Obsidian Energy Ltd (OBE) 2014 Q1 法說會逐字稿

Good morning. My name is Kirk and I will be your conference operator today. At this time, I would like to welcome everyone to the Penn West 2014 first quarter results conference call. (Operator Instructions).

Mr. Clayton Paradis, you may begin your conference

Thank you, Kirk, and good morning, everyone. Welcome to Penn West 2014 first quarter financial and operating results conference call. My name is Clayton Paradis, Manager, Investor Relations.

And with me in Calgary this morning is our President and Chief Executive Officer, Dave Roberts; newly-appointed Chief Financial Officer, David Dyck; Senior Vice President of Development, Mark Fitzgerald; Senior Vice President, Production, Gregg Gegunde; General Counsel and Senior Vice President, Corporate Services, Keith Luft; and Vice President, Accounting and Reporting, Jeff Curran.

I will remind listeners that we will be referencing a webcast presentation, in conjunction with the call this morning. This presentation is available via the webcast and, also, on our website at PennWest.com

Before getting started this morning, I'm required to review our customary advisories. Penn West shares trade on, both, the Toronto Stock Exchange, under the symbol PWT, and on the New York Stock Exchange under the symbol PWE.

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 6:1 conversion ratio. All references to wealth counts are Net to Penn West, and all financials are reported under International Financial Reporting Standards.

Certain information regarding Penn West, and the transactions and results, discussed during this conference call include Management's assessment of future plans, operations and targets. Constitute forward-looking looking information under applicable securities laws. Our actual results could differ materially from any conclusions, forecasts, or projections in such forward-looking information.

Certain material factors and assumptions were applied in drawing any conclusions and making any forecast 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, or projections in the forward-looking information, and the material factors and assumptions that were applied in drawing any conclusions, or making any forecasts, or projections reflected in the forward-looking information, is contained in our 2014 first quarter results presentation being webcast today.

It's available on our website and is contained in our first quarter press release and other reports on file with Canadian and US Securities Regulatory authorities, which may also be accessed through the SEDAR website, at S-E-D-A-R.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 most recent MD&A and financial statements, available on our website, as well as filings available on the website noted earlier to review disclosures concerning non-GAAP items.

I would, now, like to turn the call over to Dave Roberts, President and CEO, for opening remarks.

Good morning, and thank you for your interest in Penn West. Before Clayton gets into the details of the quarter, I wanted to provide my short take on the business. Putting it simply, we continue to deliver in a transparent and substantive way on the promises we made in November of last year.

Our capital operating focus is tightly centered on the Cardium, Slave Point and Viking areas, with 80% of our spending so directed. Our capital performance in these areas is either best in class or we're on a very short list. Our well results continue to meet or exceed expectations. We continue to push the limits on our well construction and completion designs and our cost structure continues to improve.

In what I would term as a starter quarter, we have provided a demonstration of our ability, absent asset sales, to grow the business, even in the context of a CapEx and activity rate that is a third less than what we will experience in Q3 and Q4 of this year. Our portfolio focus is driving costs down, generating funds for de-levering and reshaping the business in other ways, such as reducing our well count by 20% or, roughly, 3,500 wells since November of 2013. A third of which were non-producing. But in many ways we are just starting.

A 50-well quarter gives way to 150 wells to be drilled in our closing two quarters, with increasing activity levels in future years against a deep and high-quality conventional light oil inventory. And we will see further cost reductions in our business, both in the capital and operating and support elements, as we are engaged in deep studies of our processes and structures to ensure we can deliver on our results and do so at top performing costs.

I'm very proud of the progress our Team has made to date. I think our results today are clear and compelling evidence that the Company is changing for the better, and in what may be a surprise to some, quite quickly. With that, I'll turn it over to Clayton and we'll look forward to any questions you may have in a few minutes.

Thank you, Dave. Referring now to slide 2 of the webcast presentation, and our financial and operational results.

Penn West first quarter of 2014 proved to be very solid by all accounts. Fund flow of CAD279 million, or CAD0.57 per share in the quarter, was modestly ahead of analyst consensus, and we realized that 38% improvement in our netbacks from the fourth quarter 2013.

We improved our balance sheet quarter-over-quarter with CAD180 million reduction in long-term debt, excluding the impacts of unrealized FX losses. We continue to work hard on reducing costs in the business and realized a CAD28 million decrease in operating expenses, which represents a 14% reduction from the fourth quarter of 2013.

With respect to the dividend, the Board of Penn West has declared a second quarter of dividend of CAD0.14 per share, to be paid July 15, 2014, to holders of record on June 30, 2014.

On the operational side, all planned capital activities were completed on expenditures of CAD205 million, relative to a budget of CAD230 million. A testament to the fact that cost and cycle time improvements continue to drive strong capital efficiencies within the business.

In the quarter, we drilled 47 wells versus a plan of only 34, and we brought 49 wells on production versus a plan of only 39. We have shifted into the mode of balancing capital across quarters, affording us the ability to consistently execute our programs across the three core areas of the Cardium, Viking and Slave Point. With the outcome of this shift leading to greater predictability in of our performances, as illustrated by the results of our development programs this quarter.

Average production for the quarter of 110,795 BOEs per day topped consensus estimates and was, again, a strong result in light of the fact that we spent less than 90% of budgeted development capital and completed all planned activity in the quarter. In 2014, we continued to make progress on phase 2 of our disposition strategy. During the first quarter we transacted on CAD213 million of net dispositions. The majority of the dispositioned proceeds were realized in the CAD175 million transaction, previously announced in January of 2014.

Natural gas weighted assets in Southern Alberta, with associated production of, approximately, 6,700 BOEs per day and approximately 1,800 producing or suspended wellbores. As mentioned early in the call, with those 1,800 wellbores combined with our phase one disposition in late 2013, we have now reduced total producing or standing wellbores by more than 20% on nearly 3,500 wells, with a third of those being non-producing; a significant measure of progress against our strategy to focus the portfolio and improve costs as part of our long-term plan.

Turning to slide 4, funds flow increased approximately 30% quarter over quarter to CAD279 million. While funds flow has improved with a stronger commodity price environment, cost control was a positive factor as well. Volume variances indicated were predominantly disposition-related from the transactions completed in late 2013, in the first quarter of 2014.

Now let's look at production. We have provided a different view of our quarter-over-quarter production bridge here, as I believe it more accurately reflects what is happening in the business. The takeaway point is illustrated in the bar chart to the bottom right of the slide after, adjusting for A&D impacts in the quarter, and despite spending only 9% of prime capital, we were able to more than offset declines.

This is one of the primary aims of our long-term plan, to improve efficiencies in the performance of our business to the point that we are able to drive steady growth in our volumes quarter after quarter. We are very pleased with this performance early in our long-term plan. Similar to last quarter, a large majority of disposition proceeds were applied against the outstanding long-term debt, which was reduced by CAD180 million, excluding the impact of unrealized FX. The outstanding notes remain unchanged as at March 31, but include the full effect of translation at quarter-end spot currency rates, which increased the reported value outstanding by approximately CAD75 million.

We have swaps that fixed the exchange rate on our payment of CAD649 million, or 39% of our US denominated note, at par. These swaps partially offset the currency exchange risk on our long-term notes and are recorded as risk management assets and not at offset to stated debt levels. The currency effects in all Euro and pound denominated notes are fully hitched.

Moving onto the quarterly trend in cash costs, we are very pleased to report that cash costs in terms of dollars continue to trend down and have decreased approximately 17% for over CAD72 million year-over-year. We remain committed to driving further cost reductions in our G&A and operating cost structures, and to aid us in this exercise, we are currently completing two externally-reported business process reviews, which Dave referred to in his opening remarks.

Turning now to a brief review of activity in a core of light oil areas. In our Cardium programs, we are on track to achieve cost efficiency targets, as set out in our long-term plan for the area, and our productivity performance, on a per-well basis, have been consistent with our expectations. We increased our activity levels while remaining with planned spending levels in the quarter.

We believe the continued cost and cycle time improvements in the Cardium will allow us to move our development plans forward in the area at an increased pace, relative to our long-term plan assumptions. In the quarter, we spent CAD65 million in rig released 19 wells versus a plan of 15, and brought 15 wells on-stream versus a plan of 10. On an area basis, the Cardium drilling times -- pardon me, the drilling times and cost results in Pembina and Crimson Lake are ahead of plan for 2014. In Lodgepole, our drilling results show a clear trend to achieving top quartile operational performance.

Our current program, as illustrated by the green line in the chart at the bottom right of the slide show, now utilizes higher frac densities for the same cost per well in our on average, exceeding our production performance expectations. The water flood programs in Pembina and Willesden Green are proceeding on schedule, and we will continue to monitor the response throughout 2014, in support of broader water flood programs in the 2015.

In the Viking area, we spent CAD23 million. And rig released ten wells versus a plan -- pardon me, as planned and brought 26 wells on production versus a plan of 22. Similar to the Cardium production performance curves, production performance from the current Viking program, in which we drilled our first downspacing program to 40-acre spacing, is provided and is performing ahead of expectations, as illustrated by the green curve on the graphic. We continue to work hard on further reducing our costs and cycle times to maintain our leadership position in the Viking play. In doing so, we expect to ensure sustained and improved performance in the area, post break-up, into our second- and third-quarter programs.

In the quarter, one of the major Canadian banks published a West Central Saskatchewan Viking play update, which serves to validate Penn West as having among the best performing wells in the play. We have updated our Corporate presentation to include this independent analysis with our Viking asset overview and invite you to review it.

In the Slave Point area, the focus of the 2014 development program continues to be on evaluation and testing of different drilling and completion techniques. In Q1, we spent 71 -- CAD77 million, and rig released 12 wells versus a plan of ten, and brought seven wells on production versus a plan of four. In the Otter area, we successfully drilled and completed our first long-reach lateral wells while realizing cost improvements relative to expectations.

We completed and brought on-stream two wells in the Red Earth area, which are also currently performing ahead of expectations. At Sawn, we drilled seven wells during the first quarter, including our first well using nitrogen fracture techniques. Early results from these wells have been positive and we will continue to monitor their progress as we de-risk the area.

Measuring our progress against long-term planned goals, we would highlight we believe cycle time reductions and base reliability are key measures going forward and improved in the first quarter of 2014. Since November 2013, we have reduced our net wellbore count by approximately 20%, and a third of which were non-producing, and improved our focus, efficiency, and cost structure in both the long- and short-term.

As we move toward our second half drilling program, we will build on the execution improvements we have made and continue to strive to our ultimate goal of becoming the premier operator in the basin. We also remain persistent in phase two of our disposition strategy, as we focus our portfolio and increase our financial flexibility.

The operational successes we have experienced to date created a positive impact throughout the enterprise. There is, however, a common understanding that we cannot become complacent, and as we continue to focus on our high performance delivery culture, we improve constantly on our ability to deliver on all our metrics and reach our full potential.

Operator, that concludes the formal remarks. I would now like to turn the call over to questions.

(Operator Instructions). Your first question comes from the line of Travis Wood from TD Securities. Your line is open.

Good morning, guys, and congratulations on the improvements through the play types that you have highlighted in the press release. I have two questions for you. The first is just some clarity. In the press release you talk about the capital program being about a third of what you'll set up for the third quarter of this year. Are you talking about that in terms of the dollars or just activity, and how can we think about that in terms of the capital spend, the flow of that through the rest of this year? And, then, the last question that I'll leave you with is, we've, obviously, seen a good trend in terms of the absolute dollars on the cost side, and with these asset sales that seem to be associated with high costs, when can we start to see that roll through the BOE cost basis? I'll leave it there

Right. Good morning, Travis. Thanks for the question. With respect to the capital profile, basically, my reference was to dollars. I think you can expect us to look to spend CAD300 million in each of Q3 and [Q4] and we'll have our normal low, unfortunately, in Q2, as we deal with break-up. So, you know, both the activity level in terms of increase in wells because we, basically, have got 150 wells in the back end of the year, and capital is when we actually start to hit some of our marks in terms of pace.

I think the other question's a good one. We're trying to be transparent, which is the reason we include that chart because gross costs are the first order of business and as we move to rebuilding a growth profile in this Company and, particularly, growth from the assets that we're investing in, our thesis has been these are lower cost areas for us and when we produce barrels into those lower cost areas, then, we'll start to see those roll-through effects become more apparent. And I think we're a lot closer to being able to declare a point where we're going to start growing this business again, against what -- I continue to remind people is in our competitor set, the deepest oil inventory in Western Canadian sedimentary basin.

Okay. Thank you very much.

(Operator Instructions). Your next question comes from the line of Gordon Tait from BMO Capital Markets. Your line is open.

Good morning. If you could maybe address, you talked about the capital efficiencies, the shorter cycle times in the Cardium. I don't know if this was asked before, excuse me if it has been, is that something you can translate to your other core areas?

I guess the question is on drilling cycle time, Gordon?

Drilling cycle time and just improved capital efficiencies. Some of that what you've learned in the Cardium, is that something you could take to your other two core areas to start to see improvement on the same magnitude there?

One of the things -- and we visited about this, so you kind of know my answer -- is this is a small company and we're running it now from a perspective of sharing as much information across the piece. But, you know, I will tell you that we are now the pacesetter drillers, in terms of time, in all three of our plays. We have seen dramatic improvements from a third to half across the play in terms of drilling cycle time and we now have the pacesetter wells in Slave Point, Cardium on both north and south, and the Viking. And so in terms of sharing information and learning across the piece, we're clearly doing that and I'm pretty pleased with our results.

All right, thanks.

We have no further questions at this time. I'll turn the call back over to you, Mr. Paradis

Thank you, Kirk, and thank you all for your participation this morning. We can appreciate it's a busy day in the market. We will look forward to speaking with you again, when we report our second quarter 2014 results in late July. Good-bye.

This concludes today's conference call, you may now disconnect.