Obsidian Energy Ltd (OBE) 2011 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Penn West Exploration third quarter 2011 conference call. I would now like to turn the call over to Jason Fleury, Senior Manager, Investor Relations. Mr. Fleury, please go ahead.

Thank you and good morning. Welcome to Penn West 2011 third quarter financial and operating results conference call. My name is Jason Fleury and I'm responsible for the investors relation group here at Penn West. With me this morning in Calgary is our President and Chief Financial Officer Murray Nunns, Chief Operating Officer Hilary Foulkes, and Chief Financial Officer Todd Takeyasu and other members of the senior management team.

Before we get started this morning, I would quickly remind listeners of our customary conference call advisory. Penn West Exploration shares are traded both on the New York Stock Exchange under PWE and on the Toronto Stock Exchange under the symbol PWT. All references in this conference call are in Canadian dollars, unless otherwise indicated, and all conversions of natural gas barrel to oil equivalent are done on a 6 to 1 conversion ratio. All our 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 third quarter news release and are asked to review the advisory notices therein. This news release can be found at www.pennwest.comParticipants are also cautioned that the included list of risk factors contained within that release is not exhaustive. Official information detailing 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 and the SEC website at www.sec.gov,or at our own website, 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 at our website, as well as filings available on the website noted earlier to review disclosures concerning IFRS items.

I will now turn the call over to Murray Nunns, President and Chief Executive Officer.

Thank you, Jason.

This morning we'll provide you with a strategic and operational update for the third quarter of 2011 and for our 2012 capital budget as we drive forward in our strategy of growth and yield. Penn West's Board of Directors has declared the third quarter dividend of CAD0.27 per share be paid on January 16, 2012 to shareholders of record on December 30, 2011. Following my comments, our COO Hilary Foulkes will provide you with a more detailed view of our Q3 operational highlights and details of our 2012 capital budget. We'll then open up the phone lines at which time we'll be pleased to answer your questions.

Over the past couple of years, Penn West has created value by applying horizontal multi-stage technology to our light oil weighed asset base. From January 1, 2010 to our year-end 2011, we anticipate increasing our light oil production to 51% of our total production from 39%. In addition, our total liquids production is set to finish 2011 at 66% of our total production, up from 57% at the beginning of 2010.

With Penn West and industry knowledge maturing on technology application, we have seen significant improvements on productivity and predictability. Penn West has also built up a tremendous amount of knowledge as to how best attack these plays and utilize our significant strategic advantages. All of this enables us to focus our activities in these areas which will provide the highest rates of return on our capital. This underpins our capital deployment in Q4 2011 and through to the end of 2012 and beyond. We have regained the growth momentum of our Q3 activities, and we look to maintain that development momentum into next year.

The key to Penn West is balancing growth activity with fiscal prudence. Recognizing current market volatility, we have used costless collars to lock in CAD85 floors on 60,000 barrels per day on our 2012 crude production while maintaining an average ceiling of approximately CAD102. This reducing the uncertainty and risk associated with crude oil pricing.

Penn West has also undertaken an asset disposition program, providing an additional source of funding for light oil development projects. Assets targeted for disposition are in non-strategic operating areas. We currently have letters of agreement in hand and several asset packages in the market which when combined, we expect to provide up to CAD400 million.

And finally on the financial front, we have increased the size of our undrawn bank facility by an additional CAD500 million and have added CAD135 million to our portfolio of long-term senior unsecured notes.

Now let's look at our 2011 guidance.

During the third quarter, we reestablished our operational momentum following the disruptions of Q2 and early Q3, and I can state unequivocally, we have the most relieved room of senior management to be able to be back at full flight with rigs drilling, turning to the right and completion operations underway. Our drilling and completions in time levels are proceeding as per our plans for the second half of the year. Penn West is on track to meet our annual average production guidance, as updated on our second quarter report at 162,000 to 164,000 boe per day. We anticipate being firmly within our second half average production guidance range of 163,000 to 167,000 boe per day as outlined in our Q2 conference call.

We also want to reaffirm our 2011 exit guidance of 174,000 to 177,000 boe per day. Due to anticipated on stream timing of certain projects, we feel it's prudent however to guide investors to the lower end of that range.

We expect our forecasted full your 2011 capital program to be CAD1.4 billionto CAD1.5 billion net.

Our 2011 guidance may be impacted due to the timing of some of those disposition transactions we were talking about. We'll update investors on a quarterly basis on the outcome of those transactions.

Looking at the 2012 capital budget, we anticipate for the 2012 annual production will average 174,000 to 178,000 boe per day. Spending expected to be between CAD1.6 billionto CAD1.7 billion. The program will be 85% weighted to light oil development and 2012 guidance, repeating earlier, may need be reflected to reflect the impact of A&D.

Incorporating recent experience, Penn West has made greater allowances in the 2012 guidance for production outages of all times and on stream timing of projects. Our base decline is expected to average 21% for 2012.

From a capital prospective, we have not included any further efficiency gains from the shift to greater development activity. We believe further cost efficiency gains will be made. However, these gains may be offset by increases in the service sector costs and therefore, we didn't want to incorporate that into our budgeting plans.

I'll now turn the call over to Penn West's Executive Vice President and Chief Operating Officer, Hilary Foulkes.

Thank you, Murray, and good morning.

I would first like to start with some summary results. Funds flow for the quarter was CAD348 million or CAD0.74 per share. This represents a 30% increase from the CAD267 million reported in the third quarter of 2010, and it bring Penn West's funds flow for the first nine months of 2011 to just over CAD1.1 billion. This is a 25% increase over the same period in 2010.

The allocation of more than 85% of the 2011 capital exploration and development budget dedicated to light oil has helped to drive this crease in our funds slope. The 2012 capital budget has earmarked a similarly high mark of spending to our deep inventory of light oil development projects.

Murray has already described how we're approaching our forecasting differently. In addition to, this activity levels and place success support our confidence in current guidance.

This morning, I'll cover three topics --some operational highlights from our quarter, Q4 activity levels, and some information on our 2012 development strategy.

So first of all, after the inability to access our leases in Q2, the third quarter marked a wonderful return to full operational activity. During break up, we only had two to three rigs running. However, in the third quarter, we had 18 to 20 rigs operating. We drilled 30 wells in Q2 compared to 100 in Q3.

Well servicing in Q2 ground to a halt. In fact, we considered it grounded to zero. However, it accelerated early in Q3 to an average of 55 to 60 well servicing operations per day. This level of activity will continue until break up next spring.

An important point to note is that all of the wells to be tied in before year end are now drilled and in various stages of completion and tie in.

I'd like to take a couple of minutes to give you some color on plays that have added significantly to our inventory and results. In the Northern Alberta carbonate play, our two-well bad at Sawn Lake, drilled earlier this year, produced a combined 900 barrels per day in the first month, and after six months, it's still producing 700 barrels a day. At Otter, our most recent seven wells are averaging between 200 and 400 barrels a day over the first three months.

We took advantage of a successful appraisal drilling in order to capitalize on some land sales in this very prolific Slave Point platform. In total, year-to-date, we've added over 125,000 acres to our already significant land position.

In the Alberta Viking play, the results continue to impress us. At Esther, Consort, and Monitor, our wells are producing over 100 barrels a day with 65% light oil. This is after three months. We have a total of more than 400,000 acres across this trend. It's not bad for what was once thought of a uneconomic solid gas play.

The Peace River oil partnership production results from the first steam pilot exceeded our expectations. After three months of steaming, the well came on production at over 800 barrels per day and has averaged just shy of 500 barrels a day over the last three months. Our next injection cycle is expected to commence towards year end. This is the best performing thermal test in the area. We are very excited about these results and the thermal potential in this field.

By the end of the third quarter, we had established a material position in the Du Bonnet source rock resort play. Penn West now has over 100,000 acres in the heart of the trend which is strategically offsetting our existing land and infrastructure.

So now on to Q4 activity. For the rest of Q4, we expect 100 to 110 wells will be brought on stream, 90 to 100 wells will be drilled and rig-released, and these will all be completed in 2012. The momentum we reestablished in Q3 is positioning us well for 2011 results and acceleration into 2012.

When we look at the 2012 capital budget, as Murray mentioned, we are focused on light oil growth. 85% of the 2012 capital is focused on light oil development. Our increased planning capabilities have afforded us the opportunity to build strategic relationships with premier service providers for the long-term. We are confident in our ability to continue to execute in a tight service market.

So for 2012, directionally, this is what it looks like on our key light oil play. In the carbonate, we'll spend about 35% of the development capital. We'll have an average of 8 rigs running in Q1 with a focus on the Slave Point, specifically at Otter, Red Earth, and Sawn Lake. The trunk line is built. We have control of key oil and gas infrastructure, and roads. We will now drill and fill. You may hear that again.

This play has both great productivity and aerial extent and we are by far the dominant player on the trend. 20% to 25% of the capital is allocated to the Cardium -- five rigs running in Q1 focusing on development in Willesden Green, Alder Flats, and West Pembina. We control much of the existing and required infrastructure to bring volumes on stream.

On the Spearfish play, we'll spend 15% to 20% of our development capital with four rigs working continuously through Q1. This is a full-scale pad development at 24 wells per section. An expansion of our facility to 14,000 boe per day is on schedule for completion in Q1 of 2012, and our development program is designed to fill the facility by the end of 2012.

There's a pattern forming. Drill and fill.

About 15% of the development capital will be directed to the Viking play -- three rigs active in Q1 with pure development on the Saskatchewan side of play. We will build infrastructure, an example of that is our 3500 barrel a day Battery at [Dodgeland], andthe plan, you guessed it, drill and fill. Additional appraisal planning on the Alberta side will utilize your existing infrastructure and this is a distinct advantage in the early stages of this play.

Our ongoing appraisal projects are very much part of the long-term growth of the Company, so we would like to give you an update on the Cordova and Peace River.

In the Cordova shale gas joint venture, two more pads also be drilled in 2012 and we expect them to be completed by Q3. In the Peace River oil project we'll continue to drill vertical appraisal wells. In addition we plan to drill 20 horizontal producers. We are waiting regulatory approval for our three well steam pilot at Harmon Valley South.

In conclusion, for the past two years Penn West has refined the application of technologies to its asset base. We've established production expectations for the plays. We have a greater understanding of cost structures, and we are concentrating 2012 capital on those portions of the inventory which provide the highest return. We believe this very effectively supports the Penn West strategy of growth and yield.

Just before we take some calls, I'd like to let everyone know that in addition to Murray Nunns, Todd Takeyasu, and Jason Fleury in the room this morning are a number of Penn West's senior management team -- Dave Middleton is the Executive Vice President and Managing Director of the Peace River Oil Partnership, Mark Fitzgerald, Senior Vice President of Development, Thane Jensen, Senior Vice President of Operations, Bob Shepherd Senior Vice President, Enhanced Oil Recovery and Cordova, Keith Luft, General Counsel, Senior VP of Stakeholder Relations, Rob Wollmann, Vice President, Explorations, Greg Gegunde, Vice President of Productions, Dave Sterna, Vice President, Commodities and Transportation, Jeff Kearns, Vice President, Accounting and Reporting. I think we're well-covered to handle your questions.

I'd like to now turn the call over to the operator and open the phone lines to callers.

(Operator Instructions). The first question is from Gordon Tait with BMO Capital Markets. Please go ahead.

Good morning. Couple of questions.

First, could you maybe give us a little guidance or an indication of what you think your oil/gas split will be next year?

Yes, Gordon. General expectations for the split of the overall production stream will be to be by year end in excess of 70% liquids, 30% gas moving up from an exit of 66. It will depend exactly on the composition of our dispositions, and exactly -- we have a firm plot of the first half program and where we drive the second half. Our expectation is to be in excess of 70% liquids.

Okay. So we can maybe assume that would carry forward. With your dispositions, what sort of production, the ones you earmark, what sort of production goes along with that?

Gordon, it's Hilary here.

We've got in excess of CAD400 million of assets in the market at the moment. We don't need to sell all of that. And so the actual volumes associated with it are a little bit flexible right now. But all in, it's probably around the 5000 to 6000 barrel a day range, and then we'll be selective as to what we actually execute on.

Are those boe mostly gas or oil?

It's a little bit of a mixture. There's non-operated oil properties associated with it, so it's not specifically gas.

Okay. And then secondly, you've assembled a pretty big land position for the basin, the Du Bonnet. Can you maybe talk about what your plans are, you didn't really mention that in your CapEx. Do you have to delineate it or what are you intending to do with that position?

Our overall strategy with regard to land -- obviously, there were some key times last year through to where your ability to accumulate was going to be limited you didn't move ahead. We had started that process actually before the land rush and then complemented on to some pieces that we have.

We're not going to be rushing to delineate this. I think we're in the neighborhood where there's going to be enough industry activity that we'll let them do some of that for us before we rush in. We'll probably get a couple tests off next year, probably later on into the year, but we'll let industry lead. We've got the stake we want into the ground here, and we've done fairly well in the past letting them derisk plays for us.

So that's not a priority in terms of CapEx for you say for next year?

No. I think in terms of CapEx, our general -- the general drift of our entire budget for next year is that we're driving very heavily on to development. We've spent the last two years appraising the asset base, where 75% of our dollars were going into single-well events. We're now driving very hard on the development side, so 85% of our capital will be really into development pad drilling on the four major plays.

And then lastly, you mentioned you were pleased with the outcome of your seal pilot. You're going right to thermo I understand. Where do you think you will be in seal production next year? Do you have a sense of what the recoveries might ultimately be at this point?

I'm going to turn this to Dave Middleton for a quick answer on that.

Hey, Gordon, it's Dave Middleton.

Where we are right now, you have to understand we're in the appraisal stage of this project. We're appraising our land base, with the vertical wells. With the horizontals, we're drilling 20 horizontals, those aremostly doing appraisal, follow-ups from last year. We drilled the straight wells. And of course our thermals, we see that as appraisal of thermal.

We're not growing it significantly. We have just a slight growth on it, keeping production flat. We see when we get into the 2014 and 2015, that's when we start to see the fruits of our efforts.

All right, thanks.

Thanks, Gordon.

Thank you. The next question is from Michael Zuk with Stifel Nicolaus. Please go ahead.

Good morning, guys. A couple questions, I guess. The Hoadley liquids-rich product, seems like a new like to the stools. Could provide a little bit more color on what you plan on doing there?

Sure. I can comment on that.

I mean, we have a number of what we call high net back, high deliverability, high impact plays that don't have the same running room as our large resource plays. So this is one of the basket of other opportunities that there are in the company. We used to affectionately call these things "Other," and now they actually have a name. So we'll be just continuing to do some drilling. We'll probably have one, two rigs in there over the course of Q1 and just continue to kind of chip away at that inventory.

Fair enough.

And in on the carbonates, it looks like a reallocation to such that the carbonates will see the bulk of your spending next year. Can you comment on any risks or impingements you see in terms of spending? You're drilling 90 wells next year.

As far as the carbonates are concerned, we have had such good results. We've been able to acquire a very significant land base in addition to what we had already. It obviously speaks to the confidence that we have in the play. The infrastructure is in place, and so for us the capital allocation is really a drill to fill mentality. So that's Otter, Sawn Lake and Red Earth.

Okay, thank you.

Thank you. (Operator Instructions). The next question is from Rob Bellinski with Morningstar. Please go ahead.

Good morning. I just had a question on the Swan Hills region.

Is there any plan for wells targeting the platform? Or are they mostly going to be going for the reef formations?

When we look at our overall carbonates, probably about 80% is going to go into the slate point platform. We find that a much more predictable platform in terms of outcome.

The Swan Hills area, although significant rates and we have wells with significant rates, it's a less predictable play. This scenario, we'll selectively do some things, but we'll let industry work its way around the edges of our position and prove up our assets for us, so we're not going to be pushing as hard on that side of the equation.

Okay, great. In the Cardium, is there any plan move in from the halo or are you still drilling around that in 2012?

Overall in the Cardium, I think the one thing that we've achieved and understood from what we've done is that we've now hydrated the areas. We've mapped the entire Cardium under our control. And what we're doing now is moving in from the edges into what I'll call the mid-range, so not into the center of the pool budge not the edge of the pool for the three of our developments. And that's really where your efforts will be focused and very concentrated, but we're not right out on the fridge anymore.

Organization great, thanks.

Thank you. The next question is from Jason Frew with Credit Suisse. Please go ahead.

Hi Murray, and everybody else, I guess.

Wondering, you talked about capital efficiency in terms of flowing barrel per day, but wondering if you can characterize capital efficiency for the Company on go forward basis in terms of S&D and reserves.

Yes, I think I'll take an opener on this, then turn it to Hilary.

You know, generally I think our estimate on the plays two years ago would have been CAD15 to CAD18 on a play basis. We think the service side have had their way with the industry a little bit. Now it's driven that up to about the CAD20 to CAD22 mark, probably in the CAD20s on a play basis. And then when you start to roll in all of the rest of the things with running a large oil company, any land efforts, any appraisal efforts, we're probably all in looking at the CAD25 range.

I think the industry in a general trend on oil plays is, we were all looking at sort of recycle ratio of 3 plus on plays two years ago. I think on a play basis they're at about 2.5 with the cost structure changes and on the all in about a two times recycle ratio.

Jason, maybe I can comment on the capital efficiency side. We're using a 35,000 per filling barrel capital efficiency on a go forward basis. I would say there's some conservatism in that because what we're budgeting is current costs. We're not taking into account any potential efficiencies associated with more development drilling, and we're also spending less on land next year, or at least we fully expect to spend less on land in 2012 than we did in 2011. So there's a few key levers that we think are going to keep us very safely in that 35,000 per filling barrel range.

Thanks very much.

Thank you. The next question is from Roger Serin with TD Securities. Please go ahead.

Good morning, everyone.

If I do a little math on your exit rate for 2012, at the high end I would get 30% of 177,000 is about 320 million a day of gas, which is down a little bit from roughly the 360 million. Am I just doing the math wrong or are you expecting to see gas stay flat or fall in absolute terms next year?

I think in absolute terms our gas will be coming off. Given the oil weighting of our overall program, that's not an unreasonable expectation overall, Roger, depending on whether you start on the high or low end of our exit guidance. That will be the first point.

This will be by market rant piece. Some would say it's a fool's error to keep hunting oil because people will reward gas volumes, but we are still going to keep driving on oil. Our net backs of our oil versus our gas are excellent, provides us with great cash flow growth, so it may limit out our growth a little bit because we're not chasing gas plays on a volume side, but we still think it adds a lot of value.

And am I to assume that your guidance range there includes JV your volume, some of which you should be getting out of Cordova?

Yes, it will include the JV volumes, but in both cases is the ultimate aim is to appraise, to find out the maximum we can about the rocks, not to maximize our volumes as Dave said. We're looking for very little in terms of volume management at Peace River, and Bob Shepherd and the team on Cordova in that case as well, we'll see some volume as well from those pads, but completions will be later next summer. We're staying out of the expensive winter time for the completion on those pads. So those volumes won't come into play until I would say well into Q3, early Q4 of next year.

But you're still planning on having the first pad on in Q1 of 2012?

Yes, the first pad, this year's pad will be Q1 2012.

Or late Q4?

Exactly. It's right on the board.

What do you think -- Hilary did a good go forward on capital efficiencies, all in. What do you think your 2011 looking backwards, capital efficiency was all in?

I'm going to estimate higher than that. There's a couple of pieces in play on that capital efficiency that the jury is still out on. I would say off of the bat I'll say that there's 5000 to 7000 driven in our land. We were in a cycle in the industry to drive, so it was time to capture that value, time to capitalize on what we learned on our plays, so our aim was to do that.

I'd say that was the top of it. I'd say we're probably north of the 40 or at the 40 mark for this year. I think we have to see exactly where our dispositions in on the year on that side of the equation as well, so that's the other piece of the puzzle. That is all I have.

Thanks very much.

Thanks, Roger.

Thank you. The next question is from Kevin Lo with FirstEnergy. Please go ahead.

Quick question on the Cardium production.

It seems like the wells are coming on in a high range from what you historically have guided. Have you guys changed the completion techniques at all? Are you doing anything different than you used to, to get the slightly higher rate?

Actually, Kevin, what we've done is we've really high graded where we're focusing our development. When we're focusing on the Alder Flats Willesden Green and West Pembina parts of the reservoir, we're getting results in excess of what the field averages. And so I think that's what you're seeing there. And that's why we're focusing our capital there.

Okay. Great, that's all I had. Thanks.

Thank you. This concludes the question and answer session. I would now like to turn the meeting over to Mr. Nunns.

I'd like to thank everyone today for their interest and attention. We believe we started growing at Penn West in the first quarter of 2011. Mother Nature threw us a big curve ball.

We are past that. We've regained our momentum. Our operations are going ahead. We've incorporated the lessons in the last couple of years into our guidance in our direction going ahead, and we are looking forward to the next six months of activity, and reporting on those results.

Thank you everyone.

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