Obsidian Energy Ltd (OBE) 2015 Q1 法說會逐字稿

Good morning. (Operator Instructions) I would now like to turn the call over to Mr. Clayton Paradis, Manager of Investor Relations. Please go ahead.

Thank you and good morning. Welcome to Penn West's 2015 first-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; General Counsel and Senior Vice President, Corporate Services, Keith Luft; Interim VP, Finance Mr. Matthew Wetmore; and welcome our newly-appointed Vice President, Finance, David Hendry.

Dave Roberts will begin the discussion this morning, providing his opening remarks, and David Dyck will then provide a brief update on several developments on the financial side of the enterprise. And I will wrap up the call this morning with a review of our financial and operational results in the quarter before moving on to Q&A.

We will be referencing a webcast presentation in conjunction with this call this morning, which is available via the webcast and also on our corporate website at PennWest.com. Before we begin I'm required to review our customary advisories.

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 so 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. 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 assumptions that were applied in drawing any conclusions or making any forecasts or projections reflected in the forward-looking information is contained in our 2015 first-quarter results presentation being webcast today. It is available in our website and is contained in our first-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 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. I'm very pleased to report that we had a solid quarter, producing nearly 95,000 barrels of oil equivalent per day and delivering funds flow of CAD112 million from production operations, prudent financial management activities, and continued cost improvements across the business.

Penn West's first-quarter results provide a clear indication of the Company's ability to execute and perform in a challenging and volatile commodity cycle. Over the past 18 months, we have established a strong platform for this enterprise to accomplish excellence through all cycles. We remain disciplined and focused on achieving our goals and delivering on our targets, and I am confident we are making important and positive steps to ensure a strong future for Penn West and to provide our shareholders with long-term value.

We are well-positioned for the remainder of the year and maintain our current 2015 guidance, subject to our previously-mentioned capital review during the second quarter. We believe it is prudent to defer this decision to ensure capital is allocated with greatest efficiency and to maximize profit and performance over the longer term.

Our decision on the remaining CAD425 million budgeted for 2015 is based on expected commodity and cost trends, and at the same time, balances operational continuity and efficiency against the Company's relative leverage position. Crude oil prices improved in recent weeks and is now reasonably consistent with our 2015 budget pricing assumptions of CAD65 per barrel, taking into account the Canadian-US FX rate. Penn West Viking and Tier 1 Cardium programs continue to attract capital at these levels and provide strong rates of return.

While the Company's operational performance was solid, I found the most positive outcome of the first quarter for Penn West was watching how our people responded to a challenging period of time in our industry with resilience, constant effort on improving our business, and, importantly, real grace. Across all of our departments, from drilling to finance, and all of our operating areas, each of our employees continues to play a role in our continuous improvement story with sustainable success as our goal.

We continue to demonstrate industry-leading performance in drilling and completion costs and delivering 63 gross new wells and 68 gross new wells onstream in the quarter, including a Penn West record 38 new wells delivered in the Viking play in the quarter. This cadence in the Viking is all the more impressive given the breakup season that was roughly a month earlier than last year's event and was delivered without a single lost-time injury, another testament to the high standard of excellence being demonstrated at Penn West.

Importantly, we continued to learn in our plays and experimented with a new well placement scheme in the Pembina area, which we will test in the second quarter, and a lower intensity frac design in the Viking that could reduce our well costs consistently under $700,000 per well, with limited expected impact on well performance. We continue to be ruthless in our capital allocation, as demonstrated by nearly 85% of our capital dollars going to the drill bit and 90% of our investment program focused on the Cardium and Viking.

Before Clayton reviews the core slide deck, I will now turn the call over to David Dyck to discuss several of our ongoing efforts to ensure the financial stability of our business.

Thanks, Dave. Let me begin by introducing our new Vice President of Finance, Dave Hendry, who just joined Penn West last week. Dave was formerly VP and Assistant Treasurer at Talisman Energy, where he has spent the last 17 years of his career.

Dave has an extensive and broad financial skill set and experience base, which includes treasury, tax, financial reporting, risk management, and strategy. With his significant experience and exposure to the oil and gas industry, Dave will be a great addition to our team. Welcome, Dave.

I would also like to thank Matthew Wetmore for assisting us as Interim Vice President of Finance for the past number of months. Matthew has been a valuable business partner to me and has done an outstanding job in this interim role. Matthew has agreed to stay on for a short period of time as he helps Dave transition into his role.

The first quarter of 2015 will long be remembered for record low oil prices reaching levels of $43.46 per barrel and averaging $48.63 per barrel, levels we have not seen since April 2009. In response, Penn West actively reduced its 2015 capital expenditure program in December from CAD840 million to CAD625 million and materially reduced its quarterly dividend from CAD0.14 to CAD0.01 per share. These steps save the Company over CAD400 million from our planned cash outflows this year.

As at March 31, 2015, the Company remains within its financial covenants under our bank agreements and note agreements. The net debt bridge slide as you see demonstrates that in spite of low prices in the quarter, our net debt was essentially flat quarter over quarter, based on the items that are within our control. Unfortunately, foreign exchange rates are not one of the items that we control and so there was also a CAD168 million increase in debt as a result of the weakening Canadian dollar.

As a company we have been focusing on the things that we can control to improve our operating performance and our financial help, and this slide demonstrates the effectiveness of our responsive actions in the quarter. With limited planned development spending in the second quarter and proceeds from previously announced sale of royalty interest being applied against outstanding long-term debt, we expect much lower debt levels at June 30. 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.

In addition to reducing capital expenditures and cash distributions, Penn West recently announced it had entered into an agreement to sell an 8.5% gross overriding royalty in its working interests in a portion of the Viking play located in the Dodsland area of Saskatchewan, as well as certain of its existing royalties and mineral title lands located in Alberta, Saskatchewan, and Manitoba across a variety of plays.

Total cash consideration for these transactions is CAD321 million for normal closing adjustments. This transaction generates very attractive metrics for Penn West, and in particular, provides a significant reduction to our debt balances with a nominal impact to our EBITDA.

This deal will close in early May with the proceeds being applied to reduce our outstanding debt balances. This will reduce the debt balances we are reporting in the first quarter by approximately CAD321 million. We will continue in our efforts to structure and deliver innovative transactions that will improve the health of Penn West's balance sheet and capital structure.

In March, we had reached an agreement in principle with our lenders to provide for additional flexibility with our financial covenants through to the end of 2016. We are progressing toward finalizing the previously announced amendment agreements that will, among other things, amend the financial covenants as previously announced in March and which is expected to be finalized during the second quarter of 2015.

For many companies, financial covenants are the focal point of lenders, analysts, and equity investors, particularly in this commodity price cycle. There appears to be a somewhat disparate view, certainly within the analyst community, of Penn West's ability to continue to live within its amended covenants through 2015 and into 2016. I have directed my team to work with the analyst community after the quarter to ensure they have the information they need to fully understand our business, our strategy, and our financial model.

Based on the Company's guidance as set out in the press release dated December 17, 2014, and recently run on commodity futures forward strip pricing in the CAD55 to CAD60 per barrel range, our internal modeling does not forecast our senior debt-to-EBITDA ratio exceeding the amended covenant limits. And, in fact, we will be working within a sizable cushion to the upper limits.

You may have noticed that our disclosure in the quarter included an update on our hedging activities. The volatility in commodity prices, combined with our resolve to work within our amended financial covenants has prompted us to revisit our risk management programs. We have established floor prices on portions of our production for 2015 and 2016 in the range of $50 per barrel to CAD72 per barrel on short-term duration contracts.

All financial instruments and risk management programs will be closely monitored and strategically implemented to position the Company for long-term success and also balanced to maximize the benefit from a recovery in crude oil prices.

With that I will turn over to Clayton and we look forward to any questions you may have in a few minutes.

Thank you, David. I'm referring now to slide 7 of the webcast presentation, which shows our production and funds flow bridges.

Adjusting the production bridge first in the top right-hand corner of the slide, first-quarter average production of approximately 95,000 BOEs per day was delivered largely as a result of the addition of approximately 7,500 BOEs per day of new production volumes, which more than offset declines of approximately 4,700 BOEs per day.

This organic growth partially offset the reduction in volumes from the previously announced divestment of approximately 5,000 BOEs per day -- sorry, it was 7,500 BOEs per day which closed in December which had an impact in the quarter of approximately 5,000 BOEs per day.

What this illustration demonstrates is that on current levels of development capital spending, Penn West people and programs can deliver.

In the lower right-hand corner of the slide, we bridge funds flow quarter over quarter, which was approximately 18% lower, with the delivery of CAD125 million in fund flow in Q1. Clearly, the declining trend in crude oil prices that began in the fall of 2014 continued into the first quarter of 2015, and is reflected in the net revenue bar.

Partly offsetting this reduction were lower operating costs delivered from the successful implementation of cost reduction and field efficiency initiatives.

Looking more closely at quarterly cash costs on slide 8, the trend in total cash costs in terms of absolute dollars continued to trend down and has increased approximately 35% or over CAD120 million year-over-year. We will maintain our relentless pursuit to produce G&A and operating cost structures, and expect our cost profile to continue to improve as a result of our ongoing continuous improvement activities.

The progress we have made over the past 12 months has positioned the enterprise to continue to perform strongly even in the low commodity price cycle environment.

Moving on to operations, slide 9, Penn West's multi-asset portfolio improved inventory readiness and reduced cost structures provided optionality to adopt a development plan that was flexible and adaptive in this low cyclically commodity price environment.

Notably, we successfully brought a total of 68 wells on production versus a budget of 54, reflecting again our continuous efforts to drive toward a higher standard of excellence and remain best in class in our core areas.

First-quarter development activities proceeded as expected in all core areas on operated development spending of approximately CAD155 million, which was a little over 81% of total capital in the quarter and which we drilled a total of 63 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 Q1 2015 oil development summary table on this slide.

Quick updates in our core areas on slide 10, our Cardium. Penn West Cardium position is vast and has variability across the different regions. We continue to test different well designs and completion techniques to optimize cost and performance based on the variable reservoir characteristics and pressure regimes across our position.

The Cardium team continued to deliver impressive drilling and completion or D&C costs in the quarter. In Willesden Green, D&C costs averaged CAD768 per meter drilled and just under CAD176,000 per frac stage. In the Company's Pembina area, per well D&C costs averaged CAD606 per meter drilled and approximately CAD103,300 per frac stage.

The expectation for 2015 is for per-unit costs, which we measure on a meters drilled and a per frac stage basis, is to decrease throughout the year. The Company believes that these metrics are more appropriate compared to the measure across the different regions of the Cardium as well as the Viking, and across different operators versus absolute per well cost.

Water flood activities continued in Willesden Green and Pembina, and are performing in line with expectations. On the facilities side, we invested capital expanding two existing batteries, one in

PCU #9 and one in J-Lease, to handle incremental production and water injection volumes and prepare those areas for future developments in the second-half 2015 program and beyond.

In the Viking, the Company continued to target average all-ins per well costs of below CAD800,000 on a sustainable basis. Per well D&C costs in the quarter on a per unit measured basis were CAD476 per meter drilled and CAD55,355 per frac stage.

Again, with a focus on continuously improving efficiency and performance while reducing costs, the Viking team tested completions that utilized 12 frac stages per well of 12 tons each versus 15 by 15 that had been commonly used. Wells utilizing this new technique will be brought on production post-spring break-up and will be monitored for initial and sustained performance before being more broadly integrated.

However, as Dave mentioned earlier, with success utilizing this new frac design would give us line of sight to sustainable per well D&C costs in a CAD700,000 range.

A final note in the Slave Point where development activity in the first quarter was limited, we had drilling and casing of two wells, one in Otter and one in Red Earth, to retain lands. And these wells will be completed and tied-in at a later date as economic conditions improve.

With that, I will now turn the call back over to Dave for concluding remarks.

Thanks, Clayton. I think as David Dyck mentioned, we could look back on the first quarter as unprecedented in terms of the decline in crude prices that we saw during the quarter, and it all of our resolves, both at Penn West and across the industry. While we're not out of the woods as an industry, we can certainly see the glimmers of a recovery on the horizon.

For us at Penn West, we are now operationally stronger as a result of the changes that have been achieved since we announced our long-term plan about 18 months ago. And we believe the stock continues to offer significant leverage to recovery in crude prices.

It is important to note that the work that the finance teams have done to move closer to successfully amending our debt covenants will allow the Company to focus on operational excellence through the down cycle. We have continued to demonstrate continuous improvement in capital efficiencies and cost structures, and we'll continue to use this period of time to hone our skills to make sure that we are best in class in all the areas that we choose to compete in.

Our management and board remain strongly aligned with shareholders in terms of participating in and creating long-term value for all shareholders of Penn West. Importantly, our Company is made up of strong positions in core areas with proven low-risk oil exploitation opportunities. We have an extensive inventory of over 10 years of light oil drilling locations across the Cardium, Viking, and other plays.

And we have demonstrated that we are the best-in-class operator in these plays, both from the terms of our drilling and completion cost performance and our operating cost performance. Again, we believe the Company offers significant value as we currently trade at a steep discount to our net asset value and net book value, and look forward to continuing to create value for our shareholders.

Operator, that concludes our formal remarks. We would now like to turn to Q&A, please.

(Operator Instructions) Patrick Bryden, Scotiabank.

Good morning, gentlemen. Thanks for your time. I'm just curious on the top-line revenue; I guess what the strategy is behind embedding the CAD53 million monetization of FX forward contracts.

Why put it there and not really speak to it too prominently in the funds flow performance? And then I would also be curious in just the strategy for crystallization behind that.

Well, Patrick, the strategy for crystallization is to use that as an asset to assist us in our programs to reduce our debt, and that has been certainly a part of our strategy all along. So we've started to execute on that on a timely basis and use those funds in that way. In terms of its placement in our financial statements, we believe that is the appropriate place to put it, and it has been obviously vetted with our internal financial reporting team and our auditors.

Okay, and no intent to -- there was no discussion about maybe highlighting that in the text up front? It looks like it's about a dime of the funds flow of CAD0.22.

I think that's about the right number, yes.

Okay, and then just a quick question on the netback table. If we look at the natural gas [streaming] on page 5 of the MD&A, I just want to make sure the gas operating costs show up as CAD0.35 and the transportation is CAD1.95. Are those correct as stated ,or should I reverse those?

You should reverse those. Yes, that's something we just caught this morning, so there's a transposition item there. So thank you.

Okay, understood. Then just if I may, just some brief commentary on what the sustainable G&A and transportation numbers are there, given the reductions we've seen today.

In terms of the G&A, there were some adjustments, one-time adjustments in the quarter. So that -- our G&A is right in line with our targets, but there are some items in there that are one-time adjustments. On the transportation, we believe that is a sustainable level.

Okay, great. Thanks for your time.

Brian Kristjansen, Dundee Capital Markets.

Thanks. Hi, David. Can you comment on what you are expecting for 2015 royalty rate post your core sale -- royalty rates, sorry?

Royalty rates?

Yes.

They are not going to be materially different. It's a big transaction in terms of the cash, but we don't expect overall that that incremental royalty is going to materially move our royalty rates.

Okay. Then you mentioned having a sizable cushion on your senior debt to EBITDA ratio. Where do you have it modeled at peak in 2015 right now?

We have not disclosed that level of detail.

Okay. Thanks, guys.

Brian DiRubbio, Tipp Hill Capital.

Good morning, gentlemen; two questions for you. First one, as you think about your second-half capital plan, do you expect to drill more for the same dollar amount, or are you going to look to drill the same but spend less money doing so?

This is Dave Roberts. I think we continue to see reductions in our capital programs, both from our continuous improvement, and obviously vendor numbers are coming off as reported across the industry at 15% to 20%. I think right now, our view is that we're going to stick with the well count that we had indicated.

We do have the capacity to increase our well count in the Viking, and we look at that. But again, it's going to be against a backdrop of what we think capital is going to do. So I think the safest thing right now is to say we're going to drill the same number of wells. They will be cheaper, though.

Got you. Then for David, do you have any assessment of the cost of the amendments to the debt covenants yet?

No, we have not talked specifically about that, no.

Okay, are we going to get then the filing when it's completed?

Yes.

Very good, thank you very much.

(Operator Instructions) David Epstein, CRT Capital.

Thanks for taking my call. So you guys, you didn't change guidance, and the royalties that you sold and the royalties you provided in some of your own production, it is a small number of barrels. But correct me if I'm wrong, did Freeport say it was something close to CAD30 million of cash flow? And obviously, they put a CAD300 million valuation on it, which was a good transaction for you guys.

But can you help us explain how it affects your economics at all? Is guidance not being changed just because you had a wide guidance range and you'll make it up with some other cost cuts, or it's something else? Can you help us there?

I will start and then David can jump in. I think in terms of production, we feel like we have enough of a fairway to absorb the barrel that this is ultimately going to cost us and, obviously, other things that we will be looking at. So we felt pretty comfortable about saying we could still maintain our production guidance.

I think the important thing to note about this transaction and the way I characterize it internally is it is the performance of our people in terms of driving costs down, both from the drill bit and operating costs, that has created the space for us to be able to take this royalty and convert a year-to-year number, one of the ranges you suggested, and actually bring the value forward at a very attractive multiple to us.

So I think that's the main way you should look at that. And we do not believe that this sale basically impacts our go-forward ability to conduct our business. Dave, if you want to highlight anything else?

No, I think that's very well said. The economics -- we specifically chose these plays because these plays have the ability from an economic point of view to accept that burden, that additional burden. So we don't see it being a problem at all on a go-forward basis.

If I could, just two follow-ups related to that. So one is the unit costs that you delivered in Q1, does that seem like a reasonable run rate going forward the rest of the year?

The second question is on the royalty interest you owned, how did those used to get booked into financials? Was it -- did it contribute to a production in revenues with no associated cost?

On the second question, yes. On the first question, in terms -- you're talking about operating costs on a go-forward basis?

Right, say Q3 and Q4, a full quarter without the assets sold.

Yes. So the operating cost that we've got is certainly well within what our expectations were, and I think that would be a good characterization for the balance of the year.

Thank you.

Gordon Tait. BMO Capital Markets.

Good morning. Just a question on your horizontal water flood program and the Viking. What do your models show in terms of the potential increase in recovery factors in the wells or areas affected by the water flood?

And then just second piece, if you could maybe give a quick update on your asset disposition program; any movement on the resource packages for sale, or do you have any other non-core production packages that you are earmarking?

Yes, I will answer the question on the operating side. We have been pretty careful to this point talking about recoveries. Just broadly, Gord, I think what our experience is is typically, we think the Viking recoveries are 5% or less, and certainly 10% less on the primary side. And historically in the play in better rock areas, as in most primary to secondary type projects, we've seen a doubling of those numbers. And we got that project basically kicked off in terms of injection in the first quarter, and so we'll be watching it very closely.

Okay.

Gord, I'll answer your second question. I'll just kind of go back to my remarks earlier, and this was a very important and significant transaction for the Company. We will close this very shortly, and our teams are turning their attention to other assets that we will consider for disposition.

The benefit that we have got is that we've got top-tier assets, and we are being very innovative in the way that we are looking at that. And the key for us is to get a fairly high multiple for those without eroding EBITDA, because that is the metric that we are trying to improve is our senior debt to EBITDA ratio.

Obviously, I can't talk about specific transactions. You wouldn't want me to anyway, and so I will leave it at that.

Great, thanks.

There are no further questions at this time. I will turn the call back over to Mr. Paradis.

Thanks, Brian, and thank you all for your participation this morning. Appreciated the dialogue. We look forward to speaking with you again when we report our second-quarter 2015 results in late July. Thanks very much. Goodbye.

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