Obsidian Energy Ltd (OBE) 2010 Q2 法說會逐字稿

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

Thank you, and good morning. Welcome to Penn West's 2010 second quarter financial and operating results conference call. With me this morning in Calgary is our President and COO, Murray Nunns, and our Chief Financial Officer, Todd Takeyasu, as well as other members of our senior management team. Penn West Trust units are traded both on the New York Stock Exchange under the symbol PWE and on the Toronto Stock Exchange under the symbol PWT.UN. All references during this conference call are in Canadian dollars unless otherwise indicated, and all conversions of natural gas to barrels of oil equivalent are done on a six to one conversion ratio.

Certain information regarding Penn West and the transactions and results discussed in this conference call, including management's assessment of future plans and operations, may constitute forward-looking statements under applicable security laws and necessarily involve risks. Participants are directed to Penn West's news release, which we issued this morning. They are also 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's 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, and that's at www.SEDAR.com, the SEC website at www.SEC.gov. Or you're certainly welcome at any time to go on our website, www.PennWest.com. That's a lot of w's.

During this conference call, certain reference to non-GAAP terms may also 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.

Today, we're pleased to report our operation results for the second quarter of 2010. And, before get Murray gets started with a review and a bit of an update, I want to take a few minutes to talk about where we are and how we're positioning Penn West for what we believe will be a very bright future. With Murray's guidance as COO and the efforts of all of our staff, Penn West is well positioned to take advantage of the innovative technologies that are reinvigorating legacy oil and gas pools and opening new horizons for hydrocarbon exploration and development. Our land position, infrastructure control, technical ability, and balance sheet strength provide Penn West with a strong platform, as we move to lean harder on the drill bit and set the Trust up for conversion to a leading independent exploration and development company.

Early in September, we will be providing the Board of Directors with our plans for conversion to a conventional corporation. We will outline, at that time, a capital program focused on enlarged resource plays in western Canada and a plan to execute the program as effectively and efficiently as possible. Recognizing that we intend to set the fourth quarter of 2010 as a template for 2011, we'll be advising the Board on anticipated future growth plans and dividend levels. Yesterday, the Board of Directors of Penn West approved a distribution to August unit holders of record for CAD0.15 per unit, payable in September.

Following our review and update this morning, we will open up the phone lines, at which time we would be pleased to answer your questions. With that, I will turn the call over to our President and COO, Murray Nunns.

Thank you, Bill, and good morning everyone, or afternoon depending on where you are listening in from. First off, I'd like to highlight couple of key financial points. And these really stretch over a longer period of time than just the quarter. In January of 2008, we committed to reducing debt levels. Through a combination of equity issuance, asset dispositions, and the establishment of the Peace River Oil partnership, we have reduced net debt within the Company by more than CAD1.7 billion. Penn West has purposely moved away from short term debt, and we've moved more than CAD1.7 billion into long-term private notes with staggered maturities. Early in the second quarter, Penn West closed the renewal of its unsecured resolving syndicated bank facility for three years, with an aggregate borrowing limit of CAD2.25 billion. We now have approximately CAD1.4 billion of unused credit capacity available to us.

All of these in combination are significant milestones for Penn West. A strong balance sheet and access to credit provides financial flexibility for Penn West as we move towards conversion to an independent exploration and production company. On the operation side of the coin, production for the second quarter averaged approximately 164,000 BOE per day and continued to be liquids weighted, with approximately 60% of our total production being from crude oil and NGLs. 85% of our drilling activity in the capital budget is weighted towards liquids development, with primary areas in investment including the Cardium, the Colorado, the Amaranth formation, and Devonian Carbonates. We continue to selectively invest capital into the evaluation of natural gas projects for the long term. But the focus of our operations is on the liquids side of the equation.

On further notes on capital, Penn West spent CAD231 million in the second quarter, excluding A and D activity. The capital budget guidance for 2010 is projected between CAD700 million to CAD850 million. Given success of recent land sales on key resource plays and exploration targets, we anticipate full year capital spending to be at the upper end of our guidance. These land sales have allowed us to consolidate key positions in new exploration plays, as we said.

What we'd like to do now is provide some highlights from some of our key light oil resource plays that we're active on. Let's start with an overview of the Devonian Carbonate play in north central Alberta, which includes both the Swan Hills and Slave Point formations. Just to give a little color around the play, Penn West has a land base of approximately 200,000 plus acres in these trends. We have drilled or participated along these trends in 25 horizontal multi-frac wells to date over the last two years.

First month production rates per well have averaged between 200 BOE to 400 BOE per day. Three month production rates per well averaged between 150 BOE and 200 BOE per day. Our current template anticipates reserves in the 200,000 to 300,000 barrels per well range, and that's single well bore applications. Penn West development teams have currently identified more than 500 drilling locations in these trends. This is another significant play in our inventory.

Another play we'd like to update is the Cardium in central Alberta. We currently have three rigs operating in the Cardium, and we are actively increasing the pace of development. The current Cardium focus is on play appraisal and refinement, and this includes, but it's not limited to, refining completion methodologies, moving up the density of fracs on a per well basis, as well as looking at water applications in terms of fracs. In terms of multileg application, going ahead with tests of multileg models for the Cardium, which will improve efficiency, and moving towards pad drilling in key areas. The focus of our 2010 development work consists of appraisals across the Pembina area, as well as Alder Flats, Leafland, and the Willesden Green field.

Now, just a little color on Willesden Green. Penn West has 125 net sections of land and controls over 90% of the field. The results from our first well this year into Willesden Green are very positive, with a 12 of 13, 439 well. Initially testing at just over 3,000 barrels per day on test rate. Not everybody wants to hang on test rates, let's move on to the first month rate. The first month flow rate has averaged 860 barrels per day from this well in Willesden Green. Our current plans call for additional 12 wells, which are scheduled for the remainder of the year and then moving forward into development in 2011.

As Bill stated earlier, Penn West's planned conversion from an income trust to an exploration and production company is currently anticipated to be at or near the end of 2010. With this in mind, we have been actively shifting our focus towards more exploration and development activities throughout the first half of 2010, and, as we move through the second half of 2010, we will be ramping up activity levels on our key resource plays, with an expected rig count of between 15 and 20 rigs. In the near term after conversion to an E&P, Penn West will focus on growth while providing some level of income through dividends. Ultimately, we intend to position the company as a premier senior independent producer in North America.

Just before we take some calls, I'd like to let everyone know that in addition to Bill Andrew and Todd Takeyasu this morning, joining us in the room are a number of the members of Penn West Senior Management Team. These are the people who really make the wheels turn at Penn West and just by way of introduction, Dave Middleton, our Executive VP, and he's a managing Director of the Peace River Oil Partnership. Mark Fitzgerald, our Senior VP of Production, Hilary Foulkes, Senior VP of Business Development, Keith Luft, our General Counsel and Senior VP of Stakeholder Relations. Filling in for Bob Shepherd today, who is actually going to take a break this summer before it's over, we have Brian Keller, our VP of Resource Development and Exploration from the Exploration Department. Dave Sterna, our VP of Marketing, and Jeff Curran, our VP of Accounting and Reporting. So now, I will turn the call back over to [Alyssa] and we'll be open for questions.

(Operator Instructions). Thank you for your patience. Our first question is from Michael Zuk from Stifel Nicolaus.

Morning, guys.

Morning, Michael.

I just had a quick question with regards to some of the land sale activity. You had mentioned you were active in the June 23 land sale. Earlier this week, we saw one of the juniors offsetting your position in the Cordova [based] press release, their best estimate of resource in plays. I was just curious if you guys had a feel for resource in plays net to your interest and subsequent recovery factor. If you have any kind of idea there?

We do have some estimates internally. We also have drilled five wells in the Cordova to date. Two of them are on production at the current time. But because it's a competitive situation we're holding back for releasing anything of that information into the market at this time.

How many net sections are you really looking at as prospective?

Our overall position there would be about 50,000-acre range.

125,000 acres

In total, yes.

50,000 hectares.

Bill got me on the metric conversion, got me covered.

Okay, fair enough. Second question, then, you guys had mentioned the Colorado shale in the press release. Just curious what sparked your interest there and how many horizontal wells have you drilled into that play?

We're using the Colorado as a definition for largely the eastern Alberta area which would ensue a series of targets which would include the Viking amongst other thing. So it's a continuation of our work and extensions of our work from Dodsland and the (inaudible) Area.

Okay, thanks.

Thank you, our next question is from Gordon Tait from BMO Capital Markets.

Good morning. Just to get a little more information on the Willesden Green, Cardium, you mentioned you have 125 net sections. Do you have a sense of how many prospective well locations that might translate into?

At this stage, it's a little early in the game but the general look on Cardium development is that there's a minimum of four wells per section with the possibility of eight wells per section. So, you can run the math out from there. But, like we said, it's relatively early in the game. The key thing I want to underscore about this early test of the field, and we are very pleased with the results and believe this extends well across the field. This isn't a conglomerate, this is a sandstone and performing under normal operating conditions in the reservoir. So we do believe it's transferable and multiplies out across the field.

Thanks and then just a question on your realized gas pricing, we used -- I think that in the past Penn West typically got a slight premium to the (inaudible) price. I think in this quarter you're more or less in line with [a course], slight discount. Is that because of some of your disposition? Is that what we should sort of model in going forward?

I think that generally you need to understand how we market our gas. It is generally we try to target half of our portfolio towards the daily index and half of the portfolio toward monthly index. In terms of the heat content of our gas, that has not changed due to any of the dispositions. It -- probably the difference you're seeing in the price has to do with that between daily and monthly index.

I think what Dave is trying to say sometimes with that strategy of half and half sometimes we beat the market, but the odd time we're at the market or a little bit lower.

Lastly, could you maybe just talk -- you didn't much about the Lower Amaranth, how many wells you plan to drill there, what just give us an update there.

We currently have three rigs operating in the Amaranth area on the Waskada play. Plans call for between 40 to 50 well this year. We have about 26 down and about half of those tied in at this stage. We're going to be in almost continuous operations out there from now to year end.

How many wells month roughly are you drilling there?

It depends how many rigs we keep spotted out there. Typically we're five days drilling time. So we can go fairly quickly out there.

That was one area, Gordon, we looked at -- one thing we talked about in the -- today was setting things up for the last quarter of this year, and one of the areas we're very keen on is the Waskada area in Manitoba and the Amaranth. We're putting a few more rigs in there with the aim that we ramp up toward the end of the year. We've -- the wells we've got on production and that -- anybody that watch the news in Canada knows that's the area that really got hammered with wet weather this year. So, we're quite a bit behind, but we're progressively catching up on our completions and our tie-ins. The wells are coming in very, very well. Probably the most interesting thing we're doing there is we've been -- as with other areas, [we've been] looking at frac intensity, frac size. We went to a very aggressive number of stages on our last frac and the well is performing much better than the other wells. The other wells were quite good. So we're very, very pleased with that area.

Thanks. Thank you, our next question is from Roger Serin, TD Securities.

Good morning everyone.

Morning, Roger.

A couple questions just to follow up so I am clear. So you sort of describe your Colorado play as basically the Viking and some of the Colorado shales. So, am I to assume your Dodsland activity is being picked up in that? I'm certainly looking at your well list and it looks like there's a number of licensed or drilling Viking wells in the Dodsland area.

Yes. That would be a broad description for that play and extensions of it.

I think the other thing with the Colorado it's an area we're or a formation that we're looking at. It extends from the Milk River Sands all the way down through to the base of the Viking. So, there's a terrific amount of sand, silt, stone and shale in that whole package. So the current focus has been primarily on the Viking but we've tried some other things and other ideas in the full, whole gamut of zones. So that's why we're sort of sticking to the Colorado tag on it.

You're still planning 80 to 100 Dodsland Viking oil wells?

Yes, in the next 12 month cycle. That would be a pretty reasonable estimate.

And --

Just to add on to that we'll provide much more clarity around sort of weighting of the varying resource plays in the early September discussions.

Two things there -- in September we'll give I guess probably a little bit of a broad outline but certainly we'll be definitive as to where we'd like to go with the capital budget for 2011. As many of you on the phone will know we have an investor day planned for October the 20th, at which time Murray and Brian Keller and the teams will be outlining the plays. We will be providing, in conjunction with that, a much more breakdown of number of wells by area. How much capital we're devoting to each of the areas.

Okay and just -- do you plan to release information to the street on your sort of budget before the investor day, coming out of the mid September discussions?

Yes. We talked about that in the Board meeting yesterday. One thing that we asked the Board is that we have a strategy session planned with the Board in very early September. And we talk to the Board about a release following that session. I won't say immediately following but in close proximity to that session, at which time we'd outline the budget for next year. We also want to give some direction to the investors and to the street as to where we're going with level of yield next year and dividend and how much we would be looking at putting into our capital budget.

As you know, we have been very adamant about the fact that we believe we've got terrific opportunity for growth. The drill bit is not telling us otherwise thus far. We're continuing to drill. So we'll -- we hope to come out in early September with that or mid September with that basically to give you a breakdown between the funds allocated to growth and those that would be going towards yield.

Okay, I think I only have two other questions. The land sales fairly active in the quarter. Was that mostly targeting longer term natural gas projects?

I'd say it's relatively balanced between that and some new oil targets.

I want to move on to the Cardium a little bit. So Murray, you talked about, I think it was Murray that talked about no conglomerate there. You're on the west side of the pool, there's water injection to the east. So I'm presuming you saw no evidence of water issues. So I guess I'm looking for obviously a great well. Was it geology, no conglomerate? Was it technology? Was it luck? Frac to design or well orientation? What you do attribute some of the things that maximized the flow rates?

We'll start with one, it wasn't luck.

I just offered that as a gimme.

Appreciate that one, Roger.

What we find most interesting about this is that it's not out of the norm. There's nothing in this rock package that's unusual. There's no unusual pressure support. There's no unusual rock characteristics. We don't see anything that's beyond the average in the pool at this location. So there's no -- we're not hanging any single factor on this. We believe there will be variability in all Cardium results. We ultimately believe we'll achieve the average of whatever the field will achieve but we're very confident that over the long haul you will get a range of results but this is well within that band of outcomes.

So since you're leading me here, then that's roughly 1700 meters long, a little bit higher than some. I don't know how many fracs are in there. Can you give me a sense of frac stages, and whether that's what you're targeting, that kind of length of well and those sort of number of fracs?

I think you're spot on, on the length. In terms of frac density, we've moved up from our early efforts in Pembina, we're now typically in the 15 to 22 frac range.

I think the other thing we're watching, Roger, we were fixated coming out of the Lower Shaunavon and to the other areas, we're kind of fixated on the seven to eight stages. And you look at what's going on particularly south of the border and you get people with 40 to 45 stages on some of their things now, particularly south of the border. So we're moving much more aggressively in that direction. The other thing we're looking at is frac length. The other thing is multi legs. The interesting thing, and you ask the question about the influence of water, the interesting thing that Murray and I are seeing, and we just kind of, just as a hobby, follow what's going on in the US. And you look at some of the liquid-rich plays down there and a lot of them are reporting water in addition to their liquids production and gas production. So I don't know -- it seems to be identified as the boogeyman in the Cardium. We really can't figure out why. There certainly is an area that covers maybe 10% of the play area that has the, had the very aggressive water flood or water injection. But rest of the area has been basically just kind of maintenance water injection.

Just a couple last on the Cardium, rough zone thickness save me from slipping logs, I'm getting too old for that.

So am I. Six to seven meters.

Okay, and then, do you have any plans to move to water based frac fluids?

Actually we've already done some testing on water based frac fluids, so that's ongoing right now. The other area we'll be going into and I think we've got our first one in August out on the Cardium, which will be a multi length test because we believe that is really a route in the future for us. We believe that can have a significant economic impact. That, especially when it's coupled with the way the royalty structure was laid out with an accelerating royalty for added length. So that's an area with this play and Devonian Carbonates we think, in particular, can really benefit.

The other big thing is, and we're working toward that as well, is going to six to eight laterals from a single pad. and each time I talk about lateral you may have a multi leg on those laterals. That'll work towards really reducing the amount of money we're going to spend on tie in and should really help the efficiency of operation and also reduce drilling costs because your moves are lessened. You're doing everything in the same lease.

Thanks guys. You obviously read our last Cardium report on the technology section. So, I've taken too much time, I'll give it back to the operator.

Thank you. (Operator Instructions). Our next question is from Steve [VanDeran] from R.W. Baird, please go ahead.

In your prepared remarks, you made a comment about your future prospects of going corporate and a comment about the dividend. I wonder if you elaborate on that, on your dividend thoughts especially, once you become a corporation. Thank you.

Certainly. Basically the information that's out in public and some of the information that's on our website and in our various investor presentations has been very consistent. We've talked about conversion to a corporation targeted toward the end of the year. This is something that is really being set up because of the change in tax legislation in Canada and the implementation of the special tax on trusts at end of this year. We want to move the Company into growth. We also feel that in the near term, we want to strike a balance between growth and yield. So we've talked about it basically this way. We need somewhere between CAD750 million and CAD800 million to maintain production in this Company at a flat level. For every, roughly, every CAD40 million to CAD50 million we spend over that, we should be able to achieve 1% growth.

So, as we go through things, continue to go through things for the rest of this month leading up until September, what we will take to the Board is exactly how much growth that we would look at. The rest will go toward yield. Right now, if we do it on a monthly basis, the range that we've talked about is CAD0.07 to CAD0.12. We would be going to a quarterly dividend as a conventional corporation. So if you want to multiply those numbers by three, to get to the quarter, and then get to an annual dividend and yield you're welcome to do so. But basically we've talked about CAD0.07 to CAD0.12 per month.

Thank you.

Our next question is from Dan Healing from the Calgary Herald.

I just wanted to ask about the Peace River Partnership closing June 1. Is there anything you can tell us as far as update on what the situation is and also if there's any kind of visibility on time lines?

I think what I'd like to do is turn it over to two people. I'm going to first turn it over to Hilary Foulkes. She's our Senior Vice President and deal guru and did a awful lot of the leg work on the deal with the China Investment Corporation. And also Dave Middleton will be running the partnership; he's our Executive Vice President. Hilary, do you want to do a little update and then maybe Dave can add a little color as well.

Sure. So what I can do is kind of take you up to a smooth closing which took place on June 1 and a little bit of information just in terms of the partnership itself, being one primarily of financial consideration. But obviously we understand that the partnership itself brings some technical expertise to the bearing as well. Just in terms of our ability to move this project forward, a much more timely process than we had originally anticipated, I think is a huge benefit to the Company. We obviously had very little value associated with our current market cap in terms of this overall project. A huge resource, 5 billion barrels of oil in place, and the ability to move forward in the next few decades really. This is a very significant sized project. So on that note, I'll pass it over to Dave Middleton, who's actually steering the ship forward, and he can give you some update in terms of capital and short term plans for drilling.

Thanks a lot, Hilary. Currently, we're producing about -- I'm going to talk about gross numbers as well, not the Penn-West net. Currently we are producing about 2500 barrels a day and the plan going forward -- really about three things we're working on. The first is to drill up more stratigraphic test wells to evaluate the lands. To give you an idea, only about one in five sections has been evaluated for the oil sand in place. So that's one of the things we look to our future is how we can delineate more of the resource for both the primary and for thermal development. About 60% of those wells that we're drilling are going to be targeting for looking for additional primary opportunities.

The second thing we're moving forward is on the horizontal appraisal wells where we have stratigraphic test wells, and we can start moving forward with development. We have target about 13 wells right now for that. We're using dual legs as we talked about in the Pembina Cardium. We're going to be doing dual legs. In the Peace River oil sands property rigs now, we're using dual legs and had good success with that. So we have about 13. We're also contemplating expanding that program over the next 12 months to add approximately maybe 12 to 15 more of those horizontal wells.

Finally, and this would be a first step for us, is moving into the thermal. We have an approved project for a horizontal cyclic steam project. We anticipate that's going to be later this year and at the beginning of next year. We have some additional wells to put in with seismic monitoring. Again, this is to monitor performance of the thermal process. Those are the three things in fronts of us right now. Additional stratigraphic, north of 50, the horizontal wells 12 to 25, and our thermal project, one horizontal cyclic steam injector.

Okay, are there any budget numbers associated with the activity this year or next year?

Yes, I'm going look about 12 month basis here because we sort of budget through the winter for the project. The range that we have for what I've just described will be about CAD70 million to about CAD100 million.

That's for over the next 12 months?

Yes, that would us about June next year.

And long term, are the timelines as indicated over the last little while, I think first oil -- the number -- the year 2012 is when you get into production? Or how does that work?

We're also in production right now. We have about I'm going to say 50 plus horizontal wells producing right now. And as I said, we're about 2500 barrels per day of production. As we move forward our primary development we're going to be adding in that neighborhood, 30 to 50 wells per year in the primary development, and continue that forward. As we move -- I think in about 2014 we have added thermal development work in that nature.

Okay. Thanks a lot.

Our next question is from [George Telly] from George Telly Associates. Please go ahead.

Yes, good morning. One of your previous callers had indicated from your conversation regarding your dividend. I think the street at the present time is discounting your stock price based on a roughly 15% to 20% cut in that dividend, looks like it might be a little more. Is that correct?

As I say, the range we're looking at is CAD0.07 to CAD0.12. So until we have that discussion in September with the Board and until Murray and the crew finish up on the capital program that we're working towards, it's a little premature.

Thank you. That concludes question-and-answer session. I would now like to turn the meeting back over to Mr. Andrew.

Thank you very much and thanks to Murray and everybody here today and thank you for your time and attention.

Thank you. The conference has now ended please disconnect your line at this time and we thank you for your participation.