Obsidian Energy Ltd (OBE) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Penn West Exploration second-quarter 2011 conference call.

I would now like to turn the call over to Mr. Bill Andrew, Vice Chairman of Penn West Exploration. Mr. Andrew, please go ahead, sir.

Thank you, and good morning, and thank you everyone for joining us on our second-quarter financial and operating results conference call. With me in Calgary are many of our Executive team -- the 2 primary speakers this morning will be our President and CEO, Murray Nunns; and our Chief Operating Officer, Hilary Foulkes.

I thought before we get going, I should talk about the first part of the press release last night, which is my taking a move that's been planned over the past year and a half and that's a move to Vice Chairman of the Corporation and the appointment of Murray as the CEO, and Hilary as the COO of the Company. This has been in the works. I think with any venture, there comes a time and a season to turn over the ship to others, and we are really privileged at Penn West to have 2 exceptionally strong people. Murray, who has helped me extremely, over the past 3 years, just get things right after the Canetic acquisition, and Hillary, who's come in and added that much more business confidence and sense to the team. And I'm very, very excited about what they're going to do with Penn West over the next few years. They've also recruited and gotten to work and recruited over the past of couple years some very strong individuals to help with our Executive suite. At Penn West as always, we've got strong middle Management and a good group.

I get 1 chance to do this, so I wanted to spend 2 or 3 minutes just talking about some people that have influenced my life, particularly at Penn West. It's been a long ride, but it's been a -- lots of challenges, lots of building from, effectively, a little quarter of a floor in the Dominion building on 7th Avenue in December in 1992. 3 people I wanted to point out are the 3 Chairman on an event I had the opportunity to work with over those years. The first was [Bob Dickson], a gentleman who is no longer with us, I had the opportunity to work with him before I came to Penn West for about 6 years. He was -- I think he's the original visionary in Calgary and he taught me how to be positive about things. He taught me about empowering people and he also taught me about sharing the success in the Executive suite with the whole Company and the fact that it was the whole Company, it wasn't just the management Company.

The second is a Chairman that guided me through about 10 years in the middle period of Penn West, and that was Murray Edwards, and really he needs no introduction to the investment community. He is really a businessman, tremendous business savvy, and he instilled in me his ethic of hard work and thinking smart, and we were able to apply that in getting Penn West really off the ground.

Thirdly is John Brussa and I still continue to work very closely with John as Chairman of the Board. He's not had the reins over a very good period of Penn West with the change in trust legislation, the change from an E&P to a trust, and the many -- couple of very large and difficult acquisitions that I kind of pushed upon him through the early part of this last decade. But we got through them and I believe we've got a very strong Company.

Finally, I just want to thank all of the employees at Penn West, Bob Dickson taught me long ago that a company is only as strong as its people and you're really only as strong as your weakest link. And we've been very fortunate in Penn West to have a staff that's second to none in the industry, they're -- they work hard, they're very caring people, they're very community oriented and it's, I think, a testament to Murray and Hilary that they'll continue to instill that in our staff a sense of community, a sense of hard work, but also the fact that everybody will share in the success.

For the shareholders, I want you to view this the same way I do as very much a positive for the Company. I'm one of those fans, if I'm at the game and the old quarterback is missing a few passes, I'm the one that's yelling for the new guy to get in and take a few turns. So it's time for that, it's time for renewal, we're going to get that. What I'm going to do right now is turn things over to Jason Fleury, many of you have met, who looked after our investor relations. He's going to go through the necessary preamble, and then I'm very anxious to listen to Murray and Hilary as they go through the quarter and talk about our plans for the rest of the year.

Thanks, Bill. Penn West Exploration's shares are traded both from the New York Stock Exchange under the symbol PWE and on the Toronto Stock Exchange under the symbol PWT. 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 ratio. All financials are reported under International Financial Reporting Standards, or IFRS.

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. Participants are directed to Penn West's first-quarter news -- or second-quarter news release and 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 operations or financial results are included in reports on file with Canadian and US Securities Regulatory Authorities and may be add accessed either through the SEDAR website at www.sedar.com and the SEC website at www.sec.gov. or at our own website, www.pennwest.com.

During this conference call, certain references 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 IFRS items. I would like to now pass the call over to Murray Nunns, President and Chief Executive Officer. Murray.

Thanks, Jason. And just before we start the second-quarter commentary, just going to add a few more words. For 2 decades anyone involved with Penn West would find it hard not to equate Penn West success with Bill Andrew. His unquestionable devotion to shareholders and staff at Penn West over the years is what's made him an icon in the industry. Bill has consistently led this Company with a moral compass which valued integrity, honesty and human decency above all else. Our team going forward has the distinct honor of carrying Penn West legacy, and Bill's new role as Vice Chair -- he will be providing strategic perspectives to our Management team which I am certain will prove invaluable. On behalf of innumerable people, thank you, Bill.

On to business, as Bill would say.

Give her hell, Murray, I think would be the other thing he would say too. (laughter)

This morning I'll provide an update which outlines Penn West's priorities as we drive our value creation strategies into 2012, before guiding you through the overview of the second-quarter results. Following my comments, our new COO, Hilary Foulkes, will provide you with an overview of operations. Then we'll open up the phone lines at which time we'd be pleased to answer your questions.

The safety of our employees, their families, and communities has always been a top priority at Penn West. Never more so than when fires spread through North-central Alberta operations during the second quarter of this year. Cooperation with emergency responders was critical in the execution of the fire response and to the safety of all involved in bringing the fires under control. As the largest producer in this area, it required a significant portion of the second quarter to normalize most of our operations. Mother Nature wasn't finished with us yet. Wet conditions across Western Canada, in particular, flooding in Southern Saskatchewan and Manitoba, have impacted well site access, well servicing and will impact production recovery in addition of development volumes into the third quarter. Although these conditions have slowed operations and production editions, the fundamental direction and strategy of Penn West has not changed. Penn West is focusing activity on its development programs to bring forward the value inherent in our large light-oil and resource opportunities.

So on the financial front, funds flow for the quarter was CAD396 million or CAD0.85 per share. This compares with CAD0.77 per share and CAD356 million in the first quarter of 2011, representing a 47% increase from the CAD269 million reported in the second quarter of 2010. A significant increase in the oil weighting of Penn West has helped to drive this increase in cash flow as well as increases in the oil price. Net income for Q2 totaled approximately CAD271 million or CAD0.58 per share. This compares with a net income of CAD291 million or CAD0.63 per share in Q1 2011. Net income remains strong in the second quarter of 2011, mainly due to higher revenues, gains on unrealized risk management items, and gains on minor property dispositions.

We are committed to continuing our strategy of providing returns to shareholders through both growth and dividends. To this point, the Board of Directors has declared the third-quarter dividend of CAD0.27 per share be paid on October 14 to shareholders of record on September 30. We anticipate our cash returns will remain strong, based on the forecasted netbacks of CAD55 to CAD75 on new light-oil barrels and given that 90% of our capital spending is directed to these projects.

Turning to our capital guidance, we expect our forecasted full-year 2011 capital program to be between CAD1.4 billion to CAD1.5 billion. Today, in 2011, we have invested approximately CAD100 million in strategic exploration land acquisitions where we hold competitive advantages. Parallel with this, we have realized approximately CAD100 million in proceeds from the disposition of non-core assets -- that's CAD100 million in net proceeds from disposition of non-core assets. Capital spending is also impacted by increasing industry service cost structures and the uncharacteristically difficult operating conditions we've been enduring through the large balance of this year in Western Canada.

On another note, we have identified a number of assets which are non-core to Penn West that could be very attractive to industry competitors as they look to acquire liquids-rich projects. The proceeds from these dispositions will be directed to light-oil development activity or to our balance sheet.

On Q2 production and guidance going forward, our production base has evolved to a point where it is now 66% weighted to liquids. In the second quarter of 2011, we averaged 156,100 barrels per day due to the shut-in production resulting from the wild fires, floods, and third-party facility outages. Total impact to our quarterly average production volumes was approximately 13,000 boe per day. Light-oil and NGL volumes have grown 19% over the last year, excluding the impact of these second-quarter interruptions.

I spent time over the last 2 weeks visiting our operations in Southern Saskatchewan, Manitoba and in Northern and Central Alberta. Seeing the situation first hand, I can assure you, we are still recovering from the impact of the abnormally wet conditions. Primarily driven by continued operational outages, approximately 4000 boe per day is expected to be off-line through to the end of third quarter. We now estimate average production for the second half to be between 163,000 and 167,000 boe per day for the third quarter. And we expect the third quarter to average in the low 160s per boe per day and we expect to reach full production capacity in the fourth quarter and realize the impact of our development programs with volumes averaging approximately 170,000 barrels per day. Exit volumes for the year are projected to be between 174,000 and 177,000 boe per day. This represents 5% growth on a year-over-year basis.

To help drive our growth plans, we have just the right person, Hilary Foulkes. Hilary has assumed roles of increasing responsibility in Penn West over recent years. A geologist by training, her solid experience, diverse skill set, and respected reputation in the industry makes her incredibly well -- an incredibly well-suited Executive to take the role of Chief Operating Officer here at Penn West. Congratulations to you, Hilary, on your new role. With that, I'll pass the call to Hilary.

Thanks very much, Murray, and good morning. We're going to get right to the point. We have a solid plan to achieve the second-half volume target Murray has outlined. This includes the recovery of remaining off-line base production that Murray referenced just a moment ago. It includes increasing our well servicing rates back to normal levels -- we're currently running about 50%; the tie-in wells carried forward from Q1 and Q2; the completion and tie-in of a number of key pad developments; the resumption of our full-scale development programs; and bringing wells on-stream in the Cordova gas play.

Penn West expects to operate 15 to 20 rigs over the balance of the year and we're moving towards steady state drilling and tie-in activities. This will maximize efficiencies in both execution and supply chain management. We believe the capital efficiency created by maintaining a steady rig count will assist in mitigating upward cost pressures in a rising service cost environment. In the first half of 2011, more than 70% of the 170 wells brought on stream were from shallow oil plays with lower production volumes. We anticipate tying in another 170 wells in the second half of this year, with an increased proportion of the high productivity wells from the Cardium and Northern Carbonate. This gives us confidence in our exit guidance.

Let's take a quick look at the plays. Let's start with some operational highlights in the Cardium. As you know, Penn West is the leading operator in Canada's largest oil field. We have done enough appraisal drilling to date to understand the key variables in reservoir performance in much of the Cardium trend, so have commenced full-scale development in the most promising areas to date. We have also refined some efficiencies in drilling and completion. 40 wells have been drilled to date in 2011, and in the second half of 2011 we will focus capital investment specifically into West Pembina, Alder Flats and Willesden Green. These are some of our most productive wells and areas in which Penn West owns the dominant land position as well as associated infrastructure necessary to ensure uninterrupted development. We anticipate averaging 4 to 5 wells running for the rest of 2011, drilling 35 to 40 additional wells.

The Northern Carbonate play is one of the hottest plays in the basin with record land sale prices and significant M&A activity. We believe we have an enviable position in these trends. We are very excited about the results in both the Slave Point and the Swan Hills platforms. These areas provide the ability to add significant volumes of production for an extended period of time. As an industry, we're still only scratching the surface of the potential of this play. But, rest assured, this will be an impact play for Penn West.

For the remainder of 2011, we'll have an average of 2 to 3 rigs running, drilling an additional 10 to 15 wells. Specifically in the Slave Point area near Otter, we're focused on dual lateral development. 1 month average production from these dual laterals is 450 to 500 barrels a day and this has certainly helped to further fuel our enthusiasm for the play. Our control and the pre-build of infrastructure will ensure wells can be brought on at full productive capacity. In the Swan Hill, with 8 wells drilled to date, we've shifted to the use of pad drilling to increase operational efficiencies. We are set to drill an additional 4 wells for the remainder of 2011 and these will be focused in east Swan Hill. Completions are now underway on our 4 wells dual lateral pad at South Swan.

The Colorado, or Viking, is a very broad trend extending from Southwest Saskatchewan to significant portions of Eastern Alberta. Penn West holds more than 750,000 net acres where we've identified well in excess of 2000 locations. The Saskatchewan portion of the trend is dominated by light-oil, whereas the Alberta portion of the trend contains oily gas as well as pure gas prone areas. In the Southwest portion of Saskatchewan, the Viking is furthest along in Penn West's portfolio providing assembly line development and consistency of results. 54 wells were drilled in the first half of this year, essentially all on pads. Production type curves in the Saskatchewan portion of this play remain consistent with first month average production rates of 80 boes per day. The Alberta side of the play is under appraisal. We believe over one-third of our acreage is prospective for liquids-rich gas and we really think we're onto something. We will come back and address this when we talk further about exploration.

Now, heading to Manitoba, the drilling in the Spearfish, of course, was interrupted by the severe flooding in Manitoba. However, we still managed to get 44 wells drilled in the first half of the year. We are into full-scale development with 4 to 5 wells per pad and 24 wells per section. Although in the second half, post breakup drilling has been delayed, we plan on drilling 20 or so more wells in the second half as surface conditions permit. This play is another example of consistent assembly line development. On the Spearfish, the first month production rates continue to average about 90 barrels a day, and we anticipate a further 40 wells being tied in for before the end of 2011.

We do look forward to describing our 2012 capital strategy at the scheduled Investor Days to be held in Calgary, Alberta on September 20 and in New York City on September the 21. We'll get into more details on the type curves and our capital program at that time.

But, just to finish off, a quick word on the progress of our joint venture and partnership. At Peace River, early in Q2, we initiated steam injections on our first cyclical steam pilot in an area we call Seal Main. Results have been extremely positive, with targeted injection rates and volumes achieved. And we commenced flow back in late July, so results are pending. With the Cordova shale gas joint venture, Penn West and its partner began completion operations on the 8-well pad drilled during the first quarter of 2011. We anticipate initial production testing late this year.

And, finally, on the exploration front, we believe that industry is just cracking the surface of what lies ahead on the resource exploration front in Western Canada. Recent land sales have served to highlight just how much opportunity remains in this basin. For Penn West, the first half of 2011 was highlighted by both the assessment of concepts on established trends and by early stage work of rapidly evolving exploration opportunities. Penn West will selectively participate in crown land sales where opportunities can be consolidated at reasonable costs. In the Colorado Viking play, appraisal work continues on the Alberta side of this trend. Tests to date have yielded highly encouraging results. Production tests from our 5 most recent wells are between 200 and 300 boes a day, and we firmly believe that we will be increasing the magnitude of our oil resource on this trend.

We continue to leverage our existing positions and key trends where we hold both proprietary and infrastructure advantages to position ourselves for the future. Penn West is also evaluating a select portfolio of second-generation tight oil and source rock plays. The strategy of early positioning in emerging plays and developing them into large-scale projects has served Penn West very well in the past. This strategy has proved solid economic returns for shareholders in areas such as Cordova and Peace River.

Just before we take some calls, I'd like to let everyone know that in addition to Bill Andrew and Murray Nunns, in the room this morning we have a number of our key Executives joining us -- Todd Takeyasu, Chief Financial Officer;, Dave Middleton, Executive VP and Managing Director of the Peace River oil partnership; Mark Fitzgerald, Senior VP Development; Bob Shepherd, Senior VP of Enhanced Oil Recovery and Cordova;, Keith Luft, General Counsel, Senior VP of Stakeholder Relations; Rob Wollmann, VP Exploration; Gregg Gegunde, VP Production; Dave Sterna, VP Commodities and Transportation; Jeff Kerns, VP Accounting and Reporting; and, of course, Jason Fleury, our Senior Manager of Investor Relations. Unable to join us this morning is Thane Jensen, our Senior VP of Operations. So, we have the whole gang here available to answer any of your questions. I'd like now turn this over to the Operator and open up the floor to callers.

( Operator Instructions ) Cristina Lopez from Macquarie Securities.

Hi, everyone. I just want to say congratulations to all the new positions and Bill on semi- retirement. Just getting started on the quarter -- on July production volumes. I was wondering if you could give us incremental color on where the July production volume ended up coming in and where you might see current volumes now?

Yes, Christine, just to fill in some thoughts on that. The July production, we were still basically in recovery mode. Our numbers would be at about 160,000 producing barrel, would be the range we're sort of currently operating in. And like I say, it's a twofold, one-- or threefold, we haven't been able to service wells. We've got some flooded out areas still and volumes from wells that we drilled and completed in the first quarter, we haven't been able to tie-in. So that's essentially what's got us pinned to the carpet on that number.

And so in the Q2 results, heavy-oil volumes were actually higher than expected. Can you give some more color around the heavy-oil program and what plans are for the rest of the year, if you expect to continue to see volume growth from the heavy-oil areas or if you expect to see that moderate through the rest of the year?

Yes, I'm wondering if it's just a proportional issue with regards to us having more light-oil off that is giving that effect.

Okay, and then last question is on operating costs. Obviously, having fixed costs stretched out over fewer barrels have an impact. Where do you see the operating costs for the remainder of the year and then going into 2012?

I'll provide 2 comments on that. And 1 of the keys-- 1 move we've made recently is bringing [Greg Young] on into production and our adjustments in our Management team. And I'll say 2 things, obviously there are fixed costs as we bring volume onto fourth quarter we think we start to normalize into the high 15's again. We think we're at about a-- the effect of the fires about CAD1.50, approximately.

I'd say the other things we're looking forward in the long run, as we get more and more of our volume from the horizontal drilling we're getting more concentrated in our operations. We believe that'll be a long-term positive on our operating costs. I'd say the second thing is we're also, over the next 1.5 years to 2 years, looking at automation programs in some of our older fields, again to improve our overall efficiencies and reliability of operations in those locales.

Perfect, that's it for me. Thanks, guys.

Jason Frew at Credit Suisse.

Hi, there. Can you hear me?

Yes, we got you, Jason.

Okay, great. I guess this is probably a question more for Hilary actually. Hilary, I was wondering if you could give us some more color on the ins and outs of portfolio management this year. I guess, in light of having higher CapEx now versus the original expectation and with cash flow being impacted by the operating issue?

Sure. Jason, just-- I mean I guess on principle, all of this portfolio management that we do it's an ongoing process. So we're constantly looking at how we can accelerate the key plays in the portfolio and how we can kind of help to reduce operating cost across the organization with non-core property disposition. So, as we mentioned in the press release and the call, it's about CAD100 million net to the positive from the cash perspective, and, of course, that includes the acquisition of Spartan, it includes a disposition (inaudible) Saskatchewan and a variety of other small bits and pieces that continuously go in and out.

Over the course of the remainder of the year, we do plan a couple of disposition processes. Again these are non-core properties. They're not without opportunity, they're just not suitable for the Penn West portfolio. So those are going to be liquids-weighted and so we think that there's going to be some high demand for both the Red Water property that we're already in the market with, you may have seen an announcement on that. And later on in the year some non-operated properties again with pretty good oil weighting.

Okay, thanks.

Michael Zuk from Stifel Nicolaus.

Good morning, guys, and congrats on the promotions. I was just looking for a little bit of insight in terms of the greater Swan area. This may be a question for Rob, but in terms of land acquisitions and crown land sale prices, what are you liking there and where do you see prices trending going forward and I guess what's your breakeven or where do you stop investing?

Well thank you, Michael. Prices I'm probably not going to talk about too much. But I will talk about is what we do like. Certainly there are areas in the Swan Hills that has been very pricey of late, we've been a participant in some of those sales. In the Slave Point, a similar focus with a lot of land sales that have happened over the past year.

The other plays that we are spending money and building positions of significant size is on the source rock plays. And I think we'll provide a little bit more detail on those at Investor Day in September.

Just as a follow up, there's been a lot of market chatter in terms of M&A and some junior producers. Do you have an opinion or do you have an angle on how you see your acquisition strategy going forward?

Sure. I will jump in and answer that one, Michael, it's Hilary here. The premise that we've always approached our acquisitions by is if we can get things at reasonable prices, we'll do it. But I think that when we look at the inventory that we've got and the ways that we can go about advancing it, the acquisition for the sake of it has never been the modus operandi for us.

So again it -- we'll be opportunistic but we're under no obligation. We've got an inventory that is very strong and the requirement for us to do acquisitions is simply not there. So if we see a good opportunity, we'll certainly do something, but with the prices that are being paid in those areas, as you well know, getting something for reasonable value is pretty tough.

Okay. Thanks, guys.

Gordon Tait from BMO Capital Market.

Good morning. Just to follow up on the question about the Northern Carbonate, Swan Hills, Slave Point, what do you reckon that your like Penn West position is there in terms of the original oil in place or the resource potential? And then what do you think the recovery rate of that could be?

I'll touch on some of this and then I'll flip it to both Rob and Hilary. Our overall position is in excess of 200,000 acres between the Slave and th Swan. We recognize about 500 locations within our inventory on an overall basis. Recoverable reserves are between 250,000 to 300,000 per wells, so you kind of go with the math from there, Gordon. That's the basics. That addresses the areas where there's control and maybe I'll provide-- let Hilary and Rob sort of take on the question of what lies out beyond where the vertical control exists on this play trend.

Thanks, Murray, what I would add to that would be these Carbonate platforms are widespread and they cover broad areas. The ones you're hearing about right now are the ones where there's been some existing vertical production and existing vertical control or significant vertical control. We are certainly looking at areas both close to those but also away from them. From a recovery standpoint, in general, we're looking at our type curves and our development philosophy is anticipating recoveries in the 20% to 25% range on a primary basis.

I don't think I have anything to add.

Okay, thanks. And just in terms of, I guess production rates, it sounds-- you're about 160,000 barrels today, so I presume that some of that 13,000 boes a day that was shut in -- like to go from 160,000 today to exit at say 174,000 that's the midpoint of your exit rate, is some-- is a big part of that still some of that 13,000 boe today that was shut in?

Yes, I think there's some of that and there's certainly-- there's about 4,000 of that that's still out. And then the rest is really just access, so it's getting back in and tying in wells that we drilled in the first 2 halves of-- or 2 quarters of this year, so it's actually getting back and tying wells in that are waiting for attention from us. We've got some big pads that are being completed right now both at Willesden Green and Swan Hills as well as our Cordova. So it's really kind of the resumption of normal course of business from where we've been shut out from certain access.

And then maybe just to get a bit of a read through for next year kind of a top down perspective, if you exit about 174,000 boes a day next year. And looking at -- on the Colorado shales you're going to drill, you said, I think 35 to 40 wells through the remainder of the year, but they come on about 80 barrels a day presumably, they fall off to 20 or 30. Then Cardium you've got 45 to 55 wells that come on at 200 to 300. I mean it just doesn't seem like there's a lot there unless I'm missing something to really like maybe on a go-forward basis, once you establish an exit rate of that 174,000, do you really have to ramp up and push harder on these areas to get a growth rate? Can you maybe talk about what sort of growth rate you would look for?

Yes, Gordon, just to broaden that discussion into foreshadowing 2012 and I think we'll give a lot more color obviously in September. But we're looking ahead, these programs are now already to go into development mode. We think we can expand our drill program significantly. We think it's incumbent on us to start to bring forward some of that long-term value when you're sitting with 15 to 20 year inventories on a lot of these plays. Yes, if you want to read between the lines, there's a reason we're looking at some divestitures and redeploying of capital.

So we believe we can be driving the single-digit growth again. We think we'll be trying to push it past the 5% mark next year, we think we know enough about the plays and we think we're in a position we're ready to. So I think the current levels are a good indication of a transition as we've gone from a trust into the E&P model, but I think our confidence is building on the overall plays and I think you'll see 2012 that we will look to drive it a little harder.

And then what can you do to mitigate operating risk? I mean this year you got hit with (inaudible), there's no guarantee you're not going to have things next year, so what can you do to try to mitigate some of that risk so you don't end up kind of in quite as--

I think we could go to church on Sundays. That is the number 1 thing. We can't offset some of those [acts]. I think with some of our new production, some of our areas the pad drilling will allow us access, will drive us towards sort of operations that we can sustain on a more continuous basis. I think Hilary would also like to add a few comments on this as well.

Sure. I think one of the things that we're trying to do is really get the ability to shift the inventory around so there's a limited degree that you can do that, clearly when you've got Northern Alberta on fire and you've got Saskatchewan and Manitoba underwater. But we still are working towards a state where we can shift some of our drilling program, move some of our rigs to higher ground. And so some flexibility along that line certainly we're going to build into the program.

I would say that as we get into full scale development in some of these areas, improving access is going to be part of that as well, where we know we're going to be hunkering down for 5 or 6 years where some hard core drilling we can afford to put in the year around access and work on some of the infrastructure associated with that as well.

And I'd say as we move away and as our whole inventory of the Company moves away from single well battery operations in a lot of our old legacy fields to centralized infrastructure, that also gives us greater reliability and greater ability to withstand the type of events that we've seen this year.

Okay. And then maybe a question for Todd, do you have any estimates for what the insurance claims might be that you submit I guess for your business interruption insurance or what settlement you might be looking at?

Sure, you bet, Gordon. We believe that the fires affected our cash flow to date by about CAD30 million to CAD35 million and that we're looking at something in the range of CAD12 million of capital to rebuild facilities and to reestablish power at sites and all sorts of things which we could provide more detail on. Of that, we believe that-- or our best guess at this point and the negotiations with the insurance suppliers is ongoing, we currently believe that we will recover approximately CAD8 million to CAD10 million of that and we're on track to get those proceeds into our cash flow in the fourth quarter.

Okay. Thanks.

Kam Sandhar from Peters & Co.

Good morning, guys. Just 1 question, I'm wondering if you could give me a bit more detail around what your well plan program was for the first half and what you were planning on doing and then obviously you go through the wells drilled, but I'm just curious to know how much your tie-in program was delayed in the first half and what the plan is for the second half?

I'll just simply provide a broad perspective on the first half plan. I think we executed on a drilling site what we roughly anticipated in the first quarter. The first half was incredibly-- or the second quarter I will say was very slow. I think we would have had plans and thoughts for tie-ins of about 50 wells.

In the second quarter and the drilling of about 30 to 40 and I think we got less than half that drilling in and virtually no tie-ins in the second quarter except a few that spilled over from March to April. So that's distinctly a part of what the drag has been in terms of our volumes, with our second-quarter activity levels or where the real lag started to hit us and hit us very hard.

And what areas would that delay be specifically or is it spread across the base?

Pick one.

Okay.

Kyle Preston from Canaccord Genuity.

Yes, thanks, guys. I got a couple of questions here, they're related so I'll throw them both at you. First on the incremental CapEx in your program there, just wondering if you can sort of break that out, I mean you're obviously spending a little more money on land, probably some costs associated with the wet weather and the shutdowns. But the exit rate is unchanged, so just wondering where that additional CapEx is going? And related question, a lot of focus on moving to pad drilling, drilling more higher productivity, Cardium and Carbonate wells. Can you somehow quantify what kind of improvement you see in the capital efficiency sort of first half of the year relative to second half of the year?

Well I'll start off on the CapEx side and when we're looking at the increase in the capital budget, it's really in 2 buckets. One of them is associated with some expiration land acquisitions that we've made over the course of the first half. And the rest is really cost associated with-- well I guess it's 2 components to that. One of them is some upward pressure in terms of the industry costs, service costs.

And then the second one is just operating in really inclement conditions. So things like access, trucking, matting, those kinds of elements have all gone to increase our cost in the first half of the year. So we've got kind of-- I mean there's a cost bucket and then there's a land bucket for the capital.

And I'd say they're about split equally between cost increases and what we're putting on the land side of the equation.

And the second question, sorry, Kyle, was?

Just wondering if you guys can quantify the improvements you expect to see in your capital efficiency by moving to pad drilling and focusing on the Cardium and Carbonate higher productivity wells?

I think that what we're hoping to do -- expecting to do with the pad drilling, has really offset some of the upward pressure in the industry costs. So if you are hearing that costs are rising, 10% to 20%, we'd certainly expect to be able to hold the line on those costs. So if you do the back math on that, it's kind of 10% to 15% efficiencies associated with multiple wells on pads.

All right. Thank you.

Roger Serin from TD Securities.

Hi, good morning, everybody. All of my questions but 1 have been answered. Maybe Hilary, could you give us a sense, or Murray, as to how many wells you have that had been drilled that are waiting tie-in at this point?

Go ahead. We're looking at wells that have been drilled and not yet tied-in from the first quarter of the 60 to 70 wells. So those are sitting essentially in inventory. Over the course the rest of the year with the drilling activity on top of that, there'll be kind of 150 or so that will be tied-in, 150 to 170.

Okay. Thank you very much. And I would be remiss if I didn't congratulate everyone, especially Bill on his new spot.

Thank you.

Jonathan Fleming from Cormark Securities.

Hi, guys. Wonder if the percentage liquids in the second quarter is reflective of where you see things playing out for the rest of the year. I know there's lots of oil volumes to add on here, but is that going to make sense with how things look by the time we get to Q4?

Yes, Jonathan, actually I'd say it's very much indicative of the direction. In fact, of the volume that we had off, that was even a-- that had a higher proportion of liquids to it. That was probably at 80%, the volumes that we had off liquids. So frankly we see ourselves driving that way, 90% of our capital is driven into oil projects.

So we see this as a continuing trend for Penn West and that then trickles through, it trickles back into our-- obviously our netbacks because these are high netback plays, it heads back into our cash flow. One-- and it's very easy to hang on the volume number, but frankly, the profitability of Penn West is increasing on a day-by-day basis.

That's good. And I'm trying to talk about September and August, but clearly you've added 5% volumes is what you're looking for on a year-over-year basis, is there going to be some sort of impact from some of the incremental capital spending that you guys have in this year onto 2012 so we can see a number that's higher than 5% growth? And I guess I know I think what you're going to say to that, but is 10% too high on a year-over-year basis?

I-- 2 things. We're obviously always looking to build momentum. We've got a long winter in Q1 of 2011 that gave us lots of time to do things. You have to hit the ground running on these programs if you truly want to capture volume basis, on a volume basis, you got to capture it early in the year. So if we want to execute in the winter, we have to hit and be moving forward as we move into the quarter. 10%, I don't think we're going to step out and make that call yet. Hang on until September 20 and we'll give you a bit more detail.

Good stuff, thanks, Murray.

Thank you and there are no more questions registered at this time, so I'd like to return the meeting back to Mr. Nunns.

For the first time in a longtime somebody other than Bill is going to sign off on one of these things. While we've been delayed in 2011, we're not deterred by the challenges that are ahead of us, presented by the operating conditions. We will carry on the production growth we started in the first quarter into the second half of 2011.

We got a strong belief in the quality of our assets and our ability to execute on scale and execute on our strategies. Thanks, everybody, for attending today. Looking forward to talking to everyone at Investor Day on-- in September and letting you know what the plans for 2012. Thank you for your time.

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