Obsidian Energy Ltd (OBE) 2014 Q4 法說會逐字稿

Good morning. My name is Rob and I will be your conference operator today. At this time I would like to welcome everyone to the Penn West Q4 and 2014 year-end results and 2014 reserve results conference call.

(Operator Instructions)

Thank you. Mr. Clayton Paradis, Manager of Investor Relations, you may begin your conference call.

Thanks, Rob. Good morning, everyone. Welcome to Penn West's 2014 fourth-quarter financial and operational results conference call.

With me in Calgary this morning is our President and Chief Executive Officer, Dave Roberts; Senior Vice President and Chief Financial Officer David Dyck; Senior Vice President of Production, Greg Gegunde; and General Counsel and Senior Vice President of Corporate Services, Keith Luft; Interim Vice President of Finance, Matthew Wetmore; and VP Corporate Planning Reserves and Analysis, Tony Horback. Dave Roberts will begin the discussion, providing his opening remarks, and David Dyck will then give an update on our efforts to improve the financial health of the enterprise. I will wrap up the call this morning with a review of our financial and operational results, as well as provide highlights from our 2014 reserves disclosure before moving on to Q&A. I remind listeners that we will be referencing the webcast presentation in conjunction with this call, which is available via the webcast and also on our website at pennwest.com.

Before we begin I am required to review our customary advisory. Penn West shares are traded 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 6 to 1 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 6 to 1.

All references to well counts are net to Penn West. And all financial statements are reported under International Financial Reporting Standards, or IFRS.

Certain information regarding Penn West and the transactions and results discussed during this conference call, including, 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 material factors that could cause our actual results to differ materially from any conclusions, forecasts or projections in forward-looking information, and the material factors and assumptions that were applied in drawing any conclusions or making any forecasts or projects reflected in the forward-looking information, is contained in our 2014 fourth-quarter results presentation being webcast today. It is available on our website and is contained in our fourth-quarter press release and MD&A issued 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 and operational measures 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, as noted earlier, to review disclosure concerning non-GAAP items and operational measures.

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

Thanks, Clayton. And good morning, everybody. Doubtless our audience this morning includes a variety of shareholders, analysts and debt holders of the Company, as well as members of the media, all trying to take away some message from our release today.

I think the clearest message I can offer is that the 1,000 employees at Penn West and our Board remain resolute in our pursuit of our strategic objectives of debt reduction, profitable growth and demonstrating basin-leading operational excellence metrics. It is the clarity of our strategy and the commitment of the Penn West team that will allow us to navigate the present difficult times.

Certainly the turbulence in the market since December can serve to overpower our 2014 results. But it would be a mistake to do so and would diminish the work my colleagues here have delivered for our stakeholders over the past year. To be clear, the decision we announced this morning that our note holders and banks have elected to stand with us is, I think, a direct result of the work we have done in the Company to build a platform for success and the long-term and sustainable nature of the resource base that provides a decade or more of opportunity to add value to the Company.

I'll take slides 3 and 4 together. For the full year we delivered funds flow of CAD935 million. Q4 funds flow was CAD137 million, impacted by the significant decline in commodities, largely in December. Production for the quarter was slightly over 97,000 barrels of oil equivalent per day, allowing us to come in above the mid point of our full-year guidance at 103,989 barrels of oil equivalent per day, 65% liquids-weighted.

Over 75% of our drilling capital was directed at our three core areas. And we delivered all planned development activities in the year for capital costs CAD88 million below our planned budget. We believe we are the cost leaders in drilling and completion performance in each of our core plays. Operating costs are down 30% year on year and G&A costs are down 20% year on year, with combined cash cost reductions exceeding CAD325 million from 2013.

Asset sales completed since the start of our plan have reached CAD1 billion, allowing us to reduce our net debt by over CAD975 million during this timeframe. The Company did realize a loss based on impairments to property, plant and equipment and goodwill related to assess outside our core areas, largely as a result of the commodity price environment. The remainder of the goodwill held by the Company relates to our three core areas.

In sum, we delivered operationally, netbacks were improved with cost control, and the Company ran close to 100% sustainability during the year. In short, we can say the Company works and can see a clear pathway to the future we defined in our long-term plan in late 2013.

We will continue to adjust course during this portion of the commodities cycle to ensure our sustainability. But with over 500 million barrels in 2P reserves, and a significant contingent resource base supporting years of development in our three core plays alone, we think our path to success is firm.

With that, I'll turn the call over to David Dyck.

Thanks very much, Dave. I'm going to focus my initial comments on slides 5 and 6 of the presentation. And this morning I want to highlight some very important developments that are at the heart of Penn West's ability to move forward in 2015 and continue to operate within a challenging environment that has been caused in part by the precipitous drop in commodity prices.

At the end of 2013, you'll recall that the Company announced a plan to divest certain non-core asset with an objective to reduce debt. Dave mentioned that we have successfully reduced our debt by close to CAD1 billion in 2014. At the end of 2014 Penn West was well within its financial covenants under our debt facilities.

In spite of the progress we have made on debt reduction we are still carrying too much debt on our balance sheet. And if oil prices continued to hover in the CAD45 to CAD50 range, we expect that we may experience some issues with our financial covenants during 2015. And, as a result, Penn West has proactively been in negotiations with our lenders under its syndicated bank facility and with the holders of our senior unsecured notes to ensure our financial flexibility.

Effective March 10, 2015, the Company reached agreements in principle with the lenders and the note holders to, among other things, amend its financial covenants for 2015 and through to the end of 2016. Specific details are set out in our press release as well as in our MD&A released this morning.

One of the key provisions of this agreement is that our financial covenants will be set at a maximum level of 5 times senior debt to EBITDA during this time period. This will provide the Company the financial flexibility we will need to continue our operations in our core areas while continuing to focus on debt reduction. The agreement provides that until March 30, 2017 we will offer net proceeds of not less than CAD650 million in the aggregate from any sale, exchange, lease transfer or other disposition of our property to prepaid at par any outstanding principal amounts owing to our note holders, with corresponding pro rata amounts from such dispositions to be used to prepay any outstanding amounts drawn under our syndicated bank facility.

The CAD500 million tranche of our existing CAD1.7 billion syndicated bank facility, which was set to expire on June 30, 2016, will be canceled. However, the remaining CAD1.2 billion tranche of the revolving bank facility remains fully available to the Company in accordance with the terms of the agreements governing such facility.

We have agreed to temporarily reduce our quarterly dividend commencing the first quarter of 2015 from the previously announced CAD0.03 per share to CAD0.01 per share per quarter until the earlier of March 30, 2017 and a time period where the senior debt to EBITDA ratio is less than 3 to 1 for two consecutive quarters ending on or after September 30, 2015. And this translates into additional cash savings of CAD40 million.

We also agreed to temporarily grant floating chart security over all of our property in favor of the lenders and the note holders on a pari passu basis. This security will be fully released on the Company achieving both a senior debt to EBITDA ratio of 3 to 1 or less for four consecutive quarters, and an investment grade rating on a senior unsecured debt. In addition to the proactive measures described above, the Company intends to continue to actively identify and evaluate hedging opportunities in order to reduce our exposure to fluctuations in commodity prices and to protect our future cash he flows and capital programs.

I'm now going to move to slide 7 which talks about our 2015 guidance. And we are reaffirming our guidance as outlined on that slide. And this includes a capital program of CAD625 million allocated primarily towards the Cardium and Viking light oil areas.

Our expected production for 2015 is forecast to average 90,000 to 100,000 BOE per day. And we are forecasting 2015 funds flow of CAD500 million to CAD550 million. As Dave mentioned we will continue to show discipline and focus with our capital programs, and ensure improvement in our financial health and provide the financial flexibility necessary in this environment.

I will reiterate that it is our intention to revisit our second half capital programs once we get to spring breakup. With the volatility in the commodity market creating a high degree of uncertainty, we feel it would be prudent to defer this decision until spring since it has no immediate bearing on our activity levels or spending plans today.

With that, I'll turn the discussion back to Clayton and look forward to any questions you might have in a few minutes.

Thank you, David. There's a lot of information here so I'll just try to hit the highlights here on the operational side.

Referring now to slide 8 on the webcast presentation, our financial and operational bridges. In the top right-hand corner of the slide you will see the quarter-over-quarter bridge. And you can see the fourth-quarter production was impacted primarily by the previously announced divestment of approximately 7,500 BOEs per day of certain non-core assets located in south-central Alberta. That closed December 1.

Production in the quarter was also impacted by shut-in of uneconomic production and third-party outages, which combined for a little over 1,000 BOEs per day on average. Also contributing to the production performance were results in certain development programs did not fully meet our expectations, which I'll elaborate on further on this point in our play updates in a few minutes. The chart in the lower right-hand side of the slide -- bridges funds flow quarter over quarter -- clearly the declining crude oil price has had a significant impact on results and delivered us funds flow in the fourth quarter of CAD137 million relative to CAD231 million in the third quarter.

Looking at our net debt bridges on slide 9, the chart on the left-hand side reflects the change in net debt quarter over quarter, which was modest, reflecting an active development spending profile, as well as lower funds flow generated as a result of the lower crude oil prices.

The chart on the right indicates changes in net debt year over year. Looking at just long-term debt excluding working capital, that was reduced by approximately CAD462 million, excluding CAD152 million in unrealized FX rate changes. Strategically the Company remains focused on achieving a debt to funds flow ratio of between 1 to 1.5 times through the execution of our long-term plan.

On slide 10, the trend in quarterly cash costs in terms of dollars continues to trend down, which has decreased approximately 18% or CAD70 million year over year. We continuously 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.

Moving now on to the 2014 reserve results, in 2014 the Company added 58 million BOE of proved plus probable reserves weighted 75% towards liquids. Penn West's light oil development programs delivered capital efficiencies of CAD21.98 per BOE in 2014. This metric represents the total development expenditures, including drilling, completion, equipping, and tie-in costs in the year, divided by only those reserves that were added from wells spud in the year.

This is a very strong result for Penn West, and we believe is a more indicative and competitive measure for light oil resource development in the western Canadian sedimentary basin. The Company continues to possess high-quality reserves, as represented by the relatively high percentage of proved developed producing reserves as a percent of total proved, and the relatively high percent of proved reserves as a percent of proved plus probable reserves, and by the high oil and liquids weighting of approximately 75%.

Penn West replaced approximately 156% of 2014 production, excluding the impact of technical and economic revisions, which is a strong result, demonstrating that our light oil development programs are delivering in our core light oil areas. The net present value of the Company's 2014 2P reserves, discounted at 10%, is approximately CAD7 billion, which on a per share basis is CAD14, using outstanding shares at year end of approximately 497 million.

The chart in the lower right-hand corner of this slide reconciles the change in the NPV10 of 2P reserves year over year. I'll point out that economic factors of approximately CAD715 million and divestitures of approximately CAD650 million in 2014 account for 70% of the reduction in the value year over year.

Moving on to slide 13, F&D costs are calculated in accordance with NI 51-101, which, if disclosed, are required to include the change in future development costs, or FDC, on a proved and proved-plus-probable basis. Given the impact to the calculated F&D cost from 2014 negative technical revisions and the changes to booked FDC, we believe it prudent to consider the three-year average F&D cost as a more representative metric, as it tends to average the effect of one-time events in a given year. This is also why we believe the operated development cost of CAD21.98 per BOE are more relevant since it measures actual capital efficiency achieved in a given year.

The operated development cost of CAD21.98 per BOE is consistent with our independent 2014 reserves report prepared by Sproule that carries an average 2P FDC cost of CAD19.62 per BOE, and our long-term plan development cost forecast of just under CAD19 per BOE. Future development capital for total provided plus probably reserves increased to CAD4.6 billion are year end 2014, relative to CAD3.5 billion at year-end 2013. The increase in FDC in 2014 was predominantly the result of newly book undeveloped reserve locations.

Other items that have impacted the change in FDC in 2014 are largely the results of advancements and changes in programs in the Company's Cardium and Big Hill business units which have incremental costs associated without corresponding reserves being booked, such as shifting to longer laterals of up to 1.5- and 2-mile laterals in the Cardium; waterflood programs requiring pattern realignment and additional infill drilling activity; and shifting to multi-leg lateral wells versus dual legs at the Peace River Oil Partnership property in the Big Hill business unit.

In addition, cost reductions due to the currently low commodity price cycle are not yet reflected in the reserve book at December 31, 2014. Management anticipates these cost reductions, as well as reductions in FDC due to activity efficiency gains, will be included in future reserve bookings ultimately.

Slide 14 -- fourth-quarter operated development activity proceeded as expected in all core areas on capital spending of approximately CAD181 million. And that included drilling of a total of 61.4 net light oil wells with a success rate of 100%. Over 90% of all net wells drilled were in our core light oil areas, as detailed in the Q4 2014 oil development summary detail on the lower left-hand side.

On a full-year basis the Company completed all planned development activities and drilled just over 185 net wells on capital investment of approximately CAD732 million, which, as Dave alluded to, was 11% or CAD88 million below budgeted capital of CAD820 million.

I'll quickly move on to the play updates on slide 15 and hit the highlights. For the Cardium, I will say the team continued to deliver impressive all-in construction, drill and completion costs, or CDC costs, in the fourth quarter.

The Willesden Green CDC cost averaged approximately CAD3.5 million per well. And in the Company's Pembina area, per well CDC costs averaged just under CAD3 million.

In 2014, the Company drilling and completion techniques continued to evolve, utilizing on average longer laterals sections and testing various frac densities and tonnage. The expectation for 2015 is per unit costs -- that is meters drilled and per frac stage -- to decrease through the year. We believe that these are more appropriate comparative measures across the different regions of the Cardium and across different operators versus using absolute per well costs.

Penn West's core land position spans over 600,000 net acres in the Cardium. The statistical approach we bring to the Cardium play concentrates efforts on maximizing the number of completions in focused areas with a current emphasis on proximity to existing infrastructure.

As alluded to earlier, there were certain programs in the fourth quarter that were impacted by completions in lower pressure areas of the reservoir in our southern acreage positions, which contributed to lower average volumes in the quarter. We're going to continue to monitor these programs for long-term performance and have incorporated these learnings into our development programs for 2015. But what this highlights is the importance of ongoing integrated enhanced oil recovery schemes in mature conventional light oil reservoirs.

In 2014 water flood activities continued in Willesden Green and Pembina, and are performing in line with expectations. Over time we continue to expect these that programs will mitigate natural declines, and increase the ultimate recovery of light oil resource in our Cardium areas as most of our pressures are optimized.

Development activities remain on track for the first quarter of 2015 within the Cardium, with a planned drilling program of 19 net wells, and development capital spending including enhanced oil recovery capital forecast to be approximately CAD117 million. The company expects learnings from our fourth-quarter 2014 to impact second-half 2015 programs.

On to the Viking, the Company continues to target average per well CDC costs in the Viking area of below CAD800,000 on a sustainable basis. Per well CDC costs in the quarter averaged approximately CAD780,000 compared to the Company average in the first half of 2014 at CAD840,000 on a per well basis. The first-quarter 2015 planned drilling program consists of 23 net wells with developmental capital spending including integrated EOR forecast to be approximately CAD32 million.

Of note, unseasonably warm weather in the Dodsland area in February led to the imposition of road bans, which impacted certain development activities. However, Penn West is on track to recover from these delays and expects to be back on target prior to break up.

In Slave Point, development activity in the first quarter of 2015 is limited, with the drilling and casing of two wells, one in Otter and one in Red Earth just to retain lands. These wells will be completed and tied in at a later time as economic conditions improve.

We are encouraged by the Slave Point program to date and now believe the per well long-term plan target of CAD4.5 million is achievable, utilizing certain of the techniques the Company tested in 2014. We'll continue to exercise discipline with a view to ensuring recoveries and longer-term production performance and sustainability before committing significant capital in this area.

I would now like to turn the call back over to Dave for his concluding remarks.

Thanks, Clayton. We're going to try something a little bit different. This is a show me company. We tend to like to let our performance speak for itself. But one of the things that we wanted to highlight coming out of 2014, and certainly the achievement of having reached a preliminary agreement with our note holders and banks, was to talk about some of the things that keep us excited about this company.

Clearly the amendments that we have been able to reach regarding our debt covenants allow us as a company to focus on what we do best -- operational excellence through a very difficult part of the commodity cycle. But the fact remains, as a company that currently produces 65% liquids weighting with a reserve book that's 75% liquids weighted, and that is the direction our plan was going to go. We have significant leverage to oil price recovery.

I think, importantly, we've demonstrated a strong continuous improvement bent in both our capital efficiencies and overall cost structures, and will continue to focus on those areas to improve our net backs. It is important to note that the management of this Company, both new and old, and the Board, both new and old members, are strongly aligned with shareholders, with a significant amount of our personal capital investment at risk, and focused on redefining oil and gas excellence in Western Canada.

I think the most important thing for us is we have an unparalleled asset base in our competitive set. Our core areas of the Cardium, the Viking and the Slave represent proven lower-risk oil exploitation opportunities.

We have a decade worth of inventory of light oil drilling opportunities. And as I mentioned earlier, we are the best-in-class operator in all of these plays. And it is a given our shares are currently traded at a steep discount to our belief in the share price and their net asset value and net book value.

With that, I'll turn it back to Clayton and we will be happy to take your questions.

Rob, That does conclude our formal remarks this morning. We would like to open the call now to questions please.

(Operator Instructions)

Your first question comes from the line of Travis Wood from TD Securities. Your line is open.

Good morning, guys. Just a question around hedging. I know it's been part of the strategy in the past to keep that leverage and exposure to the commodity. But with the steep shape of the curve, is there any market now in either in the US or, probably more importantly, the Canadian dollar basis to layer in hedges through the back end of 2015 into 2016 and into 2017? And are you having those conversations with the lending syndicate at the moment?

Travis, it is David Dyck here. As I alluded to in my comments that is exactly what we're doing. We are looking at all those options that you talked about and those discussions are active.

And is there a market for it as of today, or does there need to be --?

There is a variety of options that we have even today and so we are exploring all of those and we will do what makes sense, as I said, to ensure that we can continue on with our programs and also improve our financial flexibility.

Okay. And then, the conversations with the lenders, is there a minimum percent hedge that they want you to be at? Or how exactly do those conversations go?

No, there's no minimum. We'll obviously be sharing our thoughts and the plans with our lending group in terms of our risk management strategies.

Okay, thank you.

Your next question comes from the line of Jeremy McCrea from AltaCorp Capital. Your line is open.

Hi guys. Just a couple of questions here. I know you in the past have talked about trying to achieve CAD1.5 billion to CAD2 billion worth of divestitures. Has the timing changed on that, your expectations, and maybe even different plays? Like, is the Viking and potentially some Cardium assets up for sale now, as well?

Jeremy, it's David again. That CAD1.5 billion to CAD2 billion, that was the number, you are correct, it was established at 2013 -- at the end of 2013. We achieved a vast majority of that, CAD1 billion in 2014.

Before commodity prices took a dip at the end of 2014 and early into 2015, we had plans to continue on with our disposition program of primarily non-core and, in fact, non-producing properties. But where commodity prices are, that has caused us to put some of those plans on hold because the market has just moved away from us in terms of being able to sell those types of properties.

So, we've shifted our focus. And as people may know, we've got a couple of packages out of the Street. One of those is in Waskada, which is a very non-core area for as in Manitoba. And the other is we're looking at selling some of our royalty assets. Those don't have a significant impact on production or on funds flow.

Okay. Then maybe just a bit more clarity on the CapEx program you plan to look at after spring break up, what kind of magnitude could we expect -- like, another CAD100 million potentially cut or CAD50 million?

Jeremy, this is Dave. We're not going to speculate at this time. As we said, we said we're going to wait until after break up. Actually break up is upon us because of the warm weather we're having in the western part of the country. But we've got a couple of months to think about that and we'll reevaluate based on what we think is the best value for our shareholders.

Okay great. Thanks, guys.

(Operator Instructions)

Your next question comes from the line of David Epstein of CRT Capital. Your line is open.

Hi, thanks, folks. The first question is with the amendments to the covenants. Are there any fees or changes to coupon maturities or other features of the bonds?

Yes, as you would expect with this type of a deal, there would be incremental fees. We have not given specifics of those at this point. We've got a preliminary agreement, so we are moving now to a definitive agreement which we'll put into place by the middle of April of this year.

Okay. But the changes would be mainly fees as opposed to other features of the instruments?

We're not disclosing any specifics of those arrangements at this point in time.

Okay. I'm not trying to press on this but the revolver, that can still be used for paying down maturities of bonds?

No, the revolver is there for general corporate purposes, as it was designed originally, and is governed by the original agreements. The asset sales that we're planning to transact here over the next little while, our proceeds from asset sales will be used to prepay either the bonds or the bank on a pro rata basis.

Okay, I'm sorry -- are you saying that the allowed uses of the revolver, one of them is not to pay down bonds or are you not commenting?

The revolver cannot be used to pay down bonds.

Okay, thanks. And can I ask one non-credit question -- do you guys have any updated thoughts on maintenance CapEx and what level of production that would keep flat?

This is Dave Roberts. We have given guidance that the program we are on, by ranging out the Company at CAD90,000 to CAD100,000 is a pretty close approximation for a maintenance capital level.

And still the CAD600 million CapEx level?

Yes.

Just let me go back to your prior question. The revolver can be used to pay down our maturities as they come due on the bonds.

That's what I meant.

Okay, sorry. My apologies.

Thank you for clarifying. I appreciate it.

We have no further questions at this time.

Rob, thank you. Thank you all for your participation this morning. We look forward to speaking to you again when we report our first-quarter 2015 results in late April. Goodbye.

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