Obsidian Energy Ltd (OBE) 2012 Q3 法說會逐字稿

Good morning. My name is Adam, and I will be your conference operator today. At this time, I would like to welcome everyone to the Penn West Exploration third-quarter financial and operating results conference call for 2012. 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. I would now like to turn the call over to Clayton Paradis. You may begin.

Thank you, Adam, and good morning, everyone. Welcome to Penn West's 2012 third-quarter financial and operating results conference call. My name is Clayton Paradis, Manager, Investor Relations. With me this morning in Calgary is our President and Chief Executive Officer, Murray Nunns; Chief Operating Officer, Hilary Foulkes; and our Chief Financial Officer, Todd Takeyasu; as well as other members of our senior management team.

Before we begin, there's just a couple of items I like to remind listeners of. Penn West Exploration shares are traded both on the New York Stock Exchange, under the symbol PWE, and on the Toronto stock exchange under 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 discussed during this conference call 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 asked to review the advisory notes within. This news release may be found on our website at pennwest.com. 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 SEDAR.com; and the SEC website at SEC.gov; or on Penn West's website, again, at pennwest.com.

During this conference call, certain references to non-GAAP terms may be made. Participants, again, are directed to Penn West's MD&A and financial statements available on our website, as well as filings available on securities websites noted earlier, for a due disclosure concerning the non-GAAP items.

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

Thanks, Clayton. Good morning, everybody. As previously laid out in our recent Investor Day, our strategy is to unlock Penn West's intrinsic value for our shareholders by optimizing our overall business performance and execution; by continued reserves growth across our dominant positions in four of Western Canada's five largest light oil plays; coordinated with balanced financial management. We are committed to optimizing capital and operational efficiencies while providing dividend income for our shareholders. If -- and if we gain certainty in the outlook for commodity price realizations and cost structures, we will be in a position to choose to add production growth in our resource assets through development of large light oil plays.

On October 17, Penn West announced two important developments in the execution of its strategies of improving its financial flexibility and confirming that vast oil resource. First, we are in the process of closing on multiple divestment transactions that are expected to raise proceeds of approximately CAN1.3 billion by year-end. In addition, there are a number of other contemplated transactions. And, therefore, we feel it is prudent to announce our 2013 capital budget and volume guidance at a time more consistent with the industry peers, in late December or early January.

I know on Investor Day we indicated a desire to announce this today, but it just makes sense to wait until these current transactions and other possible transactions have been consummated. Hilary will provide you with an update on this bit of business in just a minute. But I can tell you, we expect the currently announced transactions to close prior to December 31, 2012, and proceeds will be used to strengthen the Company's balance sheet.

Further, on financial flexibility, we have indicated to our shareholders -- shareholder base before -- that in the softer portions of the commodity price cycle, we aim to ensure consistency in the dividend. Over the last three years, we have taken appropriate measures to ensure that balance sheet integrity to support our endeavors.

So with that, I'd like to remind shareholders that Penn West's Board of Directors has declared a fourth-quarter dividend of CAN0.27 per share to be paid on January 15, 2013, to shareholders of record on December 31, 2012.

Now on the resource growth side of the equation; the culmination of several years of land capture and appraisal work by Penn West teams has resulted in over 1 billion barrels of light oil and bitumen contingent resources in our Cardium and PROP assets being assigned by independent qualified reserve evaluators. For details on the contingent reserve studies, I would ask you to study reference Penn West's press release of October 17 that is available on our website.

So let's take a step back. Why are those studies important? Why are those contingent resources important? The horizontal technology shifts in 2006 created a different world for us in the oil patch, in the world we operate in. The business models are evolving. It used to be a cash flow growth quarter-over-quarter type model that you were trying to reinforce. We are now much more akin, in this basin, to a mining style model, where you are building a large inventory of resource and [benefit]the cost of capital gain to go into manufacturing-style development.

If you look at the type of transactions that have taken place in the basin now, that is what they are premised on. What we've been doing over the past several years was refining the application of horizontal technologies to our broad-based -- broad asset base. And that's important, because ultimately the intrinsic value -- the value of this Company -- is what's in those contingent resources in our asset base.

Bringing it back to today; we know commodity pricing is cyclical, impacted by broad economic factors and speculative volatility. We are mindful of the impact this has on our business, and we exercise prudence during all parts of the pricing cycle. Additionally, pricing differentials between US benchmark WTI and Canadian crude oil streams have been weighing on Western Canadian producers in the first half of 2012. At times, the differential has been as much of CAN25 a barrel.

While this narrowed since Q2, the volatility of this differential is persistent, and has a significant impact on our, and industry, netbacks. Our current 2013 hedge position includes 55,000 barrels per day of our oil production hedged between CAN91.55 to CAN104.42 per barrel; and, additionally, 125 million cubic feet a day of natural gas production at CAN3.34 an MCF.

Turning, now, to our outlook -- production volumes in the quarter were a little softer than anticipated, primarily due to the impact of facility construction delays at Sawn, a facility which is expected to come on stream late in Q1 2013. Therefore, we are updating our 2012 forecast average production to between 61,000 to 63,000 BOE per day, versus 165,000 to 168,500 per day previously.

I will now pass the call to Hilary Foulkes, our Chief Operating Officer, to give you greater insight into our A&D program and ongoing operations. Hilary?

Thanks, Murray. We've been talking a lot about the disposition program lately, but ongoing portfolio management is really a fact of life here, and it serves multiple purposes. It allows us to high-grade our asset base, focus our human and capital resources on the plays with the biggest impact, and is one of the levers we can pull to provide the financial flexibility we need to manage our business through all commodity price cycles.

As we discussed at Investor Day, when we designed this process, there was a very clear strategy to have a number of our non-core assets in the market and a variety of ways through investment banking; through processes we are running ourselves; and directly through some of the relationships we have with industry partners. We created competition between buyers, and we gave ourselves choices. That translates into value. We can assure you that the final paperwork on all the transactions is progressing on schedule. We have executed purchase and sale agreements on all but one transaction, and the last one is expected to be signed next week.

I am going to go off-script for a moment, and acknowledge the divestment and legal team here at Penn West for their incredible effort in getting these deals papered in such a short period of time; and also acknowledge our field personnel, who have been affected personally by these sales. The volume impact will be approximately 12,000 barrels a day. And we have -- we do expect to have the full CAN1.3 billion in the bank by the end of the year.

On the operations, here's a quick update for the quarter. As you know, we've eased our pace of activity at the end of Q2. And we systematically reduced our rig count and focused our attention on completing and tying in the inventory we built in Q1, and building facilities that will provide us with a long-term strategic operating advantage and growth potential in several of our key plays -- notably Cardium, Waskada, and Swan Lake.

Each of our three most recent wells at Sawn produced an average of over 500 barrels a day in the first month of production. And they are currently curtailed due to the facility restrictions Murray referenced earlier. However, these delays are short-term in the grand scheme, and the facilities built are for the long run. With the Sawn Lake Battery, Otter Battery, and Red Earth gas plant, our incremental capacity in the northern carbonates plays expected to be over 24,000 barrels a day by mid-2013. It gives you a sense of the confidence we have in that play. We control the oil infrastructure and the very strategic gas handling in the area.

We de-risked our billing inventory and increased the predictability in all of our key light oil plays, and we perceived external confirmation of the contingent resources in our Cardium and Peace River areas. We will continue to reposition the asset base to the profitable light oil resource asset.

Our liquids production [weighting] grows to 66% this quarter through focused drilling of light oil resource plays -- Cardium, Viking, Spearfish, Swan Hills, Slave Point. This asset base continues to demonstrate the intrinsic value Murray spoke of. Wells are performing as per the tight curves and we provided at investor day. And, in certain areas, wells are exceeding those expectations.

In Swan Hills, for example, the [6 to 15] wells came onstream late in April; was producing 760 barrels a day, and it's currently at 500. The [4 of 9] well's one-month IP in July was over 1000 barrels a day. And it's still producing almost 400, despite infrastructure restrictions at Judy Creek. As another example, in the Spearfish, our four-well pad, 13 of 25, is in its early days, but came on at just over 900 barrels a day; outstanding by any measure.

We started the application of horizontal multistate frac technology in earnest in 2010. We talked a lot about cost and efficiency benefits realized by moving from appraisal to development. And our experience in executing on these resource plays is now being realized through improved capital efficiencies.

Some recent examples of empirical cost reductions include, in the Spearfish, drilling and completion costs coming down by 20%; re-drilling Pacesetter wells pretty much in every play -- from Cardium to Dodsland, from Waskada to Boundary Lake; at PROP, eight-leg wells in 30 days to nine-leg wells in 14 days. This translates into over 40% cost savings. To quote David Middleton, great iron, great crudes.

Our collective experience and cost reduction learnings are being applied across all of the asset teams. For the latter part of this year, with certainty on our disposition program, we are now ready to accelerate activity level. Yesterday, as Murray mentioned, our Board approved incremental capital at approximately CAN100 million for 2012. We will get the rigs rolling again and build momentum going into 2013.

Full-year 2012 net capital before -- therefore, moved up slightly from CAN1.3 billion to CAN1.4 billion. And this net capital does not include the planned proceeds from our recently announced disposition.

We want to establish consistent operations through good planning, portfolio selection, the right rigs, and the right crudes. Our capital efficiencies will continue to improve. Our plays are predictable and performing. We have made the appropriate appraisal and infrastructure investment for the long-term growth potential of our oil resources. This provides the ability to add production and keep plays as attractive capital efficiencies as we move into 2013 and beyond. We will continue to unlock the intrinsic value in Penn West's large scale light oil plays.

Just before we take some questions, I'd like to introduce the other members of our senior management team in attendance today. In addition to Murray Nunns, Todd Takeyasu, and Clayton Paradis, with us are Mark Fitzgerald, Senior VP of Development; Greg Gegunde, Senior VP Production; Thane Jensen, Senior VP Operations; Keith Luft, General Counsel and Senior VP Stakeholder Relations; Bob Shepherd, Senior VP Enhanced Oil Recovery and Cordova; Rob Wollmann, Senior VP Exploration; David Middleton, Executive Vice President, Managing Director of PROP; Jeff Curran, Vice President Accounting and Reporting; Dave Sterna, Vice President Commodities and Transportation. I think we've got all the bases covered.

I like to now turn the call over to the operator and open up the phone lines for questions.

And just before everybody hits their cell button, I'll just reiterate that I said 61,000 to 63,000 on the guidance. Of course, it's 161,000 to 163,000. So with that, let's open up for questions.

(Operator Instructions) Robert Bellinski, Morningstar.

Two questions. First, what is your willingness to part with one of your plays -- one of your larger light oil plays in whole, in order to focus additional efforts in developing a play like the Cardium? Just getting -- or giving a little bit more focus to fewer plays. And second, I was just wondering, what percentage of your Duvernay land lies directly underneath your Cardium position? And what are your thoughts on taking advantage of existing processing and infrastructure in that region?

I'll kind of answer this in a broad sense, Robert. First, when we look at the two portions of the Company, we are roughly split 50/50 between the vertical and horizontal production on our resource plays and our base assets, that are really what we've been using as a funding source to develop those plays. We are yielding really good sale metrics as we reduce on that series of base assets. So we really don't have to lop off any one of our single larger resource plays to continue the model as we've been generating it. So we are really not contemplating the sale of any of those at this time. We think there's a tremendous inherent and intrinsic value in those, so we want to retain those. So that would be how we address that side of the equation. So we can continue to sell out of that side. And I think Hilary maybe can add a little bit of color to that.

Yes. I just think that part of the asset base that we been able to move out so far on the non-operated side has really given us the leverage that we need. We still have more work to do on that front. We talked about continuing focus -- both our time and attention and our dollars -- on a smaller number of plays. And we can still do that with funding from what we refer to as our non-core assets.

Yes. And I would acknowledge that Hilary is a wizard in the industry at this, and has -- we've been doing this for a number of years. But there is still a lot of those scattered assets within the inventory of base assets we can use. On the second side, on the Wille Green, there's about a one-third overlap. We could definitely, with our existing infrastructure, get through the appraisal stage on the Duvernay with existing infrastructure. I suspect, in a general sense, on this play, that the ultimate builders of the infrastructure may be the mid-streamers on this, when I don't think anybody is going to be trying to put their flag in on this too early, as an individual company. There's too much capital on that side of the business. I suspect that void will get filled by the mid-streamers. But again, we can do the basic appraisal work, probably, through our existing infrastructure.

Okay. Great. Thanks.

Gordon Tait, BMO.

Good morning. Just following up on something you said, Murray. You noted that the basin is becoming a little bit more like the mining industry where you are proving up resource plays, and then to turn them into these manufacturing-style operations. Now, my question, then, is twofold. Like, first of all, do you think you are at that point? Or when do you think you'll be at that point for Penn West to kind of turn into this sort of manufacturing production-style growth? And then, secondly, what sort of an organic growth rate do you think that you can generate from your asset-based ones, all the dust settles on your asset dispositions?

That's twofold on that. I think, in terms of the evolution of the transfer, I think if you looked at this Company two to three years ago on those resource assets, we've had about 30% of our production involved in the resource asset side of the Company, and about 70% on the legacy. Right now we're approaching about 50/50 in terms of the relative position of the resource assets versus the legacy base.

We think we still have refinement to make on the execution side before -- because, ultimately, I think if you want to be in a growth mode, you've got to be in that 35,000 to 40,000 barrel a day cap efficiency. And we are not there yet. We've done a lot of appraisal, a lot of buildout. So I think there is still a progression of time while we, I would say, tighten our skill set and demonstrate that consistently. Once we have had, then we would contemplate the growth.

So I think -- I won't speculate on the growth rate. I will say, good gas companies, when they are going, they use 25,000 barrels a day cap efficiency. They can grow at about 10%. That seems to be the max. Oil is a little slower, a little tougher. I suspect any contemplated growth rate would be below that, if one was to evolve the model away from what it currently is.

And do you have a sense of when you might be in position to do that? It sounds like you are high-grading the asset base. So, is it some point next year? Where do you think you are that process?

I think we'll reserve comment on that, in terms of the timing of that. We are still in an evolution, I think, in repositioning the Company. And I don't want to put a time frame on it. It is something that may occur and is an option for us in the future, but I don't want to lock it in on a time line.

Great. Thanks.

Brian Kristjansen, Canaccord Genuity.

Do you have a sense of where your bank line is going to be, post-dispositions?

I'll turn that over to Todd Takeyasu, our CFO.

Sure. As of our September 30, Brian, we were about CAD2 billion strong. So we expect to access somewhere about half of that after we lay our [feather] in some of the 2013 capital being moved into 2012, which we talked about a bit in our press release.

And with respect to the capacity in a cut post-disposition, do you have a sense on that?

Well, we are a borrowing base -- I'm sorry -- we're a covenant base, Brian. So we won't be taking any sort of borrowing base hit. Rather, our debt capital invitations are more related to our senior debt to EBITDA and our debt to capitalization, which we expect to be reasonably in hand by year-end, certainly.

Okay. Thanks. And maybe, Mark, could you comment on your backlog of drilled wells that have yet to be put onstream?

You know, Brian, I've already talked about some of the delays we are seeing through the quarter on the facility side, which is that some of the production capacity, primarily in the North, through the end of the year and ultimately into Q1. A lot of the information is in the release that we're bringing on production, obviously, in Spearfish, based on activity through the end of the year; have some Viking production, and a little bit of Cardium production coming on late in the fourth quarter; and then the carbonate Slave Point production will carry over based on when those facilities come on, late in the quarter and into Q1.

Okay. And then, lastly, your expected timing of the Slave Point contingent resource, and where are you at in the water flood progress right now?

We haven't actually finished the contingent resource. We've begun the contingent resource study in the Slave Point. But we're looking at probably the end of the first quarter, maybe early second quarter, before that's finished. So that's on the contingent resource side. And on the EOR side, I'm going to pass the baton to Bob Shepherd, who is running that group.

Sure. And on the Slave Point water floods, our first project we expect to have online there toward the end of the first quarter. We are ordering equipment right now. We have the pilot area. Engineering is complete. Construction will start early in the first quarter.

Okay. Thanks, Bob. Thanks, guys.

(Operator Instructions) Jonathan Fleming, Cormark Securities.

Guys, I wonder if you could give any sense at all on to the size and scope of this second round of dispositions. Is it half as big as the current package? And is it oily or gassy? Or how can we think about this?

Bigger than a bread basket; smaller than -- I'll sort of tailor it.

Yes. You know, one of the things that we've tried very hard to do is keep some, I guess, lack of transparency around what it is that we're trying to market. It's been extremely successful, that strategy, for us. The more definition we get around it, the more we jeopardize value. So for the time being, I'd like to just let you know that there are other discussions ongoing -- some of them around joint ventures; some of them around straight asset sales; and, again, as we did in the first go-round, we'll see what the answers are, and then we'll make a decision.

Okay. Well, thank you.

Roger Serin, TD Securities.

Hey, everyone. A couple of questions. When will you be providing 2013 guidance?

I think the timeline, because we are contemplating the potential project transactions, and we obviously want to get -- when we put this stake in the ground, we want to put it in once. And we want to put it in the right spot, obviously. So, I would say, more than likely, January -- early January, in that first half of January as the likely time frame, Roger.

Okay. You obviously alluded to further asset sales. And you've been very effective on these asset sales. Is there a sort of size that's more or less optimum to shrink down to to make the business model go around?

You can look at it from a couple different cuts; yes, they are probably is. Have we got an exact spot we're driving towards? No. Not at this stage. I'd say more that we are driving the balance sheet in a general sense; look for markers below two times debt to cash flow, I think, is sort of where we'd like to position.

But a tremendous amount of that depends on the character of the transaction. Are you transacting an early-life asset that takes away very little cash flow, but is in a combination JV structure? Or are you moving off old harvest assets that are non-op positions? Like I say, that is a bit more of a -- we have to see how the pieces come together. And we, as Hilary indicated, we do like to keep that part of the process fairly opaque.

So, you'll really love this question. With that in mind, Hilary can jump in at any time, too. So if you were to preface this assumption into the question, so you want to fund your dividend. That changed. (Technical difficulty) you want to find production declines being flat. You want to replace production, keep your mix approximately the same -- and with the capital efficiencies that you guys alluded to as goals at your Analyst Day -- obviously the other drivers, then, is commodity prices. What commodity price range do you think you need for that to go around?

I think if you -- I won't -- I'll reference Investor Day and the cash flow sensitivities. But about a CAD10 move -- and this could be either differential or price -- equates to about CAD450 million. But I would reference there is a cash flow sensitivity grid that we presented in Investor Day. I think if you're trying to square the circle, look towards that, and not that type of range of numbers.

And I think part and parcel of this is also -- you know, it's not just that kind of circular thing that I think you've gotten in your head. It's also transitioning the asset base from one beast to a very different one. And so, with that, come increasing netbacks and simply better profitability. So as we do these dispositions, we are actually shifting into a different type of asset base, with a different scale of profitability.

I get that. I guess you're also changing the asset mix a little bit, in that the decline rates probably move up modestly over the first few years, as you move to increase the pad drilling and horizontal drilling.

Yes. I mean, there's an element of that. You know, with a steady state of activity, you kind of -- you mitigate that. And with the application of enhanced oil recovery, both -- we're starting to get water in the ground, and the Slave Point is a good example -- then you start to mitigate those declines as well.

Okay. Thanks very much.

Andre Sarto, Hart Energy.

Good Morning. Could you talk briefly about any plans you may have regarding the Alberta Bakken Shale play this time?

Rob? I'll turn that over to Rob Wollman, our Senior VP of Exploration.

Hi, Andre. Currently, on the Alberta Bakken, we continue to monitor a bunch of the offsetting competitor activity. Our plans, currently, are modest for the next -- for the short-term, as we focus on our development programs that have better capital efficiency.

And I would say it that's a general pattern across, when we look towards the 2013 budget -- is we've been appraising fairly heavily for the last three years, and greater focus on the pure development end of our business.

Thank you.

There are no further questions at this time. I will turn the call back to the presenters.

First, thanks, everybody, for listening in on Penn West Exploration's third-quarter conference call. As you can tell, we've been -- we've embarked on the repositioning of the balance sheet; and, indeed, the repositioning of the Company and the refinement of our execution capabilities. So I'd like to thank everyone for attending. And, as we have further developments and we are ready to go on the budget, we will provide details. Thank you, everybody.

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