Obsidian Energy Ltd (OBE) 2014 Q2 法說會逐字稿

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

(Operator Instructions)

Thank you. Clayton Paradis, you may begin your conference.

Thank you Stephanie, and thank you and good morning folks and good afternoon to our friends on the East Coast. Welcome to Penn West 2014 second-quarter financial operating results conference call.

My name is Clayton Paradis, Manager Investor Relations. And with me in Calgary is our President and Chief Executive Officer, Dave Roberts; Senior Vice President and Chief Financial Officer, David Dyck; Senior Vice President Production and Delivery, Gregg Gegunde; General Counsel and Senior Vice President Corporate Services, Keith Luft; and Interim Vice President Finance, Matthew Wetmore.

In addition to our second quarter financial results and a separate press release Penn West also announced the results of the voluntary internal review of certain of our accounting practices and the filing of restated historical financial statements earlier today. David Dyck, Chief Financial Officer, will begin the discussion today with a brief review of this release. Dave Roberts, President and CEO, will then offer his comments on both the internal review and second-quarter results and I'll wrap up the call this morning with a review of our typical quarterly results charts before moving on to Q&A.

I would remind listeners that we will be referencing a Webcast presentation in conjunction with the call this morning. And this presentation is available via the Webcast and also on our website at Pennwest.com.

Before getting started, I am required to review our customary advisory. Penn West shares are traded both on the Toronto Stock Exchange under the symbol PWT and the New York Stock Exchange under 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 six to one conversion ratio. All references to well counts are net to Penn West. All financial statements are reported on our International Financial Reporting Standards.

Certain information regarding 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 may 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 forecasts or projections reflected in such forward-looking information.

Additional information about 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 second-quarter results presentation being Webcast today. This is also available on our website and is contained on our second quarter -- pardon me, and contained in our second quarter and internal review restatement press releases and in other reports on file with the Canadian and US securities regulatory authorities. All of this may be accessed through the SEDAR website, at 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 most recent MD&A and financial statements available on our website as well as filings available on the websites noted earlier to review disclosure concerning our non-GAAP items. I would now like to turn the call over to David Dyck to discuss the results of the internal review of accounting practices.

I would like to spend some time talking about the restatement of our financial statements. This will be an overview as there is a complete description of the process, results, remediation, and actions undertaken in our press release on the restatement as well as in our restated MD&A and our restated financial statements.

As many of you know, I joined Penn West as CFO on May 1, 2014 and shortly thereafter certain accounting practices came to my attention. The Company's senior management took these issues to the Board and then recommended to the Board that the audit committee conduct a voluntary and independent review of these practices.

We noted in our July 29 press release that certain transactions appeared to have been made to reduce operating expenses and increase the company's reported capital expenditures and royalties and appeared to have been made without adequate supporting documentation. The accounting practices reviewed involved the capitalization of certain operating expenses as property, plant and equipment, the income statement classification of certain costs and credits, the timing of certain accruals relating to production, operating expenses and capital, and the timing for the recording of certain production volumes. Shortly thereafter, and based on preliminary findings from the review to that date, it was determined that the Company would be required to restate the annual audited financial statements for at least 2012 and 2013 and its un-audited interim financial statements for the first quarter of 2014 and 2013 and all related MD&A and other regulatory filings.

This ultimately led to the delay in the filing of our second-quarter 2014 interim financial statements and MD&A. We voluntarily informed the Alberta securities commission and the United States Securities and Exchange Commission about the review. Throughout this process, Penn West has had regular communications with the staff of each of the AFC and the SEC and continues to cooperate fully with both agencies.

To fully complete its review the audit committee determined that a review of prior periods going back to and including 2007 was necessary including establishing the relevant January 1, 2012 opening balances for the restatement. The review including the analysis of electronic and paper records together with data analytics and interviews performed by the audit committee did not identify any other accounting practices that were required to be addressed by the Company in the restatement.

In slide 2 of the deck you have in front of you we summarize the matters which required adjustments as a result of the review. Certain expenses were reclassified as property, plant and equipment from operating expenses without adequate support.

Certain expenses were reclassified as royalties from operating expenses without adequate support. Certain accrual provisions related to capital expenditures were recorded on the balance sheets which were no longer required. Certain property, plant and equipment were incorrectly classified as operating expenses and certain operating expenses were incorrectly classified as property, plant and equipment and there were delays in recording certain oil and natural gas sales and associated production volumes related primarily to closing adjustments on asset divestments and equalization adjustments.

On slide 3 we show some of the impacts of our key financial metrics and I would like to emphasize that although the accounting practices that led to the restatement of our financial statements require the restatement of our financial statements, the financial and operating health of the organization remains strong. Dave Roberts will speak to the positive developments we are seeing in our operations in a few minutes. But from a financial point of view, we continue to meet all of our financial covenants.

Our debt and cash positions were not impacted by the restatement. We continue to meet all of our commitments as they come due. Our net income was impacted in 2012 but actually increased in 2013 and in Q1 of 2014.

Our funds flow decreased due to the impact of the increase in operating expenses net of the impact of lower capital expenditures. These are the metrics I would encourage you to focus on as they speak to a company that has a solid financial foundation. The continued success on the operating side of the business are expected to drive even better financial results.

Slide 4 in your package enumerates some actions we've taken as a result of the review. We learned a great deal through this process and are now in the process of enhancing our internal control testing function and believe that increasing [of] organizational awareness and understanding of the importance of internal controls will significantly decrease the risk of errors in our financial statements. Specifically, senior management is focused on improving processes and controls by conducting ongoing compliance, accounting policy and controls training for its accounting and finance staff and increasing awareness and ensuring effectiveness of the Company's whistle blower line.

Re-establishing proper oversight within the accounting and finance functions, enforcing the journal entry policy and improving controls requiring appropriate analysis documentation and approval for all journal entries. Strengthening the capital accrual process by requiring appropriate analysis and approval of any proposed adjustments.

Requiring consistent application of the capitalization policy through training, along with enhanced clarification on areas requiring judgment. And improving the process for recording adjustments to oil and natural gas sales arising from adjustments to asset acquisitions, dispositions or equalizations.

I'm very pleased with the thorough and timely process which has allowed us to restate our historical and second quarter financial statements today. I would like to thank our lending syndicate facility members and our senior unsecured note holders, our shareholders for their patience and all of our stakeholders for their continued support as we work through this challenging time.

And, I believe that once you've had an opportunity to understand the impacts of the restatement you will find that Penn West is becoming more resilient and stronger on the financial side of the business as a result. I'd like to turn the call now over to Dave for some remarks on the operating side.

Thanks, David. It deserves saying that I'm very happy you joined Penn West and I'm appreciative of the tremendous effort you and your team and many others in our organization have put forth in helping us reach this day. Before I comment on the second quarter, I want to add my views on the meaning of today's announcement.

First of all, my colleagues at Penn West and I are appreciative of those who have supported us publicly or otherwise. Through this review process, I have seen the same attributes in our handling of this situation as I have seen in how we have managed to become better and as the fuel to our drive to ultimately be the best operators in the areas we focus on. Directness, diligence and speed. Our collective confidence in our strategy remains intact and [as] fact-driven and numbers-driven people, we welcome the fact that we now have a solid foundation with which you can measure our performance.

To that end, this next slide recalls a graphic we first introduced last year to describe our focus as a management team in how we would define success here and our road map across all 1,200 employees from where we are taking our Company. We said we would focus on value added production growth, driving an industry-leading light oil position in three core areas to solid total growth and importantly, meaningful growth in oil production. We promised balance in our spending with operating capital spending matching our capabilities and capacity to deliver efficiency and effectiveness for every dollar we invest. As well as dividend surety to our investors.

This focus and discipline ultimately leads to increasing funds flow and lower debt loads. What you can see from this four square of charts is that our plan is intact and we expect to be able to deliver on our targets over the planned period.

While we have experienced some diminution in the early plan with respect to funds flow a result of restatement. Our total cash generating position and that's what really matters in this business, remains unchanged.

I've said it before and will repeat it. The fundamentals of our business are intact. Our asset position is unquestioned.

Our people are talented and looking forward to delivering on our targets. And if nothing else, our decisions and follow-through over the past 15 months should tell you that Penn West is disciplined and will absolutely do the right thing every time.

And so while our minds are clearly turned to finishing strong in Q3, and turning our attention to Q4 and beyond, we are pleased to highlight our performance in a solid second quarter today. Clayton will go over some of our standard charts but I wanted to note some of the things that excite me about our future here from the quarter's performance.

We delivered actual volumes as noted in July of nearly 106,000 barrels of oil equivalent per day, 65% of which were liquids. Quarter 1 activities in the Cardium, Slave Point and Viking supported volumes as did a limited number of wells completed in the quarter itself. Importantly, uptime continues to improve and our performance equates to a sustained approximate decline rate of a peer leading 20%.

We continue to make progress in cost control as cash cost declines kept pace with the production base we continue to refocus and refine. And we expect our cost base to be quite attractive as we shift in the near future to a growing production profile. We continue to pursue programs to improve our processes and execution as we will continue to drive costs from our business.

While spending was light in the breakup quarter, we hit the ground running into Q3 with 8 rigs to start and now 10 across the business, which we expect to support our confirmed annualized production targets of 101,000 to 106,000 barrels of oil equivalent per day. For me, the best thing to say about the quarter is that we are finally putting ourselves in position to compete in our core areas and in the case of strong commodities to benefit from consistent performance and improving cost structures. Again, showing discipline in doing the right thing.

Finally, I want to thank my colleagues at Penn West for their focus and discipline exhibited over the past few months. The level of professionalism we are building here shows through in our operating performance and again, many thanks for our many shareholders who have stood with us through the review and restatement process. We appreciate it and we look forward to rewarding your trust.

I'll look forward to your questions in a few minutes. Clayton?

Thanks, Dave. Referring now to slide 7. And our financial and operational results. Penn West second-quarter 2014 was exceptionally strong from an operational performance perspective as alluded to by Dave and delivered financial performance that was in line with our expectations. Funds flow of CAD298 million or CAD0.61 basic per share in the quarter compares with CAD269 million or CAD0.55 per share in the first quarter of 2014 as restated.

We improved our balance sheet quarter-over-quarter with a CAD[260] million reduction in net debt. Reported operating costs of CAD15.20 per BOE in the quarter was lower than expected as a result of success in our ongoing cost reduction efforts which caused our operating cost accruals to be too high.

Accordingly, we have reduced our operating cost accruals to more accurately reflect costs which resulted in a reduction of CAD26 million to our reported number or CAD2.65 on a BOE basis. However, we would suggest that our operating costs of CAD19.12 per BOE in the first half of 2014 before the effect of the accrual adjustments is more indicative of our future and ongoing performance.

As Dave mentioned earlier, we remain committed to further reduction in operating cost performance from these levels. We also announced in our release this morning that our 2014 capital budget has been revised from CAD900 million to CAD820 million to reflect our reclassification of CAD80 million of the budget from capital expenditures to operating expense in connection with the restatement of certain of our historical financial statements.

Now we cannot be more clear on this next point. In contrary to reports in the media this morning, there is no impact on planned development capital activities for 2014 as a result of this adjustment to our guidance. We will deliver on our 200 well program. With respect to the dividend, the Board of Penn West this morning declared a third-quarter dividend of CAD0.14 per share to be paid October 15, to holders of record September 30.

Turning now to slide 8. Funds flow increased approximately 11% quarter-over-quarter to CAD298 million. While funds flow was improved with the strong -- pardon me, a strong commodity price environment, cost control was a positive contributor as well. This allowed us to capture essentially all of the increase in net sales prices in the quarter.

As Dave said, despite being a limited capital quarter, our second quarter was exceptional from a volumes perspective. Increased production reliability and strong development results all contributed to production volumes that were higher in the first quarter after adjusting for divestments.

Before the effect of adjustments, average production delivered from our development program was 105,702 BOEs per day. And exceeded consensus estimates.

Recall that on July 29, 2014, we reported second quarter volumes of 108,130 BOEs per day. That included just over 2,400 BOEs per day of adjustments resulting primarily from closing amendments on asset divestitures and equalization adjustments completed earlier in the year.

As a result of the internal review it was determined that just over 1,400 BOEs a day of those production adjustments should have been recognized in prior quarters. Accordingly, reported second-quarter production volumes now include just over 1,000 BOEs a day of adjustments. However, we do continue to focus on the performance delivered before these adjustments in the quarter which was the 106 figure and [in] that which remains unchanged from our July release.

Turning now to our balance sheet. As I noted earlier, total debt was reduced by CAD269 million in the quarter, driven by reduction by CAD128 million in the reported value of the outstanding senior notes. And also CAD151 million reduction in networking capital. Of the CAD128 million reduction in senior notes, CAD69 million of that was attributable to change in foreign exchange rates, with the remainder resulting from the repayment of amounts due at maturity.

Of the CAD161 million reduction in net working capital, it is typical to see accounts payable balances decrease relative to accounts receivable in low activity periods. Accordingly, a reduction of CAD163 million in payables was the main driver of this change in networking capital. All of this increases our financial flexibility and remains a key focus for us moving forward.

Turning to slide 10. Looking at our trend in quarterly cash costs. They do tend -- they are continuing to trend down and have decreased approximately 20% or over CAD80 million year-over-year. Nearly CAD55 million or two-thirds of these reductions were driven by structural cost changes in enterprise under our control.

On an annualized run rate basis, these structural changes translate to projected annualized savings of over CAD222 million. We remain committed to driving further reductions in our G&A and operating cost structures and expect our cost profile to continue to improve as a result of our ongoing continuous improvement activities.

In summary, we continue to streamline our business and improve our processes in the second quarter. The Company has reduced its headcount by almost 50% since its high mark in late 2012. And together, with dramatic improvements to date in development, planning and execution cycle times, we expect our work flow and cost structures will become increasingly more competitive.

As described in our long-term plan, the Company remains focused on increasing the value of every barrel we produce through better capital efficiency, better cost performance, and more consistent delivery. In essence, we are actively recreating our Company. While we continue to improve on the behaviors and decision making from our past, our present operational delivery performance and the belief that we possess an unrivaled future potential in our core light oil areas gives us great confidence in the direction we are taking Penn West.

Operator, that concludes our formal remarks. We would now like to open the call [up] to questions.

(Operator Instructions)

Your first question comes from Brian Christianson with Dundee Capital Markets. Please go ahead.

Thanks, guys. Just a couple questions here. Clayton, you mentioned the CAD19.12 per barrel op cost being indicative go forward. Do you see that through the second half of this year or do you see continued improvement? I know you had 20% improvement year-over-year to date. You must see some further improvement through 2015?

Brian, this is Dave. I think we just wanted to guide to a number that we think is a pretty good starting point from what we accomplished structurally. We are engaged in a number of continuous improvement activities and we are still committed to the decline rate we talked about when we released our long-term plan last year. So we'll see those improvements. I just think they'll probably start to slow down a little bit from the rapid pace of improvement that we've seen over the past four quarters.

Okay. Thanks. On the G&A obviously you've had some big changes but with respect to go forward 2015 from where we're at today, are there more things to happen around the edges on the G&A front?

This is David. We continue to work through our structure on the G&A front and I think you'll see some really positive effects of that as we move forward into 2015.

Great. And then lastly, on the flurry of class action lawsuits, can you comment on any potential impact that you see that having?

It's Keith Luft here. I can comment on that. Clearly, we take very seriously any and all litigation that Penn West's involved in very seriously, and we are treating this like nothing out of the ordinary. We've taken efforts to retain what we believe are extremely competent counsel, both in the United States and Canada, and we will defend these actions vigorously. We can't comment on them at this point, though.

Okay. Thanks. Just one last question. With respect to your Duvernay, you mentioned logging the well. Can you comment at all on the reservoir quality and/or what the costs -- were costs in line on the drill side there?

The costs were largely in line with what we expected. We ended up drilling the well to 1,900 meters lateral length, so a little bit longer than expected. So I wasn't surprised by the drilling costs and I would say that we were very pleased with what we saw from the log.

Thanks, David.

Your next question comes from Chris Bolton with Perren & Partners. Please go ahead.

Good morning. Just wondering how much CapEx you plan to spend this winter?

Good morning, Chris. Well, let me expand on that because I think we're, as we've reported, CAD260 million through what our program is in low 800s. And so for the remainder of the year, obviously looking at spending circa CAD560 million. I think what we would say is that on a quarterly run basis, we're going to see between CAD200 million and CAD300 million for Q3 and Q4, shaded to the high end in Q4. And I wouldn't think that, that range is out of bounds for the beginning of Q1 in next year, just to give you a frame of winter. Unless you think winter's going to start next week again.

In terms of production, do you have an idea when your divestment program might end and you start seeing production growth on a quarterly basis again?

I won't comment specifically on the end of a divestiture program. But what I will say is the long-term plan that we released last year in one of the slides that I highlighted earlier clearly indicates that we expect the beginning part of 2015 to be an inflection point for us and I think that we're still very confident with that timing.

Great. Those are my questions. Thank you.

(Operator Instructions)

There are no further questions at this time.

Thank you very much, Stephanie and thank you all for your participation this morning. We do look forward to speaking to you again when we report our third-quarter 2014 results in early November. Thank you and good-bye.

Thank you. This concludes today's conference call.