want to hedge it all because there are people in other parts of the world than Calgary that are far more intelligent than most in this room, and I guess Dave would be the exception. I'm trying to predict where oil prices are going or gas prices are going. So we are not going to hedge it all, and I don't believe it is prudent as well to go unhedged. We we'll -- and we'll generally hedge enough to protect a portion of our capital program. So, I think in the future you will see our -- generally, our average has been about 20% to 25% hedged.

Certainly, we have been in excess for about the last few years, but I hope that investors understand, we had debt that we had to repay and had to make sure that the operation kept going. So we probably overhedged a little bit in 2008 and 2009. Our normal going ahead, as I say, will probably be somewhere between 20% and about 30% hedged. With gas right now, it becomes a mugs game. Do you go to do something when the prices are where they are now, especially looking at the almost daily, where you open up the computer and look at another company that has cut back on their gas drilling. So we are happy to be reasonably unhedged on gas right now.

Yes, okay. Thank you very much, and good luck.

Okay.

Thank you. (Operator Instructions) Our next question is from Jason Frew from Credit Suisse. Please go ahead.

Hi, Murray. Perhaps this one is for you. Can you talk a little bit about your infrastructure position in the light oil plays you are targeting and how that may or may not facilitate your growth?

Jason, that's a point worthy of discussion. On all of our plays, there's virtually not a play where we don't control the infrastructure. And a lot of these have been existing fields, we'll take Pembina as a case example. Let's deal with the Cardium. The Cardium throughput in 1972 was about 140,000 barrels of oil a day and right now, it is at about 20,000 barrels a day. We control vast portions of that infrastructure. So we can effectively reduce our finding cost by a couple of dollars per barrel on an average play because we don't have the infrastructure to pay for it.

The other thing is with how you'll end up developing these fields off pads, regardless if it's Pembina or anywhere else. It's very concentrated, so it is a limited amount of infrastructure we have to lay. A limited amount of pipe we have to lay, and we can lay it in advance of drilling the wells off times, once we get the pads started. So we can be very efficient. And we then all of that flows through that we think the variable costs that we are adding is about CAD10 a barrel, so it should help to moderate some of our operating costs in the fields. So the infrastructure plays into it a multiple of ways in terms of the development of these type of plays.

And at Waskada, do you have existing pipe there, as you're looking to ramp that up:

One, we have existing pipe in the field in infrastructure, and that's important. The second key component, and this is critically important there, is the sales line. We have got offput capacity or take away capacity there that can be ramped up with a limited amount of horsepower into the 20,000 plus barrel a day range, and that's important. That provides one step function we don't have to work around as we develop the Waskada field in particular.

Okay, thanks.

Thank, Jason.

Our next questioning is from Gordon Tait from BMO Capital Markets. Please go ahead.

Good morning. On your capital allocation, if you look at the amounts that you're dedicating towards your three principal light oil plays, the Cardium, Viking and Waskada, how would you break that up? How do you allocate that among those three, on a percentage basis? Which one gets the most, the least and what's in the middle?

Just based on the rough numbers, the Cardium will be getting the most.

In terms of dollars?

In terms of dollar impact.

What sort of percentage? Would it get half of the amount you would be putting into those?

It will -- yes, it will be half to 60% of the actual net dollars. Dodsland and Waskada tend to be relatively cheaper drills. The smaller rates, but cheaper drills. So the Cardium will be about 60%, Waskada will be about 25%, Dodsland the balance.

Yes, the idea is to use -- certainly, we are going to be aggressive about Waskada and Dodsland, but we view them as a little bit of a boost, too. That if the cardium wells are a little longer to drill, a little bit more expensive and a little more complicated and what both Waskada and Dodsland and a couple of other areas where we are pursuing the same technology, they give the ability to get in there and get volumes quick. So that you can go from spud to sales in one heck of a hurry on those plays.

And then, with the Waskada play, in terms of drilling density, I can understand there's some potential for pretty high levels of drilling density there. Have you given any thought to what the potential locations you might have and where others are aiming in that area?

One of our Houston based directors yesterday reminded us in the board meeting that they're drilling gas in the states right now at 1.5 acre effective spacing. So this is oil that you can generally down space more than gas, but I think realistically, we're looking at -- when we went through the exercise, the idea was with the shower plays, to try and get them down into about the 5 to 10-acre range. I believe as we go ahead, we will reduce that further. And Cardium aim has always been initially, let's get it down to 20s and then work toward 10 and 5, and I am very much a believer in what Murray is talking about, the fact that you need to open this rock up. And so you need denser fracs, probably a little smaller fracs, but a little denser spacing on your horizontal laterals as well.

Okay. Thanks.

Thank you.

Thank you. We have no more questions at this time. I would like to return the meeting over to Mr. Andrews.

Well, thank you very much. It was Murray's birthday yesterday. So we will say happy birthday to Murray and wish you all well. Thank you.

Thank you, the conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.