Obsidian Energy Ltd (OBE) 2013 Q3 法說會逐字稿

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

(Operator Instructions)

Mr. Clayton Paradis, you may begin your conference.

Good morning. Welcome to Penn West's 2013 third-quarter financial and operating results conference call. My name is Clayton Paradis, Manager of Investor Relations, and with me this morning in Calgary is our President and Chief Executive Officer, Dave Roberts; Chief Financial Officer, Todd Takeyasu; Senior Vice President of Development, Mark Fitzgerald; Senior Vice President of Production, Greg Gegunde; and General Counsel and Senior Vice President of Corporate Services, Keith Luft.

In addition to the third-quarter results, Penn West also announced the divestment of non-core assets for proceeds of approximately CAD485 million; our capital budget for 2014; and the results of our strategic review process and long-term strategy that puts the Company on track to become Canada's leading conventional oil and liquids producer focused on profitability. A detailed discussion of this long-term plan will be the focus of our formal remarks this morning. And I would remind listeners that we will be referencing a presentation in conjunction with this call. This presentation is available via the webcast and also on our pennwest.com website, if you have not already had the chance to review it.

Before getting started this morning, I am required to review our customary conference call advisories. Penn West Exploration shares are traded both on the New York Stock Exchange under the symbol PWE, and the Toronto stock change 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 the 6 to 1 conversion ratio. All financials are reported under international financial reporting standards, or IFRS.

Certain information concerning Penn West and the transactions and results discussed during this conference call, including Management's assessments of future plans, operations, and targets constitute forward-looking information under applicable securities laws. Our actual results could differ materially from any conclusions, forecasts, or projections in the forward looking information. Certain material factors and assumptions were applied in drawing any conclusions and making any forecasts or projections reflected in such forward-looking information.

Additional information about the material factors that could cause our actual results to differ materially from any conclusions, forecasts, and projections in the forward-looking information, and material factors and assumptions that were applied in drawing any conclusions or making any forecast or projections reflected in the forward-looking information, is contained in our Q3 results and long-term plan corporate presentation, which is being webcast today and available on our website. And it is contained in our Q3 press release and MD&A and other reports on file with the Canadian and US securities regulatory authorities, which may be accessed through the SEDAR website at sedar.com, and the SEC website at SEC.gov, or 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 all [finds] available on the website noted earlier, to review disclosures concerning non-GAAP findings.

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

Thanks, Clayton, and good morning all. And I can assure you I am going to speak a little bit more slowly than Clayton just did in going through that paragraph or two.

I am really excited about the opportunity to share with you a comprehensive plan for the future of Penn West, a plan that delivers sustainable value for all of our stakeholders. There is a well-known homily in our business that the best place to look for oil is where is has already been found. The Western Canadian sedimentary basin is an historic world-class hydrocarbon basin, and Penn West has the best light oil positions in it.

In the preceding phases of the Company's lifecycle, we concentrated on resource capture, and later on determining if new drilling and completions technology could economically revitalize the significant oil positions assembled in Penn West. And now, to be successful, Penn West needs to shift to an economic returns and execution-focused business model. Fortunately for me, my background, and what I truly enjoy about the industry, fits into this stage of the Company quite well. My colleagues and I at Penn West are excited by the opportunity set here, and the Company is ready to execute. Before we move into that discussion, however, I would first like to refer you to slide 2 in the deck, and our forward-looking statement. It is important, given the extensive depth of information we are going to provide on the business today.

Thank you for that. And now I would like to make a few brief remarks about the third quarter, and we will be speaking to slide 3 in the deck. While I think our release speaks to most of the facts and issues in the quarter, I would characterize the last 4 months as a period of continued active transition for Penn West. In my first full quarter with the Company, I was able to get a detailed, from the ground up, view of our business, from its weaknesses to its strengths. Working together with the Board, both in full and with the special committee, Management set out to change the substance and culture of Penn West, with the idea that each day we could and would be better.

And following the quarter now plus a month, we can say we have improved, but we also understand how much further we have to go. From an inside perspective, the business performed generally as I would have expected in the quarter. We highlighted a capital shift for the second half of this year; and this, coupled with very high expectations for results, both from a perspective of drilling and completion cost performance and our overall focus on delivering our program expectations, led to one of the lowest investment quarters in our history, at CAD69 million. Coupling that with the normal heavy maintenance activities in Q3 following breakup, and a new emphasis on evaluating, with some rigor, barrels lost due to failure events before restoration, production fell by over 4% in the quarter.

Our end of October rate was approximately 126,000 barrels of oil equivalent per day, as we concluded our turnaround cycle. As we now focus on our Q4 investment program, estimated at less than CAD300 million, our exit rate will range between 128,000 and 130,000 barrels of oil equivalent per day, allowing us to fall within our full-year guidance, albeit at the low end of our original range. We now look for 2013 production to average between 135,000 and 137,000 barrels of oil equivalent per day on capital spending that is expected to be below the prior guidance of CAD900 million.

Importantly -- and I do not think I'm just looking for a silver lining here -- the underlying premise of our Company, that of being a liquids-rich asset holder, proved valuable for us. Even with lower overall production and not insignificant restructuring charges in the quarter, our funds flow increased nicely quarter on quarter, by almost 5% on a like-like basis. A key focus of our go-forward business plan will be combining a liquids production growth capability with approving funds flow; the latter being achieved with our commodity focus, but as importantly, better costs and better capital effectiveness. To be clear, our business is cash flow.

So while some will look at our Q3 as middle-of-the-road, it has laid the groundwork for the following slides about our future, to be taken seriously within the following context. We made, and continue to make, measured decisions about our production priorities. We had a stranglehold of capital decisions, and our on the ground performance in spending capital dollars has improved stunningly. Our cost structure is in control and moving downward, and we're having success in what has been termed a very soft market, and tightening up our portfolio with asset divestitures. All these are real steps allowing us to focus ever more tightly on making this a premier competitor in the space.

Moving into a discussion about the long-term future of Penn West, I'm often asked, just what can we expect of the Company? Or more specifically, what exactly is Management trying to do here? Of course, the context of the question is Penn West's widely known position as a premier holder of acreage and resources in Western Canada. And in fact, when I took this job, the question the Board was essentially asking me was, can we move from that abstract to a business that performs? So our focus as Management has been building a business that performs well in several areas, all focused on those elements that drive share price improvement, from my vantage point and experience in the industry.

In the end, share price growth is about predictability in terms of operating results and growth and returns. And our plan focuses on what I think are four key drivers of those outcomes -- production per share growth, funds flow per share growth, funds flow as a percent of revenue or net back per barrel, and a solid capital structure or debt to funds flow metrics. All of the other inputs we are driving -- operating costs, G&A costs, capital efficiency, and portfolio rationalization -- are tied to these outcomes. What I hope to do over the next several minutes is to describe what we expect and how we can achieve success in these areas.

On slide 5, we have illustrated the interactive process with the Board, and specifically the special committee of the Board that can be looked upon as the genesis of a new Penn West. The Board process, as noted in our earlier release, was started in June of 2013, and focused on the review of strategic alternatives to maximize shareholder value. The review completed by the special committee included, among other things, a detailed technical review and evaluation of Penn West's asset base; a [peer] of benchmarking analysis that was conducted across Penn West's areas of operations; consideration of a wide suite of alternatives in the context of the external environment, including large and small-scale M&A and AMD concepts; and a detailed economic assessment of Penn West's core and strategic assets.

The Board and Management have concluded the best value creation option for our stakeholders was a long-term business plan that has as its foundation a more focused portfolio, emphasis on profitable production growth with leading full growth metrics, cost and spending control performance as befits the tough low-cost basin we play in, and restoring our balance sheet to competitive levels. Now I would argue that, that is all new to Penn West. We have moved from a front-end focused resource capture model to building a returns-focused exploitation and development company. So the Company's plan, strongly endorsed by the Board, begins with core focus.

We believe the oil resource positions we have in our control in the Cardium and Slave Point are unrivaled in Western Canada. And together with other high-return, oil-weighted assets like the Viking, it allows us to focus activity and capital to create sustainable platforms for success for years to come. From this platform, we could generate profitable growth. From the slide, we are suggesting we can grow oil production and barrels per day at a CAGR of over 12%, and funds flow in millions of dollars at over 18%.

I do note that on this slide, and in the remainder of the presentation, CAGRs, as footnoted, are measured from 2015 through 2018. We chose this period because of the way we modeled asset sales in the plan to occur essentially on day one of years 2014 and 2015. 2014 will be a significant transition year in our asset base; hence this planning artifice. For comparability and reference, slide 40 shows the CAGRs for all the metrics included throughout the presentation for years 2014 through 2018 for comparability. And I would note that these figures are equally compelling, in my view.

I have presaged the next element, non-core asset rationalization, and I am pleased to say that we are already having success in reaching agreement on a number of these assets, and expect our Phase 2 programs to have similar success. We will describe our progress to date in Phase 1, and those assets expected to be monetized in the second phase of our program later in the presentation. I would note that these are quality assets that no longer fit our conventional focus. These asset sales will allow us the ability to tackle another success element, debt reduction, as we use sales proceeds to pay down debt. Following this reset, we will look to maintain the business with competitive debt metrics go forward.

Of course, perhaps the most crucial element noted is execution. All strategies are grand. However, it will be our ability to deliver higher net back based on cost control, and more valuable long-term reserve and production additions based on capital control, that determine our success. We will talk about what we have done to begin a process of gaining your confidence on our ability to execute, but we are today very excited about our progress.

While I am sure attaining these aspirations will lead to our shareholders' support and share price improvement, our plans contemplate a sustainable dividend go forward as a means of paying forward our shareholders for their support and commitment to Penn West. Now, I have spent a fair bit of time on this slide, but wanted you to appreciate, as I do, the intense effort and amount of time our Board, Management, and teams placed on this new plan and strategy, and our firm belief that this is the best path forward for Penn West.

As focused as we are on change, slide 6 emphasizes what is not changing in the Company. Working safely in preserving our environmental heritage as Canadians remain values, not just goals, for us. Candidly, for some time, this has not been a fun place to work. But we expect that our new focus, and by providing an opportunity to create success, we have the chance to restore a passion for our business and the Company in the future.

I could tell you our employees are also hungry for an environment that depends on high-performing individuals and teams as we reach for our collective and individual potentials. And we want to work to improve our reputation in the oil patch, be a partner of choice, good at what we do but respectful of the strengths and opportunities others bring to our business. Finally, we want to remind people that we are owners in this Company, too. And our goals and compensation programs are increasingly being tied to all of our shareholder interests.

As we move to slide 7, we illustrate the change that is required, again emphasizing those elements that will lead to our success -- focus on the balance sheet, with long-term targets for sustainability for the business, as well as significant effort towards restoring our capital structure, with more competitive debt metrics. Focus the portfolio. Right-sizing the asset base by not only culling the tail of our business, but also recognizing our core conventional development skills model and deemphasizing those assets that do not fit that profile. Portfolio focus also entails putting our money where our future lies; hence the significant portion of our capital flows to new primary and EOR production opportunities, largely in our three key light oil resource areas.

Improve costs and net backs. We need to ensure that, in areas we compete in and focus on, our cost structures are competitive and continue to improve, with a focus on driving net backs higher throughout the plan cycle. And finally, improve capital efficiency in those areas we compete in, making sure our development costs compete or lead the pack; and to make sure that we are constantly focused on increasing recoveries through primary completion or enhanced recovery schemes to ensure we drive best-in-class development metrics, as we look to continue to replace reserves at rates that exceed our production profile.

Before we move into the plan detail and a greater focus on these four areas, on slide 8, I wanted to emphasize again that while strategic studies are useful, and plans are important, this is a business of action and results. And so, concurrent with the 5 months of study and planning that our led to our new view, we have maintained a constant stream of positive action supporting our goals and demonstrating our conviction toward improving the Company.

Over the summer, in addition to concluding our reviews, we streamlined our Management structure and significantly reduced staffing levels. Our drilling and completion performance is improving rapidly. In fact, referencing our second-half reallocation of capital to the Cardium and Viking programs, announced earlier in the year, an CAD87 million shift in investment dollars. Our well costs and other improvements we have in hand will deliver those programs for just over CAD75 million, a very positive first step. And finally, as announced this morning, we expect to close non-core asset sales totaling roughly CAD500 million by the end of the year, putting us at nearly one-third of the way towards achieving the lower end sales goal of CAD1.5 billion. We have enjoyed a busy and productive 5 months.

On slide 9, we begin to discuss our long-term plans for the Company. We are a liquids-based company, so it will be no surprise that our goal is to prioritize light oil development, showing meaningful total production and stellar oil production growth in the future, with an expected increase in liquids waiting to nearly 80% by 2018. Clearly, the Cardium is the heart of the Company, and we envision increase capital spending in the play throughout the plan, reaching CAD800 million invested per year there within 5 years. Slave Point is an outstanding medium- and long-term resource growth opportunity, and has capitalized appropriately in the period. And in perhaps a change for some observers, our improved cost and delivery performance in the Viking allows us to feature investment there, particularly in the early years, as a solid production growth performer and cash flow driver for our business.

We clearly understand, as well, that 2014 will be a year of some transition for the business, as we move major assets out of our portfolio. The effects of asset sales may create some volatility versus the simple model we are illustrating, but the resultant balance sheet improvement and portfolio focus will be significant. And as we focus on our high-performance delivery culture, we improve constantly on our ability to deliver all of our metrics. 2014 is the year we get our culture bedded down, and [integrate] fully throughout the Company. That will be critically important as we press forward toward the end of the decade.

Let's look to slide 10, as we begin to show why I am, and why my team is, excited about the opportunity we have in front of us. We expect to show that a focused Penn West, with competitive and improving metrics relative to operating excellence, can yield the following results -- total production growing at over 7%; oil production growing at over 12%; per barrel net backs growing at over 10%; with funds flow per debt-adjusted share growing at over 14% with our plan. And I would note that, while we do highlight this later, our plan is built on essentially an Edmonton par view of less than CAD90 average throughout the 5-year window.

I think many of you have always expected our portfolio to deliver results like this. We are now poised to execute on these expectations. On slide 11, we begin diving into our individual focus for success areas, starting with focus on the balance sheet. As mentioned, the plan contemplates CAD1.5 billion to CAD2 billion disposition program, to be completed over the next five quarters. And as noted, we already have in place agreement to transact on CAD485 million of dispositions in 2013.

Our future focus is to manage the business to successively more challenging sustainability ratios, targeting a narrow band of around 110%, and potentially less over time. The balance sheet reset and discipline cost and investment programs designed to drive high net back light oil production give us the ability to contemplate positive cash flow generation in the future, with all of the opportunities that entails for our business and shareholders.

Slide 12 illustrates the balance sheet effects of asset sales on restoring competitive leverage ratios, combined with our plan to remain disciplined in later years, as our cash generation and development programs ramp up; while slide 13 indicates our expected level and varieties of debt throughout our long-term plans, as well as our likely prioritization of funds uses in maturing our various debt tranches. Finally, on this theme, slide 14 illustrates our attractive note maturity profile, with the takeaway being our funds flow profile is more than sufficient relative to the periodic and balanced nature of our maturities.

Penn West benefits from the support of its lenders. Many representatives of our [noted] investors and current bank syndicate are on this call. And we look forward to continuing our long-term relationships with many of you. Speaking to the success element of, focus the portfolio, slide 15 highlights our current portfolio management strategy as reflected in the plan, indicating timing, expected outcome of the processes, and the uses of proceeds from this program, while slide 16 gives more fulsome information on what we expect to complete in the market this year, and the assets that comprise our Phase 2 planning.

It is generally no secret that the Company was going to go to the market to focus its portfolio, but this was also identified as the top risk to our success, specifically the overabundance of assets on the Canadian marketplace, creating a potential failure scenario for our processes. Clearly, asset quality matters, as well as the seriousness with which we are approaching completing transactions. Our Phase 1 results are, I think, very good, and portend well for us into the future, particularly as we move into attempting to transact assets that have historically been core to Penn West's future story and offer a great deal of potential to targeted buyers.

As for the dog that did not bark, we actually hear him. We recognize we have given ourselves what may seem a great deal of time to complete these activities. I would offer two things in response. First, this is just a model view, and while I think we can forecast with great accuracy our capital programs and base declines, and have done so, A&E timing in the market seems almost completely subjective, hence the wide timing range.

A second point is an important one, and it relates to timing as well. While I am focused on transacting as we move the Company forward, I want our shareholders to also appreciate that, for any asset to leave our portfolio, we will get appropriate value. We want a fair trade. Our Phase 1 results indicate that we are not being unreasonable in terms of value. The Phase 2 assets may indeed take longer, as their general scale and scope will require a different and likely more time-intensive marketing effort to gain a result.

Finally, slide 17 places our asset groupings and the sales assets on a map for illustrative purposes. 17 slides in the first map may be a record for any oil company presentation.

Turning to slide 18, the second aspect of focusing the portfolio relates to generating value with the drillbit. It is interesting that the greatest blessing our Company possesses -- the largest acreage in conventional light oil resource position in Western Canada, by far, of any company in our peer group -- has also been our Achilles' heel. We have not been able to be focused in a singular fashion on any one or any related group of assets. In the oil and gas development world today, in particular in basins like the Western Canadian sedimentary basin, that ability to focus, and that need to be in control of the most granular details, is essential for success. Planning and executing at the most basic of levels will be key for us in the future.

It is not surprising, then, that the core element of our strategy is a disciplined investment program focused on a very few key quality assets, leading to sustainable value-added growth. Thus, for a capital program for development activities that approaches CAD5 billion in aggregate over the 5-year period, roughly 90% of the spend will be directed to the Cardium, Slave Point, and Viking areas, with over 50% of total spend on the Cardium. In addition, our plan to contemplate full EOR integration. We're going to get back to our roots as a leading water flooder in Canada, so our plans will include between 10% and 20% per year, and an investment towards our EOR programs -- a significant increase from the past 3 to 5 years with capital programs at Penn West.

It is a straightforward decision. Water floods slow decline and deliver the most inexpensive F&D barrels to portfolios like ours. Our programs as modeled result in cumulative net new adds to our business of close to 70,000 barrels of oil per day equivalent in just 5 years. Slide 19 emphasizes why we are focused on the Cardium, Slave Point, and Viking assets. Let's face it -- the business can be a bit of a treadmill at times, so areas with substantial resources yield running room. We have that in our business, and importantly, in our asset base today, in our control today.

So here we show the number of drilling opportunities we hold in inventory at current pricing assumptions and technical understanding -- all noted with very compelling economic returns. Our current inventory across these plays following the development contemplated in this plan is not exhausted, and we would expect that additional opportunities will open up to us from our portfolio as we appraise and further define our assets in the Cardium and particularly in Slave Point. As everyone knows, we have great rocks and great positions to build from well into the future.

Of course, spending money and drilling wells never seems to be a problem for our industry, but in slides 20 and 21, we are attempting to add context to what we expect to accomplish. Slide 20 highlights our target for the basic competitive context of our industry to being a sustainable profit-making business -- the ability to replace your reserves at greater than production and ensuring that development costs are competitive. At Penn West, again, we start with a great organic asset base. We know where our barrels are; we just have to go get them. That is a high-class problem.

We can, in our current plan, predict with confidence that we will be able to maintain a production replacement rate in excess of 100% from organic opportunities in our control today for the 5 years contemplated here. And given my earlier comments about inventory, it is not a stretch to see that trend continuing well into the future. Again, we are planning our activities to deliver this metric, among others. At the same time, for the focused portfolio we have been discussing, we expect we can deliver a development cost metric for our operated assets over this period in the CAD16 to CAD20 per barrel range, which appears competitive when you consider that for 2012, a recent study suggested total reserve replacement costs in North America exceeded CAD20, and internationally reached almost CAD30 per barrel.

Slide 21 supports our view that we have a high-quality economic development program. And as we have shown, we can be competitive and clearly will continue to improve on our execution. We then expect to further high-grade our existing opportunities and unearth new ones from our extensive resource base. Our focused approach is going to allow us to work this asset base harder than ever to deliver outstanding results.

Before we move into a discussion of our core assets, I would like at this point, on slide 22, to offer our guidance for 2014, the first year of this comprehensive plan. Our Board this week has approve the capital budget of CAD900 million, exclusive of environmental spend of roughly CAD75 million, for 2014, with two-thirds of the investment directed at light oil opportunities, resulting in the drilling of 210 net wells to Penn West. We include in the inset graphs the total spending by location, including drilling in the EOR investments; and well breakdowns for your benefit. One of the things we're transitioning to as a Company is a more even flow approach to our investment profiles during the year.

It was certainly true this year, and in the past, that Penn West might commit as much as a half a year's CapEx budget in the first quarter, an approach that limits effectiveness, learning transfer, and the ability to adjust programs as situations warrant throughout the year. Generally, in 2014, you should expect to see our capital flow at 25% to 30% of the total year spending in quarters 1, 3, and 4; with a small remainder dedicated to the breakup period. The shift to an even flow capital investment philosophy began in the present quarter, and combined with our low spend in Q3, creates a phase shift in our production profile for 2014. Our production additions are more second-half weighted, and with normal declines, our average production following in 2013 divestitures is expected to range between 105,000 and 110,000 barrels of oil equivalent per day.

Even flow investment will result in less variability and production quarter on quarter beginning in 2015. And of course, we grow production from that year following our portfolio rationalization work. It may be a tough year to model, and so we will be thinking through ways we can increase information flow during that 2014 to the external world to ensure we assist analysts as appropriate. I would add here, though, that while a year of transition in sales, our sustainability ratio does not exceed 115% in the year, reflecting the funds flow power of the asset base we were retaining go forward.

The next several slides go into a great deal of detail for our three signature assets -- the Cardium, the Viking, and the Slave Point area. They all follow the same format, and I think you will be pleased with the level of specificity and detail we are offering on these, the engine of our business. Starting with slide 24, we outline the progression of annual development capital in the Cardium resource, coupled with the number of wells represented in the plan and the expected accumulative additive production impact of this program. And I would remind you that our potential in the Cardium extends well beyond this time horizon. This would be a feature play in any portfolio. Well cost and cycle times improving, solid recoveries in the primary base per well, historic water flood success in verticals, and proven results from the use of horizontals in EOR, leading to further recovery improvement. We have hundreds of well opportunities at 30%-plus rates of return at moderate price assumptions. The Cardium is indeed a company-maker.

Slide 25 shows our familiar acreage outline, but highlights both our 2013 and 2014 capital activities. We show a breakdown of our spending in both Pembina and Willesden Green areas, highlight year-by-year production from the Cardium -- and I should note that this includes just the Cardium reservoir body, not that larger Cardium district area that includes other reservoir horizons -- and finally demonstrate the dramatic improvement in drilling and completion costs we have experienced in 2013 that will carry forward in our plans. Given the extensive number of wells we will drill over the period -- and again, in a sustained, well-planned program -- I would expect our cost curve to continue to bend lower as we move rigs and crews into the area and leave them there to continuously improve with years of inventory ahead. And even as we improved in our costs and delivery cycles, we will still be pushing limits in areas like longer laterals and advancing our completion techniques.

Slide 26 rounds out the Cardium display, with some key economic and recovery data from the play, and highlights very well the concept of running room, as we illustrate the resources we consume in our 5-year outlook versus our current book position, and the remaining resource potential still under our control. I think you will agree, our Cardium position remains the most attractive conventional resource play in the country.

Turning to the Viking asset and slide 27, the Viking is a commonly misunderstood asset in our portfolio. Perhaps the most common advice I get for this asset is to sell it, for a variety of reasons ranging from Penn West's competitiveness there to the overall scale of the opportunity it offers to our portfolio. Simply, the Viking provides a solid, high-return, near-term growth platform for the Company over that next 2 to 5 years, as well as being that rarest of breeds -- a free cash flow generating asset while in the throes of a large-scale development program. It is a great play. Well costs under CAD1 million, very short cycle times, with recoveries of over 50,000 barrels of light oil equivalent per well, leading to 70%-plus rates of return. So as indicated here, expect a fair amount of capital and well activity through 2015, with resulting attractive production ends. Slide 28, in fact, shows Penn West building a 10,000 barrels of oil equivalent per day business over the next 2 years, with the ability to sustain it over the forecast period.

The other graphs highlight that we have, over the course of the summer, closed the drilling and completion gap with our competitors in the field. And then finally, as a reflection of the quality reservoir position we occupy, we believe our well results are the best in the play, again leading us to view the Viking as a source of superior production adds in terms of economic performance. The map included that shows our drilling focus in future also highlights the downspacing activity to 16 wells per section in some areas to match our competitors, as well as new water flood activities we will be engaged in over the next 2 years. Slide 29 closes the Viking summary with highlights of the key characteristics of the play for us.

I would point out that the resource conversion or running room chart only focuses on the three areas of activities we will be engaging in over the plan period, or a little less than half of our total contingent book. We chose to highlight the Dodsland and Avon Hills area here, as it is our focus area, and it represents the richest reservoir and is the most oily of our acreage positions. Again, we still have room to run here, as evidenced by the graphics, and think we can go toe to toe with anyone in the play for years to come.

In slide 30, we turn to Slave Point. It is an asset that represents a huge step forward for us, if successful, because of the resource potential in the area. Because of individual well costs and carbonate reservoir risk, our program is more slowly ramped up over the plan period. This reflects both capital discipline as a core value in the Company, but also the careful planning we are undertaking as we plan for the bright future of this asset base.

Slide 31 highlights our progress on well costs in the play, but adds the most expensive wells in our go forward portfolio. We will continue to look to improve costs here. Of course, Slave Point also represents the highest IPs and EURs per well in our portfolio, so continuing to drive completions, improvements and cycle times will also be important. The brisk production ramp reflects the go-forward potential, and I would note that most of the EOR affects here are certainly back-end loaded in this view. There's a lot more to come from this area.

Slide 32 illustrates the prize -- the prospective resource is a crown jewel. Well economics are attractive, and we have a high control land position in the play. Our 2014 activities are largely focused on low-risk drilling to drive cost improvements, some work with longer laterals, water flood development, and a 3D shoot to try to expand our play fairway here. I remain very excited about this play.

We turn last to our focus on total cost of operations, beginning with slide 33. I think we have been criticized, often fairly, for not being as focused on this aspect of operating excellence as possible. Clearly, an overarching focus on growth and our production-at-all-cost perception of the Company was a driver of this, but we have re-instilled a discipline around this metric by focusing on net backs per barrel and cash flow generation as two of the most important of our core metrics. We highlighted in the release that we have even shut in production that is uneconomic in the quarter, but perhaps never before seen staff at Penn West. The result is reflected in the slide that reflects a ground-up view of how operating costs will change at Penn West.

Now, the graph that everyone will focus on is on the lower left. Our cost per barrel will be going down, aided by production growth, to be sure, but largely driven by our control of the gross expense number. Again, portfolio work to trim the tail of our asset base helps, but it will be the focus on our key drivers that leads to real improvement. I have used the phrase, project management approach, to describe what we will be doing in each category of expense, beginning with our five key drivers. What I mean by this is that we will systematically break down and understand our costs in these categories, and create standards and processes that cross the enterprise to drive them lower. For example, power management will encompass a review of elements such as peak load management, true lifting costs in areas with multiple driver types, and real costs of restoring failed production due to power issues. I have great operating people at Penn West. We're going to turn them loose in these areas, and expect them to create solid savings in the business.

On slide 34, I also want to illustrate the power of portfolio focus; and people around here have heard me say I really like this slide. The estimated 2014 corporate-level operating cost figure we present, even broken down as we have here on the graph on the left, is often still very opaque. Where are the numbers coming from? Can they really be changed? As I tell my teams here, I care about the corporate number, but I worry about the field and lease level numbers, and here we have some positive news. For the three focus areas that our capital dollars all are flowing to in this plan, we are providing a second level of detail on our total and by-category cost. And what is important here is the table in the upper right of the page. It is very important to understand why we are going to get better, and why portfolio focus matters.

We're showing our operating cost positions relative to what we believe to be the best in class for those areas. Now we compare very favorably, and, in fact, lead in two of the three, and are close in the core area of the Cardium. But as mentioned, we are going to continue to work to get even better. The important thing is that cost leverage will be multiplied as our new development production increases in each of these areas over the plan period, and is expected to represent nearly 50% of the corporate total by 2018.

On slide 35, we provide a similar analysis for G&A. We have made good strides in this area, and we will be using a similar approach on measuring total cost versus direct value added to the business to seek improvements. But we have reversed the trends of continuous growth, and we will look to continue to surface ways to accelerate a decline here.

Again, in aggregate, and echoing what we have said here, developing barrels at competitive cost and operating them at top-tier metrics leads to good results, and we created the illustration on slide 36 to demonstrate this. We plotted a graph of our peer group using Q2 2013 reported operating costs, and highlighted our progression as a result of our delivering the plan we have been discussing. The key takeaways here are that we are maintaining cost control while liquids waiting is going up, which leads to the view of dramatic improvement in net backs per barrel in the period, and with the commodity and cost advantages our portfolio offers us. And importantly, these improvements are against a broadly flat commodity debt.

So in summary, slide 37 revisits a new Penn West -- stronger, competitive, profitable, solid production, and importantly, oil production growth from a refocused base. Funds flow rising dramatically without price support, driven by commodity mix, capital discipline, and cost control. A reset, stronger balance sheet, with continuously improving leverage metrics, and all the while increasing investment in organic opportunities that we control today with a sizable inventory beyond the plan horizon.

I think everybody is well aware of the potential of this Company. To date, the Board and the Penn West team have acted decisively and with a sense of urgency to improve this Company, and we now have the full support of the Board to move forward on this challenging and exciting long-term strategy to become Canada's leading conventional liquids producer. We will continue to be decisive and to move swiftly to maximize value for our shareholders. We understand that, simply, we need to hit our numbers consistently, especially our guidance, with no excuses. We need to demonstrate a trend of improvement as an entire Company, and we need to execute the long-term plan quarter by quarter.

Finally, we have included a number of charts in the appendix to assist with your understanding of the plan and (technical difficulty) slides. We would certainly welcome your comments and questions, and look forward to seeing many of you in Calgary or on the road as we tell our story and begin rebuilding this great Company.

With that, I will turn the call back to Clayton.

Thanks very much, Dave. Candace, I think with that, that closes our formal remarks, and we will move to Q&A.

(Operator instructions)

First question, Cristina Lopez, Macquarie.

Hi, thanks, guys. Just a couple questions. Some of them are somewhat addressed. But with respect to the asset sales being targeted for 2014, in particular PROP and Cordova, can you speak to the production from those areas currently?

Cristina, it is Mark.

Current production net in those areas would be combined in that 5,000 to 6,000 BOE range. The activities in 2014, certainly under our obligations with our partners and under the JV agreements, will continue as we move through the sale process, but that would be the general range. As you know, Cordova, essentially all gas and prop is oil

Is there any intention to spend more money -- again, you said there would be some ongoing capital. I know at prop there was ideas of spending a bit on cold production there. Is that going to be at all a focus in 2014 prior to looking at an asset sale?

It's a good question. I think, certainly, we recognize through the technical work that the teams have done, and in our conversations with our partner, that there is an opportunity to do more primary work in that partnership. As we pursue the sale of the assets, it is our intent to continue the activities on a parallel path. I think that is just good business.

And I will ask a question on the dividend level. Obviously, you speak to a sustainable dividend. Is that reference based on what your current dividend level is? Or will you be assessing the dividend on a go forward basis?

Hi Cristina, it is Todd. What we modeled here was the dividend at the current rate. We maintained the drip throughout the program, but as you can see, at a high 80s at par light oil price, it goes around pretty good, if we execute as we plan to.

And I have one last question with respect to Q3 operating costs. It looked to be a little bit higher than the prior two quarters. Is that a function, one, of electrical cost, and then two, a lower production base?

Cristina, this is Dave. Simple answer is, you have turnaround cost in there, and also the lower production, both from those turnaround activities and the fact that the decline was pretty steep of the two factors -- three.

And then that would then point to 2014 from that presentation being in that CAD17 range, and then slowly declining after that. Is that correct?

Yes.

Excellent. I will let others ask questions. Thanks so much.

Next, Patrick Bryden, Scotiabank.

Good morning, gentlemen. Appreciate -- you guys have been through a process here, and some hard decisions that were not easy, and I do appreciate the disclosure. Just moving to a few quick questions, please. If we try to think about coming out of the AND phase here, phase 1 and 2, where does your production specifically bottom out at? And in terms of getting there, how much of that is strictly AND versus natural decline?

I will try this on, Patrick. I think we try to do a pretty good job with the charts that we show. Pretty clearly, 2015 is the base point, as we see it, and then growing from there, hence the V-shaped section of the curve. We basically have the capability, or we think to predict -- or at least I would think that you should look at the company, is essentially the 12.5 BOE of asset sales, probably that range of numbers is going to be repeated at the end of 2014 program and the remainder are going to be declines, offset by the addition that will largely feature in the second half of 2014.

Okay. Appreciate that. And I am wondering if you can maybe -- or are you willing to give a sense for what you think your corporate decline rate is now? And what you think it would get to in 2018?

I think the first number is that we consistently said you know. The decline in this basin typically runs 20% to 22%, all in. Probably 4 to 5 points lower than that on just the base, with factoring in the new development. We are not prepared yet to really address what we think the shallowing effect is going to be over the EUR programs, end of 2018, but it is clearly going to come down from the 20% to 22%.

Okay, appreciate that. And then obviously, you've gone to great pains to lay out a pretty elegant strategy here in terms of the growth that you would expect to drive, looking ahead. But -- and I guess with all due respect to that process, if we look back at the history, the per share measures have been nowhere near that. So how should we draw some confidence that you folks can get there?

It is a fair challenge, and one that we candidly understand we have earned. And part of the plan is to demonstrate our execution quarter on quarter. I think what I would point you to is, we have clearly are moving in the right direction in terms of what our investment costs are doing. Our drilling and completion costs are coming down, and I think dramatically. And so I think that is something that it gives you some initial confidence. The fact is is that we are playing in areas that are well known in this basin, and so people are going to be able to look at our type curves and say, are they doing as well as everyone else? And we are going to be able to say that categorically.

So it is going to take some time, but what we are embarking on here, there is nothing heroic in our plans. All this stuff is in our control. We do not have to wait on any one else, partners, land agreements, all of this other kind of stuff. We just have to execute. We think we have closed the cost gap. We're going to continue to get better. And as we demonstrate well results, we think that confidence in the investment market is going to grow quarter on quarter.

Okay, appreciate that. And then just maybe back to the JVs. I am not sure if you can express this, but can you characterize the nature of your ability to sell or exit both Cordova and Peace River? Is that just a straightforward process, or are there any encumbrances to that?

Pretty clearly, any time you have a JV, as with any operating partnership, you want to make sure that your partners are well-informed, and you understand what their options are and what your actions are. And we believe that this is what I would term the straightforward process, other than the ability -- our ability to continuously inform our partners. At the end of the day, both of these JVs were created to make money and create value for the respective companies, and we believe that that is still going to be the outcome here.

Okay. And then just lastly, and then I will step of the way, and I thank you for all your time. Can you -- is it possible to get a sense for where the spending levels are to date on both JVs?

Mark, can you address that?

Yes, I -- not in specifics right now, Pat, but I can certainly give you some general context similar to comments I provided to Cristina. As you are aware, we have had drilling activity underway in Cordova through 2013, and the focus in 2014 will be the completion of those Wells and bringing those on stream as we are able. And then in our partnership, we continue with the Seal Main and Harmon Valley self-pilots, continue with the advancement of primary program that we have talked to and have expanded into 2014, and continue with the planning and development of our, ultimately, Seal Main and Harmon Valley self-thermal work on an ongoing basis.

So on a relative basis for the total capital that is being invested in light oil because of the carries in the partnership, it is relatively minor and immaterial, in the grand scheme of things. But as I said, we are continuing as an ongoing concern on both of those JVs with the activity while we proceed with looking for buyers for our share.

Okay, thanks for the answers. Appreciate it.

Your next question comes from Travis Wood, TD Securities

Good morning guys, and thanks for the time. And I do appreciate the amount of work that you will have ahead of yourselves for 2014, given the announcements this morning. But I have a couple of questions. The first is, if we look at the 12,500 BOE that you have for sale -- or within the PSA agreements. What is the fixed cost that would be associated with those barrels? You talk about the high OpEx per BOE number, but can you give any color on the fixed cost side?

Travis, it is Mark. The operating costs associated, if that is where you are going, is about CAD22 of BOE associated with that, so certainly reflects the non-core nature of those within our portfolio. And if you were to break out the variable versus the fixed you have, can you talk about that at all? I would suggest, given the nature of those dispositions, given that they are essentially the intent of what we're doing through the non-core dispositions is to white map and move completely out of an area that we move the entire cost structure out of the company

Okay. So going forward, similar type of process for the other non-core assets that you are looking to divest of?

Yes, absolutely. I think it speaks to the strategy that we have around the dispositions, which is, as Dave talked to, very much focused our development and our capital activity in core areas. And as we move out of the other areas, it -- I think it is in the best interest of both ourselves and counter-parties to truly move away.

And another question. This is a back to the decline side, but more so just for the short-term. So if you are reallocating capital spending a little less on the non-core assets, so to speak, what happens through the corporate decline rate in the short-term, with a bit less spending on some of the base assets?

The decline does not really change, Travis. I think the issue, and what we're trying to highlight is, basically this year, if you think about what we have done, very low spending quarters in Q2 and Q3. We are moving to this even flow approach, Q4 forward. And so it has essentially pushed the normal production lag that we have in this company out by a couple of quarters.

And so the decline, as it looks over the next couple of quarters, I think you could say it is exacerbated, but the base numbers are not changing. It is just where the additions are going to come in. And that's the reason I talked about -- we're going to have to do a better job of explaining some of this stuff until we get largely the second half of 2014.

Okay. And the last question, and this might be -- maybe you can share with Mark. It might be a better question for you, Mark. When you think back to 2008, and not that this is exactly the same strategy that is trying to unfold, but sounds very similar, and what we will see on the execution side. But what do you see that is different in this strategy versus what Penn West was trying to execute on in 2008 with non-core asset divestitures, and trying to spend more on the Cardium to improve the efficiencies? What is going to make this one different?

I actually will take that one, instead, because I was not here, but I am clearly a student of the history of this company, and it is one of the reasons that I am, A, so animated about our success and excited about what we can do here. I think what I would say is, it is all about follow through. We are going to focus with discipline on the things that make operating companies successful. We're going to focus on the asset base that actually do the right things for us in terms of yielding production and economic results. And we're going to stick with it and drive through this.

And that is one of the reasons that we put out this five-year plan, is because we recognize we have a reputation that is being quite changeable. And what we have done is, we have put a stake in the sand here, in terms of what we're going to try to do with this company and how we're going to drive it forward, and that is the key difference here.

Okay, thanks very much. I think that is it for me.

Your next question comes from Dirk Lever, Altacorp Capital.

Thank you very much. And as Pat said before, thank you very much for laying this out. It is very comprehensive. I have a couple of questions. The first one is, as you are going into the water flood work, what have you got for expertise? You've seen a lot of turnovers, so have you been building up in internal expertise? Did you hang onto that? Because the -- for the rubber to hit the road, you have got to have people with the abilities to do it, so you could touch on that?

Yes, there is no question that we have restructured significantly here. But the only thing I would say there is, water flooding is in the DNA of this company, and we have the resources here in order to be successful in those areas that we are attempting to move forward with water flooding. So I am not concerned about that, and I think this is going to be -- candidly, this is going to be an exciting place for people that may not be in this company today that want to come work, as we return to our roots in that particular area.

Okay, thanks. And the other one is, I'm just going to use round numbers, because I'm just trying to square off to the 2014 guidance one of the 105 to 110. And I am assuming that that bakes in the sales of the 15,000 to 20,000 barrels per day, because round numbers, 125 barrels per day at the end of October. End of 2013, you're like 130 barrels per day. So to get there to the 105 barrels per day to 110 barrels per day guidance, I'm assuming that you baked in that 15,000 BOE to 20,000 BOE sale?

No, I think that we would suggest to you, as we have baked in the sale of the 12,500 BOE, and the remainder of that is, what we are trying to describe in terms of this capital shift that basically does not show any significant production adds until the back half of 2014. And so you get a more pronounced depth of the curve into 2014, which will allow you to get to that average number.

Okay, so there's a decline. And you have -- so that 105 BOE to 110 BOE does not factor in any of the sales for the phase 2, then?

That is correct.

Thank you. That is the clarification. Thanks.

And your next question comes from Gordon Tait, BMO Capital Markets.

Thanks, and good morning. Just looking through the presentation, it looks like the Cardium is the only core play where you are increasing your capital in 2015 over 2014. Although from your presentation, also looks like the Viking has the highest IRRs of those core plays. So I am just curious why you're not putting more capital into the Viking versus the Cardium sooner than later?

Gordon, I think that is a -- let me unpack that question a little bit, because it probably requires a little bit of philosophy. First thing is first. We are managing this business to create not only a production growth profile, but to generate funds flow. And so one of the key metrics for us is sustainability. And so what we are trying to do is fit all of our very attractive programs within a certain capital quantum. There's no question that we could spend more money if we wanted to do that.

And so what we have done here is, the Cardium is the most important play in the company. It provides the greatest long-term value add for us and for our shareholders. And so we need to create this investment ramp to get us to the ability to ultimately spend the amount of money we need there on a go forward basis, to basically be the driver of the company.

The Viking is very attractive to us. It provides this short-term flywheel for us on a very predictive basis for us to generate solid production growth and cash flow growth. But there is no reason for us, in our current structure, with the things that we're trying to get done in the three big plays, to over-invest there.

Okay. Now in that Cardium, historically Penn West has always had quite variable results. So are you getting better at zeroing in on where to drill the wells, how to drill the wells, to get a little more consistency in the drilling results?

Gordon, it is Mark. I would make a couple of comments to that. I think, consistent with the focus conversation that Dave has led regarding Cardium, Viking and Slave Point, the same applies, as you will see, in the Cardium, where we have given you detail on exactly where we are going to focus over the next five years.

I think advancements that the industry is made in terms of completion techniques combined with the cost reductions that we have seen over the past 6 to 9 months, and then that focus has given us a lot of confidence in terms of predictability and relatively low levels of variability in our results go forward in the Cardium.

Yes, I think I would just amplify on that, because I made the comment, too. And my experience south of the border is, teams get better as they do the same things over and over and over again. And the important thing that we have with this incredible depth of inventory that we have, particularly in the Cardium, but the other two plays as well is, in my expression, we will be able to put several drilling rigs out there and park them.

And we will have the same crews, same rigs, doing the same things over and over again. So the advancements that we have already gotten will be cemented in, and probably increased over time. That is how you win in this business. And so having those opportunities like the Cardium is what most of us live for this business.

Okay. And then with respect to your sales, specifically, at Seal. Is it feasible that your partner CIC could be a potential buyer of that asset? First of all, do they have the people on the ground to operate? And secondly, are there any restrictions to SOEs and acquiring interest in what I think are designated oil sand leases?

I think the first part of your question, Gordon, you probably have to raise with CIC, because clearly we would not intimate anything that they may or might not do. And I think as far as for any restrictions, I think all of us can draw our conclusions of what some of the statements the governnor of Canada has made in the past about that.

Okay. And then lastly, not to be a downer, but what happens? What is your plan B if the assets that you've identified for sale do not get sold at the prices you want? Are you going to sit on them, or do you have a fire sale? What are you looking at?

I think I indicated -- so I appreciate the opportunity to amplify this, is look, we have a desire to transact, but clearly we have an obligation to our shareholders to make sure that we create the most value through these transactions. We have highlighted a number of assets for you, largely on the basis of, they do not any longer fit our conventional oil focus.

We clearly have, as everyone notes, an incredibly deep portfolio. There will be other opportunities that we could potentially substitute in the event that these assets proved impossible to sell. But I would tell you, I think that is a very unlikely scenario. Most people know these are quality plays, and they create real opportunities for other operators to come in and be successful.

Thanks.

And your last question comes from Brian Kristjansen, Dundee Capital Markets.

The 2014 guidance appeared to me, at least, to be surprisingly low. I get spreading CAD900 million over 2014 has some impact, but I'm wondering if you are planning to shut in any more incremental un-economic production in 2014? And if you can, can you quantify it? And then Dave, you mentioned that you are still sticking to the corporate decline of 20% to 22%. I wanted to see if you could quantify what your existing capital efficiencies are? Thanks.

You have got the key point that was always puts me in a corner from the last question. The capital efficiency numbers, I would tell you that since we put that guidance out for 2013, we are going to be within those ranges. But one of the things that we are going to be focused in on as a company is for the true measures of capital efficiency. Are you are replacing your reserves? And what is going to be your development cost? And I think we have outlined what our expectations are going to be for that.

As far as the 2014 guidance, again, I think you really have to consider Q2 and Q3 spend, the fact that we are more even flow from this point forward, which is going to push a lot of our additions towards the back half of next year. And so I'm not guiding, specifically to this, but pretty clearly what we saw is the run rate between Q2 and Q3 might be indicative of what we would see in the first half of next year on the basis of our capital spending profile.

So -- and again, I do not think that changes the decline rate. I do not think it changes the quality of the programs that we are after. It is just a function of us re-phasing the business to make this into a more normal oil and gas company.

Okay, thanks. And then just on the -- on your slide where you're showing a long-term production growth, you're seeing a further dip in 2015. Is that ex-incremental sales, or does that include any of the incremental sales?

No, that would include the impact of sales that we would've modeled at the end of 2014, day one 2015.

Great. Thanks.

And we have no further questions at this time, and turn the call back to our presenters for closing remarks.

I would like to say thank you to all for joining us today. We appreciate your continued interest in Penn West. Should you have any further questions for Penn West or the presentation today, please feel free to contact our investor relations team, and we would be happy to assist you. Thank you. This concludes our conference call. Goodbye.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.