Obsidian Energy Ltd (OBE) 2014 Q3 法說會逐字稿

Good morning. My name is Mike, and I will be your conference operator today. At this time I would like to welcome everyone to the Penn West 2014 third quarter results conference call.

(Operator Instructions)

I will now turn the call over to Clayton Paradis, Manager of Investor Relations. You may begin your conference.

Thank you, Mike, and good morning. Welcome to Penn West 2014 third quarter financial and operating results conference call. With me this morning in Calgary is our President and Chief Executive Officer, Dave Roberts; Senior Vice President and Chief Financial Officer, David Dyck; Senior Vice President Production, Gregory Gegunde; General Counsel and Senior Vice President Corporate Services, Keith Luft; and Interim Vice President Finance, Mr. [Matthew Wetmore].

This morning Dave Roberts will begin the discussion by providing his opening remarks. David Dyck will then follow and offer his comments on the long term business plan in light of the current macroeconomic and commodity price environment and a preliminary 2015 outlook. I will wrap up the call this morning with a review of our quarterly results before moving on to Q&A.

I'll remind listeners that we will be referencing a webcast presentation in conjunction with the call this morning. The presentation is available via the webcast and also on our website at www.pennwest.com. Before we begin, I am required to review our customary advisories. Penn West shares are traded both on 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 six to one conversion ratio. However, it should be noted that the value ratio based on the current price of crude oil, as compared to natural gas, is significantly different from the energy equivalency conversion ratio of six to one. All references to well counts are net to Penn West. All financial statements are reported under international financial reporting standards.

Certain information regarding Penn West and the transactions and results discussed during this conference call including without limitation management's assessment 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 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 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 third quarter results presentation being webcast today which is available on our website and is contained in our third quarter press release and MD&A released today, and in other reports on file with the Canadian and US securities regulatory authorities.

All of which may be accessed through the SEDAR website, the SEC website 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 non-GAAP items.

I would now like to turn the call over to Dave Roberts for his opening remarks.

Thanks, Clayton. Let me first pause as we approach Remembrance Day and offer the thanks from the people of Penn West to the men and women who serve in our forces today as well as those who have served and sacrificed in the past. Your service makes possible the lives we enjoy today in this great country.

In many ways today marks the first anniversary we introduced with our long term plan for the Company last year at this time. And while I appreciate many people have a sense of angst for the Company and the industry in general in the face of the significant commodity price pull back experienced in the past 60 days, no one should lose sight of the very strong quarter and year our team has completed. This is a team that made and has kept some important promises. We have reduced corporate debt significantly.

Cash costs continue to fall and have come down an additional 23% in the last 12 months. Drilling and completion costs that we had reduced by 30% on average per well have been sustained with increasing activity levels. Production is within guidance for the third consecutive quarter and on track for the year. And closed asset sales will reach the CAD1 billion milestone mark later this year.

We're on track with our plan and look forward to 2015 and beyond as we move into growth, continue to cut costs and further improve our balance sheet. We built this business to be successful in the face of commodity price head winds. We expect to be able to show our supporters and doubters alike the tenacity of our people born out of can-do attitudes, focused on our processes and plans.

I'm excited about a business that has delivered an average production of 100,839 barrels of oil equivalent per day in the quarter with a 64% liquids weighting that generated CAD231 million in [funds loss]. In executing our third quarter capital program of CAD225 million, we drilled 73 net wells and put 39 net wells on production, setting the Company up for an improvement in fourth quarter volumes even with the late year closing of a previously announced asset sale.

Importantly, the improvements in our operational performance and deliver of production growth through the drill bit will offset this asset sale, allowing us to maintain our 2014 production guidance of a 101,000 to 106,000 barrels of oil equivalent per day and positioning us to deliver full year average production above the midpoint of that range. Penn West is delivering as promised. We are excited about our 2015 capitol budget and program and look forward to sharing the details of that plan with the market on the morning of Monday, November 17.

With that, I would now like to turn the call over to David to touch on some of our sustainability issues and our preliminary 2015 outlook.

Thanks, Dave. As Dave mentioned in his opening remarks, the recent pullback in Canadian energy equity prices since early September, and that against the backdrop of an equally precipitous fall in global crude oil prices during that period, has pushed Penn West supply deals over 10%. This has raised some concerns amongst some of our key stake holders including the analyst community and shareholders about our ability to sustain our dividend.

I can reiterate that the Company remains confident in its ability to fund its capital expenditure programs and continue to pay a dividend. We have modeled and assessed our business plan at commodity price levels well below our budget assumptions. The current annual dividend obligation of approximately CAD225 million net of dividend reinvestment plan proceeds represents approximately 25% of the Company's forecast funds flow in 2015, an amount that the Company believes is both reasonable and manageable.

On November 17, 2014, the Company will be releasing further details of its 2015 budget and updated long term plan. The updated long term plan will provide a renewed vision of growth in both production and profitability through a continued pursuit of operational discipline, cost control and focused capital programs on Penn West's core areas. What will guide our investment decisions in 2015 more than absolute commodity prices will be the duration in commodity price weakness.

Maximizing capital efficiencies and reliability in the delivery of production requires thoughtful planning and discipline. As a result, our programs for the first half of 2015 have been planned for some time, and we would not expect those plans to change. Should we continue to see commodity prices weaken can further below CAD75 per barrel through the second quarter of 2015, we may consider adjusting capital allocations in some of our second half capital programs.

We control over 90% of our capital investment allocations, and therefore, possess the flexibility to respond quickly and make the right decisions for the long term value of the Company and for our shareholders. As part of the third quarter results released this morning, we have provided a preliminary view of our 2015 plan. We are planning for a capital budget of approximately CAD840 million.

Our 2015 production is forecast to average between 95,000 and 105,000 BOE per day. This production base will generate funds flow of between CAD875 million and CAD925 million in 2015. Our placing assumptions remain essentially unchanged from the long term plan assumptions of a year ago with a Canadian light sweet barrel assumption of CAD86.50 per barrel, a natural gas price assumption of CAD3.69 per Mcf [eko], and a foreign exchange assumption of CAD1.04.

I will echo Dave's remarks and say that we are excited about and committed to our 2015 capital budget and look forward to sharing the details of that plan with you on the morning of Monday, November 17. Details of that conference call are expected to be provided on November 10. With that, I will turn it over to Clayton, and we'll look forward to any questions you may have in a few minutes. Clayton?

Thank you, David. Referring now to slide 5 of the webcast presentation I'll just begin a quick summary of third quarter results. Looking at financial and operational bridges, third quarter production is cyclically the lowest volumes quarter in the year because new development production additions tend to be weighted to the back end of the quarter due to field development activities ramping up post spring break up which tends to coincide with the end of Q2 and the beginning of Q3.

Because of this activity lag early in the third quarter, production tying activities don't typically occur until late August and early September, therefore, having limited impact on the average production volumes in the quarter. In addition to this lag, new production additions in the quarter, we also had significant plan maintenance and turn around activities. Collectively, the results tends to exaggerate declines in the period. However, looking beyond the quarter as new production additions late in the quarter provide incrementally greater impact in subsequent quarters and turn around activity is completed, we remain confident and would reiterate that our average corporate decline annually remains in the 20% to 22% range.

On the funds flow side, funds flow of CAD231 million is lower in the quarter on lower price realizations and higher costs related to maintenance and turn around activities. Importantly, we continue to show progress in delivering strong percentage of funds flowing net back per barrel against our realized prices in the quarter, and indication that our cost control efforts are taking hold and we would expect this trend to continue into 2015.

Turning now to our debt bridge, while total net debt increased modestly quarter over quarter, it was not unexpected, as we typically experience moderate declines in production and funds flow as reasons discussed previously and accompany this with an increasing capital investment as we ramp up development activity post spring break-up. However, on a year-over-year basis, net debt has been reduced over CAD660 million, primarily of result as of success in our divestment strategy and does not include expected proceeds of CAD365 million from the divestment announced on October 23, 2013.

In the third quarter, the CAD141 million change in net debt was driven primarily by an CAD83 million impact on the reported value of the senior notes due to changes in the unrealized foreign exchange rates as of September 30, 2014. Increasing our financial flexibility remains a key focus for Penn West.

Turning to quarterly cash costs, the trend in cash costs in terms of dollars continues to trend down and has decreased approximately 23% over CAD97 million year over year. While we continue to focus on further reducing our G&A and operating cost structures and expect our -- pardon me. We will continue to focus on further reducing 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. On the operational side of the business, as we ramped up development activity in the quarter, we invested CAD181 million of development capital, over 92% of which was concentrated in our core light oil plays.

Penn West is currently running nine drilling rigs, and we remain on track to complete all planned drilling for 2014. Directionally, this implies modestly higher development activity in investments as the pace and momentum from the third quarter carries on into the fourth quarter. In the Cardium Penn West invested development capital of CAD65 million and drilled 20 net wells and brought 7 on production. The majority of the wells are drilled in the Willisden Green area.

As planned, the drilling program in the second half of 2014 is featuring more multi-well pads that are expected to provide cost efficiencies and drive cost savings. We would expect this to carry on into our 2015 Cardium program. Year-to-date, Penn West has drilled 44 Cardium wells, versus a plan of 67, with the remainder expected to be spud in the fourth quarter. The Company currently has five rigs operating in the Cardium as planned to complete the 2014 program.

Water flood programs throughout the Cardium area are proceeding consistent with the Company's long term plans and are performing in line with expectations. Over time, the Company expects these programs will mitigate natural declines and increase the ultimate recovery of light oil resources in our Cardium areas as reservoir pressures are optimized.

On to the Viking, in the quarter, the Company invested CAD59 million of build on capital. The pace of drilling increased substantially compared to first half of the year with 48 wells drilled in the quarter which was slightly behind the plan initially due to the prolonged wet conditions in the area. A second rig was brought in early to recover schedule, and by quarter end, the program was back on track. Year to date, the Viking team has drilled 66 wells of the planned 101, and there is currently one rig operating to complete the remainder of the program in the fourth quarter.

In the quarter, high industry activity in the area increased service costs on the completion side of the business by approximately 10%. In addition, the Company recovered its drilling schedule from the effects of wet conditions which pushed per well drilling and completion costs marginally higher in the quarter to approximately CAD870,000 on average. It is important to note that because Penn West is a cost leader in the area, it was able to absorb these excess costs, and by quarter end average costs were turning back down toward an average of CAD840,000 per well; with a line of sight to getting per well costs down to our long term plan target of CAD800,000.

Leveraging off the positive results of the 16 wells per section down spacing program earlier in the year, the Company is continuing to test down spacing programs across the play. As the largest acreage holder in the core of the Viking play an expanded down spacing program would significantly increase the existing 400 to 500 drilling locations the Company currently has estimated. In the Slave Point it should come as no surprise, that the focus of the third quarter program was to test various drilling and completion techniques to further our understanding with respect to optimizing production performance, recoveries, and reducing cycle times and per well costs.

The Company invested development capital of CAD43 million and drilled five wells in Otter. In the quarter, the Company completed it's first acid frac stimulation in Sawn. Initial results are encouraging, and production performance on this well is equivalent to the Company's tier one type curve in a lesser rock quality part of the reservoir. All planned 2014 drilling operations in the Slave area are essentially complete with 19 of the planned 20 wells drilled. Development activities for the remainder of the year will be focused on completions and tying operations.

We are encouraged by our Slave Point program to date and now believe the per well long termed plan target of CAD4.5 million is achievable utilizing certain of the techniques the Company has tested this year. We will continue, however, to exercise discipline with a view to ensuring recoveries and longer term production performance is sustainable before committing significant capital. Now just a quick review of some achievements.

Net debt as Dave alluded to in the opening of the call has been significantly reduced in the first year of the long term plan. With over CAD660 million -- pardon me, a CAD660 million reduction realized to date which does not yet include proceeds from additional CAD355 dollars expected upon close in early December of the recently announced divestment. Operational improvements, discipline, and focus in investment have resulted in more reliable production performance in 2014. And as David mentioned, the long term plan has been prepared to position the Company for success in a low commodity-priced environment.

The Company remains comfortable with its ability to fund capital expenditures in conjunction with paying a dividend and assessed its business plan of commodity prices well below it's budget assumptions. We continue to work hard to deliver our targets and get better every day.

Operator, that concludes our formal remarks, and I would now like to open the call to questions.

(Operator Instructions)

Your first question is from Brian Kristjansen with Dundee Capital.

Good morning, guys. A question for David.

You mentioned adjusting capital allocations should prices stay low through Q2. Would you contemplate adjusting the dividend?

No. The dividend is intact.

And what I actually said was that we would consider adjusting capital if the commodity prices decline further. So at the current levels, there is no contemplation of adjusting our capital program.

Okay. And then on -- if they were to go lower, would adjusting capital allegations being adjusted and again no change to the dividend?

That's correct.

Perfect. Thanks.

And then with suspending the CAD43 million spent on development capital in the Slave Point drilling five net wells, I'm assuming that was not CAD8.6 million net per well? And how much incremental capital was spent outside of drill casing complete?

That's right. We're seeing a range of outcomes in our wells there, but typically, we still focus people in on well costs are generally CAD5.5 million, but there was an additional approximately CAD10 million spent on Eeyore activities in this area.

Got it. And with respect to -- I know you want to figure out before you commit more capital. Should the Slave Point progress, is there any issue getting acid to site if acid fracs are in fact what you do on a program basis?

No.

Perfect, thanks.

(Operator Instructions)

The next question is from [Bryan Derivio] with [Dix Hill] Capital.

Good morning, gentlemen. A couple of questions for you.

First, given last night what happened here in the states, can I get your thoughts on what you think would be more important for the Company longer term Keystone actually coming online or TransCanada happening? Which is more positive for the Company?

I guess, Bryan, first of all, it was an interesting night in the states, and some of us stayed up way too late watching it. But we're always grateful to live in Canada when we see things like that.

I think in either case, generally both of those lines are going to serve Penn West, because they reduce congestion in western Canada. So, we would not pick a favorite horse in that race.

So both would benefit you?

Correct.

Got you. Now, if I remember reading the disposition press release correctly, you had mentioned that the disposition of the producing wells that you have would also reduce your asset retirement obligation. Have you quantified that yet?

No. We don't quantify that on a deal by deal basis, but it's a significant number, and we'll be assessing and reviewing our overall NRO at the end of the year as we would normally do.

And also a couple of weeks ago Chevron sold their stake in Duvernay to the Kuwaitis sort of sets a marker for evaluation. How are you looking at that relative to your stake in Duvernay as you are trying to assess value for that property?

Well, the Chevron JV with the Kuwaitis is obviously in a different part of the field. But we view it as positive that there is more and more activity coming into the play.

I think we're looking forward to releasing all well results when the well comes on in December as we continue to look to realize some value out of that. But any activity is good activity. But clearly we need to establish our own benchmarks through our own performance in the sector of the Duvernay that we're in.

Got you. Final question. Outside of Duvernay, cab you give us a sense of how many acres that you have that are non-producing that you are targeting for further disposition?

That's a great question, Bryan. But that's not a real metric that we look at in terms of what it is we're trying to do here. If you want to follow up with us, we can probably do a better job of delineating that. I'm not going to throw a slag out there this morning.

I'll follow up with Clayton. Thank you.

There are no further questions at this time. This concludes today's conference call. You may now disconnect.