Obsidian Energy Ltd (OBE) 2013 Q2 法說會逐字稿

Good morning. My name is Simon and I will be your conference operator today. At this time, I would like to welcome everyone to the Penn West Exploration 2013 second-quarter results conference call.

All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session.

(Operator Instructions)

Mr. Paradis, you may begin your conference.

Thank you, Simon, and good morning, everyone. Welcome to the Penn West 2013 second-quarter financial and operating results conference call. My name is Clayton Paradis, Manager Investor Relations. And with me this morning in our Calgary office is our President and Chief Executive Officer, Dave Roberts, and Chief Financial Officer, Todd Takeyasu.

Before getting started this morning, I would like to quickly remind listeners of our customary conference call advisories. Penn West Exploration 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 6 to 1 conversion ratio. All financials are reported under International Financial Reporting Standards, or IFRS.

Certain information regarding Penn West and the transactions and results discussed during this conference call, including Management's assessment of future plans and operations, may constitute forward-looking statements under applicable securities laws and necessarily involve risks.

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 sec.gov or on Penn West's website.

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

Turning now to our second quarter results, Penn West continued to focus on reliable and repeatable performance from our asset base in the quarter. Average production of 140,083 BOE per day was in line with internal expectations and slightly ahead of out of line's consensus.

Funds flow of CAD287 million, or CAD0.57 per basic share, was up year-over-year on narrowing light oil crude pricing differentials between Canada and US benchmarks, which more than offset lower production resulting from asset dispositions late in 2012. Also in our release this morning, we reiterated our 2013 production and capital guidance of 135,000 BOEs to 145,000 BOEs per day, and CAD900 million in capital, respectively.

The previously contemplated CAD300 million of contingent capital will not be spent in 2013. With respect to the dividend, the Board of Penn West has declared the third-quarter dividend in the amount of CAD0.14 per share to be paid October 15, 2013 to shareholders of record on September 30, 2013.

I would now like to turn the call over to Dave Roberts, President and Chief Executive Officer.

Thanks, Clayton. I am very pleased to be here this morning and thank you all for your continued interest in Penn West. I am nearly two months into my job and I can say that we are moving forward with sharp focus and a strong sense of urgency to address multiple areas for improvement at the Company.

I completed the review of all of our assets and I can tell you that I am pleased with the overall quality of our people and property base. I believe Penn West can offer a compelling investment option to the market. I would also offer some of the following early observations.

Our organizational structure did not and still does not fully reflect our desire to run lean and hard as a Company, while maintaining a standard of excellence in safety and environmental performance. We've already reduce a number of layers at senior level of the Company and have reduced our total employee count by over 10% year-to-date, and continuing the process of further streamlining and tightening up our structure.

Today, and we also recently realigned our businesses along asset type lines to allow us to manage our businesses according to where they are in the lifecycle. So, after establishing a Cardium-specific business, we also have created a business unit with a focus on properties in the development stage, and another with those more mature properties in our portfolio that need a more intense late in life handling.

Our end goal is to position the Company as a returns driven development and production delivery engine. Now, our value creation aspiration have to be grounded in real capital efficiency, centered on maximizing ultimate resource recoveries and strong internal rates return, with an emphasis on the medium- and longer-term results.

This will also allow us to highlight the EOR strength in our asset base. Capital discipline and improving our development cost metrics will continue to be a priority. And we need to be more open in copying other success and driving to be best invascent wherever we compete.

Finally, it goes without saying that in addition to the philosophical and organizational shifts we are undertaking, some of our assets will likely need to leave the portfolio. As we move into our planning cycle for the next several years, we will be taking these decisions in concert with the work being done by the Board to evaluate all our options across the enterprise.

I'll expect that we will be more forthcoming in our targets in this area and others at the next quarterly call. I would say, however, in addition to the focus and cost savings effect asset sales might have for us, any proceeds will first be directed toward improving our leverage position as we target a more competitive debt ratio.

So, as we look forward to the remainder of the year, I expect second-half production will be sequentially lower than the first half due to capital program loading in quarter one. However, the year remains on track to meet guidance. I would say we will be seeking to create a more even flow approach to capital spending in future years to help with capital efficiency.

Now, the biggest shift comes in our decision to reallocate CAD87 million in capital from Spearfish into our Cardium and Viking plays in the second half.

While there are significant number of further primary locations to pursue in Waskada, we need to calibrate on our results to date, continue to seek ways to reduce our cost there, and importantly, begin activities related to the assessment of water flood schemes and other pressure maintenance activities in this field where the opportunity exists to increase recoveries from the current estimate of roughly 2%.

The Cardium is the key asset in the Company and represents an opportunity for us to create repeatable and sustainable investment programs. And we will be reallocating CAD40 million of capital to the play in the second half. As a result to this shift, we anticipate drilling 14 additional wells.

Our confidence to make this shift is bolstered by the success we had in our first-half program where we completed a selective drilling campaign focused on CapEx efficiencies and advancement of slick water fracturing stimulation techniques. Drilling completion cost in the first half in the Alder Flats development area improved by more than 30% from 2012.

Based on these results and further steady by our teams, we are confident the comparable savings and type program improvements can be repeated in the Willesden Green and Lodgepole areas of the Cardium. Additionally, the horizontal water flood pilot at West Pembina continues to meet expectations.

Low decline oil production has increased with minimal water cuts to date. Importantly, two additional water floods in the Willesden Green area are scheduled to come on stream prior to year-end. Another area of focus for us is the Viking play. We believe that drilling cost and cycle times of our program are competitive with other industry players with room to further improve.

And while our completion costs in the Viking trend to be higher than most of our competitors due to our use of nitrogen in our completion scheme, we estimate our well results are approximately 20%-plus higher it in terms of first-year production performance than those of our competitors, more than justifying the additional cost.

Now, there's further cost improvements that we can make with pad drilling, continued refinement of our completion techniques, and continuous improvement in our basic drilling performance, so we are very excited about this plan on a go-foward basis. But based on our results to date in the first half of 2013, we are reallocating CAD47 million to this opportunity, with the expectation of drilling and completing 32 new wells in the half.

We will continue to evaluate down spacing in the core of the play for the 2014 program, and the implementation of water flood schemes to increase the recoveries and values from this play.

In closing, I would say that operationally the quarter was solid if unspectacular, but given that at Penn West our production is on plan, capital is on budget, and cash flow is ahead of budget, we think this quarter gives us a lot to build on. We are excited about the changes we are making here and look forward to stronger results in the future.

Operator, that concludes my formal remarks and I would now like to go to questions.

(Operator Instructions)

Your first question comes from the line of Jeremy Kaliel with CIBC.

Hello. Dave, two questions for you. Number one, can you talk about perhaps any business strategies changes that you plan to make under your leadership? So, high level question there. Number two, would you be able to give us an update on your asset rationalization process, specifically for the Duvernay? Would you be able to share how many CAs you have signed and when bids are due? And for the rest of your assets, would you be able to say if there are any plays that you definitely are going to keep in your portfolio that you don't want to dispose of?

And maybe just a status the view process overall? Thanks.

Okay. Great, Jeremy. Thanks and good morning. So, let me see if, I will test my memory here, if I miss anything then you can check up on me.

First thing, strategically, I think one of the things that we have done is we want to focus on exploitation and production delivery. Because I think most of us know and we released a contingent resource study, this is not a Company that's lacking for oil resources. What's been lacking is our ability to execute with best-in-class techniques in order to extract the most value. And so that's kind of the key frame. I think the five areas that I guess I would say that are driving me continuously is we are a small company in my view and need to act like a small company in terms of how the steward our resources and the level of organizational structure and complexity that we have.

I think secondly, we need to be more competitively aware. We justifiably are very proud of some of the things that we have done here in the past, but there's a lot of companies that do things very well in the basins we try to compete in. And we need to be more open about sharing ideas with those companies and also improving our performance relative to what they can teach us. I think thirdly and probably very important to me is we need to get our balance sheet in shape and we are going to work very hard on that. We are going to focus more on moving away from what I think are some of the shorter-term metrics the Company has pursued over the last several years to what I call medium- and longer-term shareholder value metrics, in terms of focusing on recovery and rate of return. And there's just going to be a relentless focus on where we decide to compete and we're going to try to be the top operator. So, you've heard these things before, but these are things that we are repeating with a lot of emphasis here to make sure that this is the direction the Company returns to relative to the asset base it has.

The second part of your question, the Duvernay process is ongoing. Pretty clearly, I'm not going to be able to talk about the number of people that we have in the process. Interest has been good there and I think the program in terms of timing, we expect that it will reach a conclusion in the third quarter. That will be consistent with some of the well results that we are expecting in this type of play that will give other people more information in terms of looking at it. So, still very positive about what that asset based may be able to do for us, but we'll have to probably wait until a little bit further in the quarter to give a view on that.

I think the last question, unless I missed something, was what do I think is going to stay? The Cardium is the heart of the Company, I think that is an easy one in terms of something that we are going to focus in on. It's our biggest resource play. I think we've probably got if not the best, then one of the best acreage footprints out there. It's an area that we need to do better in, but it is clearly going to be central to anything we do as an enterprise.

And then I think, clearly, the two other assets that at least in my view, it's early days and I don't want to presuppose anything the Board is doing, the Slave Point area is something that I think we are well positioned to do very well in in the future. And, clearly, we are indicating that the Viking is a play, that's something that is going to be important to us. Now, this is not to say that anything else is now automatically on a disposition list, because we are working very carefully with a special committee of the Board to evaluate all of our options in terms of those assets that may not fit with the Company today, and we will take a decision on how those are ultimately going to be handled as an enterprise. So, hopefully that gives you some color on what we're thinking about right now.

Great. Thank you.

Your next question comes from the line of Travis Wood with TD Securities.

Yes, good morning, everybody. Just a quick question on more similar to Jeremy's question on the strategy, but this is more focused of the water flood and how important will this water flood or other EOR opportunities play within the strategy going forward versus what it's done for you guys in the past?

Travis, it's a great question. This Company has a terrific history of being one of the largest and best water flooding companies in the space. And if you're going to play in the conventional gas space in the Western Canadian sedimentary basin, that's probably a good skill to have. I think we as a Company have emphasized more primary activities over the last couple years as an enterprise. And you're going to see with me being here, a more intense focus on getting back to basics in terms of making sure we match up our EOR investments with some of our early stage development assets. And that's going to be critical, places like the Cardium, as we move forward.

Rough numbers, it's hard for me to put any kind of metric on it. I would bet that at least 20% of the value of this Company on a go-forward basis is tied up in water flooding. And I think we're going to start to try to reflect that in our operational and capital spending decisions.

And then maybe just one more question if I may? This is focused of the decision to allocate some capital from the Spearfish into the Viking and the Cardium. Is that purely economic or are there some other reasons underlying that focus outside of pressure maintenance?

Well, I would say that it as purely economic as these decisions can be. We are better positioned today to actually devote more capital to the Cardium and the Viking. And we really do need to take a look at the program that we have to date in Waskada to evaluate the money that we have spent there, what we are getting out of it. And we do need to do some catch-up on the water flood planning out there. So, I would not read anything more into it as we think we have better opportunities to spend this money in the Cardium and the Viking.

Okay, thanks very much.

Your next question comes from the line of the Dirk Lever with AltaCorp Capital.

Thanks very much and good morning. I have two questions. One, with reference to the restructuring charges, and I'm assuming that that has to do with the restructuring of the employees, so if I can get confirmation on that? And do you expect more in that? Also you had indicated that the balance sheet in shape is a priority. In the past, the Company gave guidance as to where it was looking for debt-to-cash flow figures. Is that still what you're looking at as a target? Or are you looking at something more conservative? You can give us guidance as to what your idea of a balance sheet in shape is, that would be helpful? Thank you.

Hello, Dirk, it's Todd. The restructuring includes the 10% roughly staff reduction that Dave talked to and we talked about in our press release. And it also includes part some of the executives, but not the three executives that we press released after the second quarter. And as we move forward, we do expect that charge to rise through the year as we continue to restructure and such. Debt-to-cash flow targets really are the same. We've always sort of messaged that 1.5 to 2.5 times depending on where we are in the commodity price cycle. I think Dave has a sharper view of that and brings a sharper view of that, and I would say that we are targeting something in the lower end of that range. Relative to where we would have signaled in years gone by.

Great. Thank you.

Your next question comes from the line of Gordon Tait with BMO Capital Markets.

Good morning. A few of my questions have been answered. But I wonder if you could give us an update on the status of the field heavy oil development, and also the joint venture, your shale gas joint venture with Mitsubishi?

Yes, Gordon, good morning. We will, at Cordova, we will be moving in a drilling rig this quarter. We've got some more appraisal work to do up there in terms of less proving the resource in place and more trying to focus in on operationally how that can actually be managed. I would say that continues on pace in terms of what our plans and expectations are, relatively small program in my eyes relative to the other things that we do. We continue to discuss our activities at PROP, Peace River, in terms of what we are doing up there. We have been very encouraged with the early stage results of some of the pilot of steam flooding that we have been doing up there, and are discussing with our partners how we get to the larger pilot expansion. I think it's something that still offers us some real attractive opportunities as an enterprise.

I will tell you I've seen plenty in my background and really combing through that to make sure that we're going to get that done with as much capital efficiency as possible before we elect to move forward. The other thing we're doing up there is I think there's some things that we can do in the shorter-term in terms of driving more for some cold oil production across our acreage position, and we will be moving to drill the rig up there as well in Q3 and Q4 to pursue some of those opportunities. Again, the emphasis on these long-term projects are great. But we need to make sure that we augment them with as much near-term cash flow as we can to continue to improve our overall return profile.

All right. And just going to the water floods at Pembina, can you tell us about how many injectors you have in place now? And can you also quantify the improvement you've seen in the decline, like I said, with the wells where you have seen a response to the water flood? What has the decline rate gone from and to?

Yes, I think, and I'll see if I can around the houses here in terms of answering that question. The West Pembina pilot is essentially a two horizontal injector pilot that took a base level in this very small area from about 20 barrels a day with a high GOR, to roughly 90 barrels today. And that rate is kind of hanging in. And so you would think about a normal decline rate in the Cardium on a primary side being close to 20%, and I think we have probably taken 5% off of that if not more. I think the more important thing for us is that at least our reservoir simulations indicate to us that we could see as much as a doubling on a recovery factor if we establish water flood or pressure maintenance early enough in the life of these particular fields. And that's the prize that we are really chasing.

But your point is a good one. One of the things that we need to do is establish the water floods, because if we can haircut this decline rate that we are fighting against, we will make us -- it will make it easier for us to make our estimates on a go-forward basis. So, looking forward to what these next two pilots give us out there and as I said, I think we are going to put a tremendous amount more emphasis on that on a go-forward basis. Thanks.

Your next question comes from the line of Clark Andrews with Dundee Capital Markets.

Hello, good morning, guys. If you could explain the reasoning on the switch of the reserve evaluators for the contingent resource study? And mention who you plan on using going forward? And secondly, what are your expectations regarding run rate G&A, as well as restructuring costs in Q3? That's all for me, thanks.

Clark, thanks for that. Essentially, we use AJM Deloitte for the resource studies and that tends to be their area of specialization, and also it's a pretty laborious process that they went through. That's the reason that we chose from outside of the two evaluators that we currently use in the Company. So, I wouldn't read anything into that other than the fact that they were a specialist. And I apologize, I didn't quite catch the second part of the question. It was another reiteration of the restructuring costs?

Yes, if you could just -- what are your expectations regarding your run rate G&A and as well as restructuring costs for Q3?

We are in progress of reorganizing the Company, but I mean, what we have on the table so far for the third quarter is the severance associated with the three executives which we press released in July. And the rest of it restructuring charges for the year are in front of us. And in terms of our run rate G&A, that's another work in progress, but certainly with what we've got done in the first half, our run rate will fall below CAD3 on a run rate basis. From CAD3.30 or so in the second quarter.

Great. Thanks, guys.

Next question comes from the line of Christina Lopez with Macquarie.

Hello, gentlemen, just a couple of follow-up questions. One with respect to the Duvernay, can you address whether you are going for an all out sale of the assets or entertaining JVs as well?

Yes, Christina, this is Dave. I think at this point I'd say, we're going to entertain all offers. I've been pretty open that I really don't think this Company needs another joint venture. And so we will -- that's going to be my bias going in. But end of the day, our job is to make sure that we create the most value for our shareholders, and so we will evaluate the proposals that we get on that basis.

The question I have, Dave, is with respect to all back. It's been on the higher side relative to its peers, trending downwards in the first two quarters of this year. Where do you see some more efficiencies that you can end up gleaning from the Company on the all back size? And ultimately then, better netbacks?

It's a great question. And I think you all appreciate it's a complex question, because I would say that on anybody's comparative metrics on a corporate basis, we are probably between CAD3 and CAD5 out of range in terms of an OpEx per barrel metrics. So, part of that is structural and we talked about a reduction in our staff count here by 10%. We are not talking about the next tranche, but we are in process of that because we recognize that we need to get leaner as an enterprise to take some of that pressure off. I think the second and third things are is we need to get better how we do things. I've talked about -- I have corporate planning in my background as well, so I'm really interested in making this a more plan efficient organization in terms of even flow scheduling, not everything always being a crisis in terms of how we react to things. I think we need to do a better job of supply chain management because we essentially don't do a lot of that here currently.

And so to put numbers on the stuff, it's difficult at this particular time. But I do think that I'm clearly going to be targeting at least clawing back about 50% of that difference, and you can't say exactly how I'm going to get there. The other thing that is clear on this is we need to be able to talk about our assets in an independent fashion. Because I need to make sure that I am most competitive in the basins that I want to be in, and most you all know that follow this Company, there is a wide swath of assets in this Company that will never be quote-unquote, competitive, on an operating cost basis. And we need to talk about those in terms of how we're handling those differently, and that's the reason we said that up this set aside business unit for that. And in some cases, say they need to be removed for our portfolio to help us in terms of structural of our asset base.

I am going to be more specific on targets in the third quarter call abort what it is that we're going to try to do in terms of getting to a number. And I will probably speak at that time on a gross cost basis, because the marginal metrics are really going to be also dependent on what size we think this company is going to be, and ultimately what we think the decline rate is going to be. So, more to come on that. But I think that we've made some positive steps in terms of looking at the organization. More to come there, and the work that the Board is doing in conjunction with us in terms of what the asset structure will also help us on the OpEx side. But I clearly recognize we've got a problem and clearly I have got a laser focus on that.

This may be better then for the Q3 call. So, expect I will ask it then as well. But it is, where do you expect to go forward over the medium-term? Understanding the near-term is a restructuring phase for the Company. But do you see the Company able to return to quotes in the future or is it going to be mitigating the production per share declines?

Well, I think the work we are doing with the Board is designed to answer that question. But if I am talking about an investable hypothesis here, clearly my focus is on can you create a vehicle that grows reasonably relative to the basin we are in, and also provides an effective return for its shareholders. And I think that you can do that from the asset base that we have here. My question is is what the Company is going to look a lot different than it does today in order to achieve those kinds of metrics. So, probably is a better question for Q3 since I danced all over that one.

That's completely fair. Last question is on the CapEx and maintaining the CAD900 million in CapEx. Is that pre- or post-disposition and then pre- and post-JV capital?

It's all pre-, so pre-disposition and it's post-JV.

Okay. Perfect. I will let somebody else ask questions, thank you so much.

Your next question comes from the line of Jonathan Fleming with Cormark Securities.

Hello, guys. I wonder if you could comment on how you think of the relationship between the debt level and the dividend? Because clearly if you're going to really move the needle on the debt, you're probably going to have some reduction in cash flow. So, how do you think of those two things?

I will let Todd take a crack at it and then I'm sure he won't leave anything for me to clean up on. But then if he does, I'll weigh in as well.

Well, as you know, Jonathan, we significantly trimmed our dividend for this quarter. And as happy as we are to have that behind us, I think it remains important, particularly as we go through the restructuring phase and reorging the Company and getting all the things done that Dave has talked about. That being said, on a go-forward basis, if we do downsize the Company significantly, and as a result are continuing expected funds flow, flow up significantly, then we will make that reassessment at that time. But for now, we believe that our sustainability ratio within our payout ratios are really quite appropriate at this time.

Okay. Thanks, guys.

Your next question comes from the line of Brian Dirubio with White Cap Management.

Good morning. Would you be able to reduce the debt level by CAD900 million without impairing cash flow?

I think that is one of the reasons, Brian, that Duvernay is currently in a process. It represents to us a significant value pocket that we could move the balance sheet some. And it currently has no cash flow. And there's other things that we can do to that end. But again, and I differ back to Dave's comments, where we're in a Board process and all stone are being unturned. And I think we need to hope what we are going to drive to a comprehensive strategy at that time towards the beginning -- before the end of the year for sure, and I think that that's the time that we should have that discussion.

Thank you.

Hello, Simon?

Sorry about that. The next question comes from the line of Dirk Lever with AltaCorp Capital.

Thanks. Sorry guys, I forgot to ask this, I think I speak for many when I say this but we really appreciate the resource breakdown by play. I want to know if in the future we can expect to get a production broken down by play, much like your competitors do? I think it would go a long way for helping us to understand better the opportunities you have within your organization. Thanks.

Yes, Dirk. It's a great question. One of the things I've already talked to Clayton about is making our disclosures and our presentations more investor friendly. And so, I am a believer in more information rather than less. And so, I think you'll see us moving in that direction and I will go as far as I can. I have limitations as well, but we're going to try to give as fulls of a picture as we can of what I think is a really quality set of assets here. And so, hopefully you will start seeing those changes roll out in the latter stages of this year.

Thank you.

And there are no further questions at this time. I turn the call back over to our presenters.

Thank you, folks. We appreciate your attendance in the second-quarter call. That will be all. Thank you.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.