Obsidian Energy Ltd (OBE) 2011 Q4 法說會逐字稿

Good day, ladies and gentlemen. My name is Sheila, and I will be your conference operator today. At this time, I would like to welcome everyone to the Penn West Exploration Limited 2011 fourth-quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Mr. Jason Fleury, Senior Manager of Investor Relations, you may begin your conference.

Thank you very much, and good morning. Welcome to Penn West's 2011 fourth-quarter financial and operating results conference call. My name is Jason Fleury, and I am responsible here for the Investor Relations Group at Penn West.

With me this morning in Calgary is our President and Chief Executive Officer, Murray Nunns; Chief Operating Officer, Hilary Foulkes; and Chief Financial Officer, Todd Takeyasu; and other members of the senior management team.

Before getting started this morning, I would like to quickly remind listeners of our customary conference call advisory. Penn West Exploration's shares are traded both on 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 six-to-one conversion ratio. All financials are reported under the International Financial Reporting Standards, IFRS.

Certain information regarding Penn West and the transactions and results discussed during the conference call, including management's assessments 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 fourth-quarter news release and are also asked to review the advisory notice therein. This news release can be found at www.pennwest.com.

Participants 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'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 at www.sedar.com, at the SEC website at www.sec.gov, or at our own website at www.pennwest.com.

During this conference call, certain references to non-GAAP terms may be made. Participants are directed to the 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.

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

Thanks, Jason, and very nice FLS, by the way, there, Jason, this morning. This morning, we will provide a strategic and operational update for the fourth quarter of 2011.

First off, Penn West's Board of Directors has declared a quarterly dividend of CAD0.27 per share, to be paid on April 13, 2012 to shareholders of record on March 30, 2012.

After hitting a few strategic highlights, I will turn the call over to our COO, Hilary Foulkes, who will provide you with Q4 operational highlights and the direction on our 2012 capital program. Then we will open up the phones for questions.

At Penn West, we have refined the use of new technologies and developed the executional skills which position us for sustained growth from our light-oil-weighted asset base. By year-end, 65% of our production was from light oil and liquids. We are spending approximately 85% of our 2012 exploration and development capital on light oil projects.

Global demand for crude oil supports a price band of between CAD80 to CAD100 a barrel. 2012 global forecasts by the IEA indicate crude oil demand of approximately 90 million barrels per day. While some degree of volatility in crude oil pricing can be expected, the outlook for future prices is solid.

Penn West believes in the long-term viability of the natural gas market in North America, despite the current oversupply. Price stability will be driven by structural changes to the demand side of the market. We maintain our gas optionality with key projects, including our shale gas joint venture at Cordova with Mitsubishi.

At Penn West, we've just begun to scratch the surface to unlock the potential of this asset base. The Penn West reserve book at December 31, 2011 showed a substantial increase, the vast majority of which were oil barrels. Based on our 2011 reserves evaluation, our employee inventory and our results to date, we have a foundation for sustained growth. As development of the asset base continues, we strongly believe that the book will continue to expand.

In 2011, Penn West replaced 234% of our 2011 production prior to gas revisions and dispositions. We added 138 million barrels to the book, 73% of which is crude oil and liquids. We had a proven to probable ratio of 69%. This ratio is one of the highest in our peer group, so our book has lots of room still to go. Our book is 74% crude oil and natural gas liquids, making us one of the most oil-weighted conventional senior producers in North America.

Driven by a 13% increase in oil and liquids reserves, the NPV of our reserve book increased by CAD1.3 billion or CAD2.70 per share. Simply stated, we believe this reserve book is a validation of our business strategies.

We indicated on the third-quarter conference call in November that finding costs were trending to a range of between CAD25 to CAD34 for the year. F&D was CAD22.64 per BOE, including FDC, excluding the impacts of economic revisions driven by natural gas pricing and land. During 2011, we spent significant dollars on both appraisal work and capturing important development and exploration land positions based on those investments. Our all-in, fully-baked, everything including the kitchen sink F&D, including FDC, was CAD26.79 per BOE.

At CAD85 oil, we generate a netback of approximately CAD55 per barrel on new adds. This yields recycled ratios on new barrels of greater than 2.4 times and 2.0 times, respectively, against those finding costs. With oil prices near CAD100, we are returning even more attractive recycle ratios on our capital spending for shareholders.

We are adding oil production. We are weighted towards oil from a cash flow point of view, and, to borrow a phrase from US dollar bills, with a slight variation, in oil we trust. Cash flow increased to CAD0.93 per share in the fourth quarter of 2011 from CAD0.67 per share in the same period of 2010. This is driven by a number of factors, most notably higher oil production, focused capital programs and crude oil price strengthening. Given stable demand for crude and a leverage to oil in our 2012 capital program, we expect strong cash flows to continue.

We hedge to provide a measure of certainty and predictability. Hedging and floors extends out the window of certainty for our Company, allowing us to maintain consistency of operations while protecting balance sheet flexibility. We look for attractive hedge ceilings to ensure Penn West and shareholders capture additional upside in strong markets.

Penn West has oil collars on 60,000 barrels per day of crude, with an average floor price of $85 West Texas and $102 ceiling for 2012. Looking forward to 2013, we have 20,000 barrels per day locked up with average collars of $90 by $106.

Year-to-date 2012, we've sold properties for a combined total of approximately CAD340 million, and that is year-to-date in 2012. With these dispositions, our net capital budget is expected to be CAD1.3 billion to CAD1.4 billion. This ensures we maintain balance sheet flexibility. These dispositions also help to streamline and focus our asset base.

With the growth of our cash flow supported by our hedging program, the debt to cash flow ratio for Penn West continues to improve. While smaller minor dispositions will continue to be part of our active portfolio management strategy, we are looking to balance barrels in with barrels out in the future. With dispositions in hand and crude oil price strength, we have spending optionality in the second half. Additional funds can be directed towards debt retirement, expanded oil development or moving ahead with our promising EOR and waterflood plans.

Our goal is to add both value to our reserve book, which we demonstrated in 2011, and oil and liquids volume to our production. Central to growing volume is consistent execution. Key to developing this consistency is incorporating operational and production-related improvements into our planning, our capital programs and our guidance on a continuous basis.

I want you to look for a pattern here. Annual production averaged 162,000 per day, solidly within guidance. Average second-half volumes came in at 165,000 BOE per day, again within guidance. Fourth-quarter average volumes were approximately 168,000 BOE per day. Our exit rate for the year was approximately 172,000 BOE per day, prior to dispositions. Some Cardium production was brought onstream early in the first quarter and was not included in our exit volumes.

In the future, however, we will not provide snapshots of production, so exit rates or immediate impacts or daily rates indicators, which are influenced by plush production and which are not directionally representative of our business.

The volumes associated with dispositions are approximately 5500 BOE per day, the majority of which closed early in Q1. On the basis of these dispositions, 2012 average production is expected to be between 168,500 and 172,500 BOE per day.

The most important measure in our internal corporate goals is project execution. Everything -- and I mean everything -- we are driving towards is based on dollars, barrels and time.

I am very pleased to introduce our COO, Hillary Foulkes, who is ensuring that everyone in our organization has their eyes on these targets.

Thank you, Murray, and good morning. As Murray has already stressed, we've been adding value through oil growth in our Company. 2012 is focused on volume, and we have taken off the lab coats, and our activities now will focus on growing this Company.

On our last conference call, we said that the momentum we established in Q3 was positioning us well for 2011 results and acceleration into 2012, and we are pleased to report that is the case. When we forecasted Q4 activity, we said 100 to 110 wells would be brought onstream, and we tied in 104. We said we would drill and rig-release 90 to 100 wells in the quarter; we did that.

Over the last quarter, we deployed 20 to 25 drilling rigs, with facilities and production activity keeping pace. We drilled over 450 gross operated wells in 2011 and approximately 85% of those were focused on light oil targets. The remainder was appraisal work on our two joint ventures.

In 2012, we anticipate a capital budget of CAD1.3 billion to CAD1.4 billion, net of disposition proceeds. 85% of our exploration and development spending will be light oil development. There is a lot of execution activity and associated services that come with this level of investment, and one of the advantages we have is our ability to leverage the size, scale and continuity of our programs into certainty of supply for drilling, completion, facility and production requirements.

So let's start with an update on our light oil development, first with the Carbonates. Our enthusiasm for the Northern Carbonate [play] is unchanged. Over the course of 2011, between the Swan Hills and the Slave Point, we drilled 37 operated wells and brought 36 onstream. We continue to meet or exceed our type curve, with three months' IPs from our Slave Point development area just over 300 barrels a day. The two-well pad at Sawn Lake that we spoke of in the last call is still producing 500 to 550 barrels a day after nine months.

We've doubled our land position to 380,000 acres through exploration land acquisition, with a particular emphasis on the Slave Point due to the consistency of our results to date. Through our appraisal work, multiple years of inventory have been confirmed. The early adoption of dual laterals and eight laterals per section is setting up the play not just for primary production, but for the longer-term waterflooding.

In 2012, we anticipate spending approximately CAD300 million to CAD350 million, with roughly 70% of that capital being invested in the Slave Point. Our strategic approach to the Swan Hills portion of the play continues to be selective development as the play is further de-risked.

In the Cardium, our focus continues to be in West Pembina, Alder Flats and Willesden Green. We established through earlier appraisal work that these areas exceed industry average production for the Cardium. Wells are on type curves with three months' average production between 150 and 200 barrels a day. We drilled approximately 100 wells in the Cardium last year alone, which continues to support our play characterizations and drive our capital allocation.

In our three Cardium focus areas, we are driving ahead with five rigs, using two wells and four well pads. Generally, we are developing at 400-meter interwell spacing, with select testing at 200-meter interwell spacing to establish the potential for increased primary recovery.

While driving ahead with primary development, we have very promising [intense] oil recovery results. The horizontal waterflood pilot inside the Pembina field is into its third year. Injectivity through horizontal multi-frac injectors is significantly more efficient than a typical vertical injector. Production from offsetting vertical producers has increased three- to five-fold, and [CORs] have been reduced by over 90%. Our inventory in the Cardium is still expanding. Given the vast resource in this play, we expect the Cardium to remain a key growth driver for the Company in the years ahead.

In the Spearfish, we drilled approximately 95 wells on this play in 2011, and plan on the same in 2012. Our facility capacity will reach 13,500 barrels a day by the end of Q1. We are confident in the predictability of the results, and our current drilling program is designed to [fill] the battery by early 2013. We are currently commissioning liquids recovery and gas conservation infrastructures which will be in place early 2013 and will add significantly to our netbacks.

The Viking is a predictable and profitable play on the Saskatchewan side of the border. The Dodsland battery will be complete in Q3 this year, and we will drill to fill over the subsequent few quarters. Appraisal of the oil-rich portion of this play in Alberta continues to be encouraging. Activity is focused in areas where we can leverage existing infrastructure, while the long-term predictability of the play is established.

The horizontal multi-stage fracking technology is translating very well, both technically and economically, into a number of smaller plays we've accessed through our legacy asset base. Areas such as the Peace River Arch, southeast Saskatchewan and central Alberta are examples of places where results are very encouraging. These plays, although smaller in inventory than our big four, are impactful and allow us more flexibility in the portfolio.

2011 taught us the value of flexibility in the portfolio and in our operations. And with breakup around the corner, we are doing a few things to mitigate as much of the impact as we can. We've been laying pipe to the edge of leases. We've been installing tanks early. We've been preparing and upgrading roads to allow us to access leases for longer. And we've been constructing leases in advance.

We would now like to spend a few minutes addressing the ongoing resource appraisal, the areas that are keeping our project pipeline full. The two joint ventures, exploration and enhanced oil recovery are the areas of focus which support the long-term growth of Penn West.

In Cordova, we continue to assess reservoir performance and adopt evolving completion practices. In the Peace River Oil Partnership, our first pilot is back into the steam injection phase after an extremely successful first cycle. Continued stratigraphic appraisal drilling is ongoing, and applications for further pilots are underway.

Exploration activity is characterized by two distinct tactics. The first is the extension of existing footprints where we've established an early-mover strategic technical advantage. Slave Point is an example of this. And the second is source rock exploration, where we are establishing positions on emerging trends. We have been successful in both, and that is all we are going to say for now.

Last, but certainly not least, is enhanced oil recovery. We believe there is significant upside in our asset base through the use of enhanced oil recovery techniques, and more specifically, through investments in waterflood development. As the largest operator of waterfloods in Western Canada with more than 140 active floods, we have an extensive knowledge base from which we can draw. Our expertise, combined with the advances in horizontal technology, creates an opportunity to pursue some of the most efficient waterflood techniques in the industry. Our near-term focus will be on the Cardium, Slave Point and Spearfish formations.

In 2011, we replaced over 200% of our reserves, including the effects of economic gas revisions and [A&D]. We increased the NPV of the Company. The growth in crude oil strongly contributed to this value creation. The vast resource associated with our still-expanding inventory of primary light opportunities of horizontal multi-stage frac waterflood, enhanced oil recovery, joint ventures and exploration is still not reflected in our reserve book.

As we continue to advance our capital programs, the reserves will evolve toward a better reflection of the depth and quality of our inventories.

We have many large-scale, high-impact light oil properties with predictable outcomes from which we can choose. We've developed our operational capacity and the strategic service industry relationships. Murray highlighted our financial and strategic flexibility. We are in the enviable position of having a number of levers to pull on the operational side of our business, too, so we can continue to add value and volume to the Company.

Just before we take some calls, I would like to let everyone know that in addition to Murray, Todd and Jason, joining us this morning in the room are a number of Penn West senior management teams. These are some of the people whose extraordinary efforts are quite literally paying dividends.

With us in the room we have Dave Middleton, Executive VP, Managing Director of Peace River Oil Partnership; Mark Fitzgerald, Senior Vice President, Development; Gregg Gegunde, Senior Vice President, Production; Thane Jensen, Senior Vice President of Operations; Keith Luft, General Counsel, Senior Vice President, Stakeholder Relations; Bob Shepherd, Senior Vice President, Enhanced Oil Recovery and Cordova; Rob Wollmann, Senior Vice President, Exploration; Jeff Curran, Vice President, Accounting and Reporting; Dave Sterna, Vice President, Commodities and Transportation.

I would like to now turn the call over to the operator and open the line for callers.

(Operator Instructions)

Greg Pardy, Capital Markets RBC.

Thanks. Good afternoon. Just a couple of questions. Curious as to whether you are contemplating asset sales beyond the 5000 BOE a day that you sold. And, Murray, you outlined a number of different areas that you could put the proceeds to work. Are you leaning towards just sort of reducing debt over the course of the year?

And the second thing is just around the Cardium. Could you provide a little bit more color around what you are seeing in terms of IP rates, and are there any changes in your EUR assumptions? Thanks very much.

Okay. Thanks, Greg. I will handle the first part of that and then turn the second ones with regards to the Cardium over to Hilary.

The first thing I would like to say is for the last three years, really, to strike a balance, to move the plays ahead, what we've done has been selling barrels on a fairly continuous basis, cleaning up the asset base. I think in the last three years, we've had net dispositions of between 15,000 and 20,000 barrels a day, and that has really allowed us to keep the balance sheet trimmed.

But now, as we've seen strength in oil, as we've laid hedge floors in, we think we are now at a balance point. So I think we will keep disposing of the properties to clean up the asset base. But simultaneously, I think we will be availing ourselves of acquisition opportunities that are naturals for the base. Right now, we see a net balance from this point forward.

And then as to sort of deployment of capital in the latter half of the year, I think our initial reaction right now will be -- for the immediate term will be debt retirement. And then I think as we move into the second half of the year, provided we've got the consistency of results which we expect to have, and oil prices remain solid and we don't have any changes or significant long-term shift to the (inaudible), what we will look to do is then look at midyear, to August to September timeframe, of looking at reallocating.

I think internally, we are split. We've got a lot of projects we like. That's the first problem of where we put dollars. I think for the long-term benefit and just significant size of the prize, EOR and waterflood is going to be high on our list.

Okay, thank you.

And then I will have Hilary answer some questions about the Cardium, the second part.

Greg, I will just start by giving you a little bit of color, just in terms of IPs. We mentioned it in the call. But on the average, across that western side of the Cardium, we are seeing three-month IPs in the 150 to 200 range, very much in keeping with the type curves that we've established; so no surprises there. We are certainly starting to see recognition in the reserves book of some of that. But it is, again, very early days.

From an inventory perspective, the inventory isn't going down, so we are still finding that there is a lot of opportunity in the primary development as we continue to drill.

I might just mention a little bit on the cost side. We are expecting costs to really stay pretty much neutral over 2012. We think that the two four-well pad development activity, some of the longer-term contracts, of course, that we've got on the drilling and the frac (inaudible) side, are going to help us alleviate any of the upward pressure we might see from industry activity. So from a cost perspective, not seeing any great advantages there, but expectation is to hold things steady.

Excellent. Thanks very much.

Brian Kristjansen, Canaccord Genuity.

Can you comment on what Sproule is giving you for bookings on the dual laterals in the Slave Point?

You know what? I'll take that one, and I'm not going to quote an actual number here. But I can tell you that it is early days for Sproule in terms of their reserve estimates on those numbers. This is one of the areas that we would expect to see some positive adjustments next year. But it is also -- it's early days in the production curve for those.

So without getting into the actual -- down to the decimal place barrels, we think that they are being pretty conservative. But time will tell.

Okay. And can you comment on your waterflooding plans in the Slave Point for 2012?

In a general sense, like a lot of properties, we are eyeballing what the competitors do. We've gather and garner a lot of information, and there is a couple of key efforts up in that neighborhood. But I will let Bob Shepherd elaborate just a little bit on the thought process for Slave.

Okay, thanks.

Just briefly, I expect us to be initiating at least one pilot in the Slave Point by the end of the year, in the Otter area. And we feel pretty confident about expanding our efforts beyond that in the Sawn play as well, where we have existing waterfloods. Murray mentioned we've got the competitor activity. We'll be watching that. It is going on almost in the same timeframe.

Okay, great. And then lastly, with respect to the increase in future development capital in this year's reserve report, can you -- I know in the past you've quantified basically a year's worth of bookings being booked. Can you -- has that altered or could you quantify how many years of drilling you've got booked?

Yes. I think as a general number, we would be about between -- about two times now, which kind of is reflective of that book with a 230% increase. Under the general guidelines, and I think if you look across the industry, the guidelines allow a maximum of five years, which that is that key difference in the amount of probable we have booked versus a lot of competitors. And I will throw in some editorial comment now -- especially on the gas side of the equation. So we've got room for expansion of this book.

Great. Thanks, Murray.

Jonathan Fleming, Cormark Securities.

You have been changing your production mix a little bit here over time, and I wonder what the effect is on the royalty rate go-forward.

The general mix -- I think there is two general impacts, and then I will have Todd Takeyasu, our CFO, kind of fill in the blanks on it.

But in a general sense, because we are loading in royalty-free oil on the front side, there is an immediate impact that it has some lowering impact, but that is price-dependent, on the bulk of our production. So with that as kind of a framework, I will turn it to Todd to give a little more color on that.

Sure, Jonathan. I think Murray has it (inaudible) with what Murray said. We have a bit of a mixed bag with low gas prices. The royalties on base gas production are very, very low. And as you know, royalties on our new horizontal multi-frac production is also very low, to the extent that it is within the holiday period.

However, our base oil royalty rates, because oil is at $100, is a little bit higher. So at the end of the day, we are flat-lining and expecting the number to remain flat to down as we look forward through 2012.

Okay, good stuff. I wonder if you could make any comment -- additional comments, I guess, on services. Clearly, we see gas prices coming down, which should be helpful to you guys as you continue to drill up an oil-weighted program. Can you comment at all on any potential cost reductions that you see going forward here in 2012?

That's a logical one for Hilary, Jonathan, so --.

Jonathan, I am just hoping that none of the service companies are listening, because we are not expecting to see a big decrease in costs. What we are hoping is that through increasing development activity -- so higher density, higher intensity drilling -- we will be able to offset any of the positive kind of pressure on those pricing regimes.

But I think partly when we see some of the gas fleet not as busy, what we're anticipating also is that we will be able to kind of continuously improve the quality of the fleet that we are using and tying up for the long-term.

One thing, Jonathan, I will just tail in with on that one is the way we built our capital budget and our guidance, we did not include any improvements in efficiency in our overall programs, so that we have capacity to offset if there was upward pressure.

Everybody in the basement scrambled to the liquid side of the boat pretty quickly. The rig counts are high. We will see if that can be sustained, given the cash flow from the gassy side of the basin over the balance of the year.

Good stuff. Thanks, guys.

Jason Frew, Credit Suisse.

Hi. This is probably a question for Rob and the Slave Point play. But can you -- could you provide a little bit more color on the lands that you've acquired last year, and the geology, the trend and how you plan on de-risking those?

Sure, Jason. Really, I would characterize it in three buckets. One bucket would be extension of the Sawn Lake trend, where we've seen, obviously, some very exciting early results. The geological mapping is showing a broad platform. It is oil charged. It looks very encouraging. Our plans at Sawn Lake are to drill a few more appraisal wells this winter and be ready to accelerate that program going into late 2012 and into 2013.

When you go further west from Sawn, we've picked up a large position. It is on a broad platform. Like I said, it looks oil-charged. We will likely go out in 2013 and do a significantly larger appraisal program on the west end of the block. So that would be Sawn.

At Otter, our results in both the Tier 1 and the Tier 2 lands have allowed us to expand our position confidently in the Otter area in particular. So we've just added inventory, a significant amount of inventory there.

And then on other Slave Point platforms, we have been able to pick up land very cheaply in 2011, establishing large positions on what would be more exploratory opportunities, but opportunities that look consistent with what we've seen at both Otter, Red Earth and at Sawn Lake.

Thanks.

Ronny Eisemann, Dahlman Rose.

Good morning, everyone. Just in round numbers, what were the volumes associated with the Cardium production that got shifted into early 2012?

And also, out of the 5500 barrels of production per day that you sold in '11 and '12, roughly how much came out with the CAD340 million this year?

So I'll take on the Cardium one first. We shifted one multi-well pad -- there is one multi-well pad that didn't come on at year-end. And now I will -- this will be my message on the dangers of exit and flush production. That pad, when it initially comes on in the first couple days, is press release fodder, because it is doing a couple thousand barrels a day, half of it load fluid, half of it production. 20 days later, it is going to start to settle down, or 30 days later.

So I am a little reluctant. Any Cardium well typically would flush at 200 to 250 barrels a day. And then by day 90 is going to be down to 100 to 125 barrels a day. So that is plus or minus, and you can reference our type curves to fill that in. I'm getting a thumb that says that is a little higher than that at three months. So that is the trouble. We would have had, again, volumes like that coming on from a pad like that.

But that is why we got out of the business of providing exit rates, period, full stuff. They are not reflective of our business in the long run.

Now Hilary can take on the other question.

Sure. So the question, if I remember correctly, was that of the 5500, approximately how much was 2011 and how much was the early part of Q1. 1000 barrels of that was at the tail end of 2011, and about 4500 of that was the early part of this quarter. So over the course of January, we closed about 4500 barrels.

Great. And then last question. How much capital was shifted into the end of 2011 to help prepare for the spring breakup?

We shifted about CAD80 million forward into the latter part of Q4, and there were a number of activities that were associated with that. In some cases, we were spudding wells kind of the 27th of December, rather than waiting until the International Dateline had been crossed. We were building leases in advance. We were trying to get pipeline to the edge of leases.

So there were a number of activities that took place, primarily Red Earth, Otter, Sawn, as well as the Spearfish. And so Spearfish, of course, gets underwater pretty quickly, during breakup, so we wanted to get ahead of the game with the battery expansion there as well. So a few areas really where we knew there was the possibility of getting hit hard at breakup.

Thank you.

Jeremy Kaliel, CIBC.

Good afternoon and congratulations on a good quarter. I think most of my questions have been actually answered now. So maybe just to clarify. Murray, did you say that the Cardium production that was brought on just after year-end in deferred, that was one four-well pad?

That was one eight-well pad.

One eight-well pad, okay. And that was previously thought to have been coming on before year-end?

Yes, some of the guys who were doing the operation actually wanted to spend Christmas with their family. But in all seriousness, that has been an ongoing operation. The complexity of an eight-well pad and that has been sort of a broad expansion of our operational expertise on that type of play. So we ran a series of concurrent operations and learnings on it. And frankly, we were traveling into unknown territory in terms of its predictability.

Okay. Then my only remaining question was the production mix. Of the 5500 BOEs per day of volumes that you disposed, what was the percentage of gas versus oil there?

I'll turn that want to Hilary.

Sure. The percentages -- it is north of about 65% for liquids in that package, and it was designed in that fashion and in small chunks, so that there was an active market for those assets.

Great. Thank you very much.

Michael Zuk, Stifel Nicolaus.

Good morning, guys. Just on the reserve side, my question was asked, but I'll ask it a little bit differently. PDP reserves shrunk a little bit year-over-year, while PUDs and probables increased. I guess can you speak to how you managed that process this year? Was it purely a function of gas prices? And I guess how you see yourself managing reserve growth going forward.

Okay. Can you just repeat your (technical difficulty), Michael?

Sorry. PDP reserves were down year-over-year a tad, while PUDs and probables grew. I was just curious was that purely a function of gas prices, where the miss was, I guess?

I'm not sure if you are talking empirical numbers or percentages.

In millions of barrels, BOE. So PDP (multiple speakers).

Maybe what I can do, Michael, is speak to the overall philosophy, and then we can get into the actual numerics perhaps off-line. Because I don't have the decimal places in front of me here.

But generally speaking, we still have a very conservative book when it comes to the PUD to total proved numbers. So as we expand out some of these plays, I think the reserve companies are starting to realize that there is a lot of running room, in the areas where we have vertical control in particular. And so that is why -- I mean the book is still so very heavily weighted towards proven reserves.

So we are not seeing anything that is out of line here. In fact, we are seeing things that are generally way more conservative than our industry peers.

So the bookings will continue. As Murray alluded, and I mentioned as well, we still have huge portions of our portfolio that are not reflected anywhere in the book at all. So we would be happy to get into whatever the numbers are that you are looking at off-line, if that is okay.

Fair enough. And I guess secondly, and somewhat unrelated, how much of the 380,000 acres you purchased in 2011 were from the Carbonates play?

We added roughly 125,000 acres on that play trend, so the balance would have been what we were holding prior to the year.

Okay. Thank you.

Aaron Bilkoski, TD Securities.

Thank you. I just have a quick question or two. You are planning on spending CAD1 billion on the light oil plays. Could you shed some light on how the remaining CAD0.5 billion or so will be spent?

And second of all, I was looking at the cash costs on your natural gas production. They seem to be just shy of about CAD3.00 an Mcf. I was curious at what point you started shutting in gas volumes.

On the gas volume side, a tremendous amount of our gas is associated with the oil production itself. In fact, almost a third of all our gas production is tied to that. So that is never going to get shut in, at least not until we see CAD20 a barrel, and I don't think we are going to see that. So that is the first side of the equation.

In terms of the balance of our gas, a tremendous amount of it is tied up in joint venture type properties and mixtures across Canada in multiple systems. It is very difficult to differentiate for closing in.

So we've gone through this exercise before. I think we went through it in the summer two years ago, and went through the summer and fall last year. And we basically found that we are not going to be the ones who influence the gas market, and the value of shutting in for delay, waiting for an unknown reversal in gas probably isn't worth it.

And frankly, I will say this from a perspective, the market also wants to see volume on our side of the equation. And differentiating gas and oil in shut-ins would be a difficult exercise for us as well. So we are probably even a little less inclined than a lot of the gas players.

So on the capital side of the equation --

I will just give you a little bit of direction on where some of the additional capital (technical difficulty) in kind of the big four light oil plays is going. Of course, we've got some of the contribution that we make to the joint venture appraisal work. EOR is also an area of the portfolio that we continue to allocate capital. And we have a number of smaller plays that are generally liquids-rich, but don't kind of qualify as a pure light oil play. So we continue to fund some of these smaller, high-impact plays outside of our big four light oil development areas.

Okay, thanks. Would you be able to tie some numbers around that or no?

Yes, we can. What we will maybe do is follow up with you after and give you the breakdown. But yes, absolutely, we've got those numbers.

Great. Thank you very much.

Cristina Lopez, Macquarie.

Hi, everyone. Just a couple of clarifying questions. I apologize if you addressed this earlier. I was late to jump onto the call and so missed some of the prepared remarks.

But on the CapEx, so is the plan still to spend the CAD1.6 billion to CAD1.7 billion on the E&D spending for the remainder of the year? Obviously, the acquisition is bringing down the total net CapEx. Is that correct?

Yes, net CapEx will be CAD1.3 billion to CAD1.4 billion. So when we looked at the balance of capital '11 and '12, what we were anticipating was CAD1.5 billion net in 2011 and CAD1.6 billion to CAD 1.7 billion in 2012. So a combined CAD3.1 billion to CAD3.2 billion spending between the two years.

We don't control sometimes when someone wants to close on their acquisition disposition, and some of that moved across the date line. So what we've done is really balance the equation between the two years, and we are looking at net capital spending across the two years of now between CAD2.9 billion to CAD3 billion. So that is how we are balancing it or squaring that circle, Cristina.

Okay. And then one other question on the sold production. You referred to the 5500 in the press release. That is just Q4 and January then, sold production; it doesn't take into account what was sold in Q2 of this year, which was 1100 BOEs a day?

No, this is all after our last guidance. So it is Q4, Q1 in terms of the volumes.

And then finally, I know that you have been testing your first slickwater fracs. Are those now onstream, and if so, are you giving any indication on results?

I'll answer the second question first, Cristina. We are not giving a lot of indication on results, and you probably missed something earlier in the call, where we were just talking about three-month IPs on Cardium wells being 150 to 200 barrels a day. We've got eight wells that are in the process of flowback on that eight-well pad. So too early for us to talk about results. And we are certainly not talking about IPs, instantaneous production.

Good initial results on the slickwater fracs, so we are encouraged by that.

Does that -- so asking it a different way, does that mean that now you will look to expand the number of slickwater fracs you are planning on doing this year and potentially bringing down costs that way?

Yes, we are looking at probably in the neighborhood of 50% of our fracs ongoing in the Cardium being slickwater. And again, it is area dependent. It's a heterogeneous reservoir, but we figure that we will be in that neighborhood.

Perfect. Thanks, guys.

(Operator Instructions) Kyle Preston, National Bank.

Thanks, guys. Most of my questions have been answered, but just one follow-up question here relating to capital efficiencies. Just given the fact that you guys are sort of in full swing now on your multi-pad well development program, just wondering what kind of capital efficiency you expect to realize going forward. I think in the past you had referenced CAD35,000 a flowing barrel to add new production. Do you expect to move up on that going forward?

Our general target is CAD35,000 a producing barrel. That is what we've largely baked in and built in to our programs. We want to see as the programs unfold. As we said around all of our guidance, we want to make sure we've captured it, we've captured the dollars and barrels and time, before we project out anything lower. So at this stage, the best for modeling purposes is CAD35,000 a producing barrel.

All right. Thank you.

I just want to thank everybody for listening to the Penn West fourth-quarter conference call. I hope if you walk away with one thing today, it is the intense focus for us on dollars, barrels and time, and moving the business ahead in that manner on a very predictable basis for all our shareholders.

So thank you, everyone, for your time and attention.

This concludes today's conference call. You may now disconnect.