Obsidian Energy Ltd (OBE) 2015 Q2 法說會逐字稿

Good day. My name is Steve, and I will be your conference operator today. At the time I would like to welcome everyone to the Penn West 2015 second-quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

Mr. Clayton Paradis, Manager of Investor Relations, please go ahead.

Thanks, Steve, and good morning, everyone. Welcome to Penn West's 2015 second-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 Gregg Gegunde, and our VP of Finance Dave Hendry.

Dave Roberts will begin the discussion providing his opening remarks, and then David Dyck will 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 Q&A.

I 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 am 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 the conference call are in Canadian dollars unless otherwise indicated, and all conversion 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 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.

Certain information regarding Penn West and the transactions and results discussed during the conference call this morning 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 the forward-looking information and the material factors and assumptions that were applied in drawing any conclusions or making any forecasts and projections reflected in the forward-looking information is contained in our 2015 second-quarter results presentation being webcast today. It is available on our website and is contained in our second-quarter press release and MD&A issued today and in other reports on file with 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 websites noted earlier to review disclosures 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 thanks to those joining us on the call today. I know it's a busy morning, and we appreciate it.

In the quarter, Penn West continued to make progress steady progress on its long-term strategies with solid operational and financial performance beginning with the delivery of production that was within guidance at 91,164 barrels of oil equivalent per day weighted 69% towards liquids. This is a positive result considering the second quarter is impeded by spring breakup and new development additions are limited in the quarter.

In addition, we were successful in finalizing amending agreements with our lenders, improving our financial flexibility so that we can continue to focus on our core business.

Finally, we continued to advance on our target of reducing the relative leverage of the Company with the successful closing of several non-core divestments for total proceeds of approximately CAD414 million, all of which has been or will be applied to the repayment of outstanding indebtedness.

In total, I am pleased to report that net debt was reduced by approximately CAD500 million. As at June 30, 2015, the Company was in compliance with all financial covenants under its lending agreements. Principally our senior debt to EBITDA ratio was 3.2 times relative to a 5 times limit, and we had CAD700 million available on our credit facility.

Operationally, the second quarter was executed as planned and was focused on completion activities in the Cardium and Viking programs.

During the second quarter, we took advantage of the slowdown in activity during breakup to reevaluate our asset portfolio and second-half capital program in the context of lower commodity prices. We remain confident that Penn West development programs in the first half of 2015 are economic, even in the current commodity price environment and, as a result, we believe the best economic decision for the business is to maintain the majority of our second-half drilling program, which allows us to sustain operational momentum into 2016.

On the macro front, despite continued volatility in the commodity and foreign exchange markets, our realized prices remain fairly resilient. In fact, I view the second quarter, particularly in the latter half, as being very constructive in terms of crude pricing relative to our business model.

We had very positive net backs realized on the light oil portion of our portfolio in which we averaged over $28 per barrel of oil equivalent in the second quarter, even considering very poor NGL pricing in the quarter, and just over $23 for BOE for the first six months of 2015.

All crude oil prices on the Canadian dollar basis proved to be stronger and less volatile than anticipated through the second quarter. We are mindful of the recent price weakness and will act accordingly should these lower prices persist.

Of course, it is the people of Penn West that forged our results in the quarter. It is certainly to our benefit that we have a stress-tested group here as their experience and resolve in re-creating Penn West over the past two years has served us very well in this commodity cycle. We as a group remain focused on continuous improvement in our operations and our cost structures, working on those things we can control to deliver improving margins on every barrel we produce. I remain grateful for my colleagues here at the Company.

I will now turn the call over to David Dyck to discuss the many positive steps we've taken on the financial side of the business in the quarter.

Thank you, Dave. Good morning and welcome to our second-quarter conference call.

Now, as Dave mentioned in his opening remarks, we took some meaningful steps in the quarter to increase our financial flexibility and improve our balance sheet. On May 25, we announced the finalization of amending agreements with our lenders, which included modifications to our financial covenants. These amendments will provide us access to long-term liquidity required to navigate the current commodity price environment and will allow us to focus our attention on our operations. As part of these amending agreements, we will offer the net proceeds from non-core asset dispositions to prepay at par outstanding principal amounts owing to noteholders and to repay outstanding amounts under our syndicated bank facility on a pro rata basis until March 30, 2017, or until CAD650 million has been prepaid to our noteholders.

We have the ability to prepay further amounts to noteholders at par beyond CAD650 million from net proceeds from asset dispositions. It is, however, at our discretion and remains subject to noteholder acceptance. This will allow the Company to delever its balance sheet while providing the opportunity to reduce the fixed component of our debt structure, which generally bears a higher interest rate.

We are pleased to report that the full CAD316 million of proceeds from the royalty transactions that closed in early May was offered to lenders and was fully accepted. The pro rata amount was, therefore, applied to the prepayment of our outstanding notes with the remainder used to reduce amounts drawn on our syndicated bank facility.

Subsequent to the end of the quarter, the pro rata proceeds from the most recently closed CAD98 million in divestitures were offered to noteholders, and similarly the full amounts were accepted. We will prepay these amounts in early August and have already cashed our US dollar currency exposure on this payment.

We had also paid down the pro rata portion of this CAD98 million on our syndicated bank facility following the quarter. These transactions highlight significant progress in delivering on our plan to reduce our leverage to more competitive levels and to improving the focus and cost structure of our asset portfolio.

As you have heard me say in the past, EBITDA is key to surviving in this environment. In addition to realizing cash cost savings, we have continued with our hedging program to stabilize EBITDA by reducing the volatility in our revenues. We have achieved our target hedging levels for the quarter and continue to build on these positions into 2015.

The board at Penn West has declared a third-quarter 2015 dividend in the amount of $0.01 per share to be paid on October 15, 2015 to shareholders of record on September 30, 2015.

Transitioning to the financial results, a net debt bridge on slide 5 illustrates that despite low commodity prices in the quarter, net debt was reduced by nearly CAD500 million or 18% quarter over quarter. To put that into context, over the past 24 months, we've been able to reduce our debt by over CAD1.2 billion from a peak of approximately CAD3.4 billion in the face of volatility in commodity prices and exchange rates.

Within the second quarter, there are a number of moving parts in the debt capital structure that are worth highlighting. Clearly, the biggest driver of debt reduction in the quarter was the net proceeds from the sale of non-core assets. Notable was the reduction of our senior notes, which were reduced by CAD515 million quarter over quarter.

There were two significant events that drove this reduction. The first was normal course maturities in the quarter of [$]165 million in US denominated notes that were repaid with existing capacity on the Company's syndicated bank facility. The second was the prepayments from asset sale proceeds as I've described previously.

The reduction in the fixed portion of our debt has increased the financial flexibility we have within our debt capital structure. This will continue to improve as we further prepay our long-term notes from proceeds from additional non-core asset sales.

Lastly, there was a reduction of CAD275 million in the Company's working capital deficit. This is the result of decreased operational activity and lower associated spending during the spring breakup. Note that our cash balance includes the proceeds from the recent asset sales have been accepted by the noteholders but not yet paid.

In the first quarter, we received some questions on the detailed makeup of our funds flow. As shown on slide 6, we have now adopted a funds flow from operations metric in order to provide increased transparency into the funds flow generated directly from operations and to normalize for the volatility resulting from foreign exchange, hedge monetizations and debt repayments. We expect that this metric will be more comparable on a quarter-over-quarter basis and will demonstrate the consistent delivery of our operating performance.

In excluding financing-related transactions, which include gains on monetized and settled foreign exchange hedges of CAD42 million and realized foreign exchange losses on repayment of long-term debt of CAD74 million, the Company's funds flow from operations for the second quarter was CAD79 million or CAD0.16 per share.

Let's review our guidance. When Penn West last updated its 2015 guidance, the forward strip for crude oil was in the range of CAD65 Edmonton par. Since that time, crude oil prices have declined. Accordingly, the Company has reduced its Canadian crude oil pricing assumptions for full-year 2015 to CAD60 per barrel. For context, this is approximately equivalent to $50 per barrel WTI, adjusting for foreign exchange and transportation differentials.

In light of our lower pricing assumptions, as well as weaker than anticipated NGL realizations, the Company is updating its funds flow from operations guidance from CAD500 million to CAD550 million to a range of CAD350 million to CAD400 million.

Additionally, the capital budget has been reduced from CAD625 million to CAD575 million as a result of a deferral of certain projects and realized cost savings.

As part of our commitment to prudent financial stewardship, keeping within debt covenant thresholds and to reduce risk as we work to decrease leverage, we have continued to layer on additional hedges both during and after the quarter. Although we have seen a recent drop in crude prices, we were able to reach target hedge levels for the remainder of 2015 for both crude oil and natural gas. We continued to build our contract positions for 2016 in a disciplined and systematic fashion. At this time, our crude oil swaps averaged above CAD70 for each quarter through the end of 2016.

With that, I will turn it over to Clayton to review our second-quarter operational performance and I look forward to any questions you may have in a few minutes.

Thank you, David. Referring now to slide 9 of the webcast presentation and the production of funds flow operations produced, second-quarter average production of just over 91,000 BOE per day was delivered largely as a result of the addition of approximately 6,600 BOE a day of new production volumes which offset most of the approximate 6,700 BOE a day of base decline. You can also see from the graphic that production in the quarter was impacted by divestments of non-core production and the voluntary shut-in of uneconomic volumes as a result of lower commodity prices.

In addition, the second quarter is a series in which we plan for majority of our maintenance and turnaround activity, which tends to take a longer -- a larger relative portion of our volumes offline. This year the incremental impact in the quarter of this planned maintenance and turnaround activity, as well as the impact of third-party outages, was approximately 1,500 BOE per day relative to the first-quarter 2015.

In the lower right-hand corner of the slide, we bridge funds flow from operations quarter over quarter, which was approximately 10% higher with the delivery of CAD79 million in the second quarter. The increase is largely attributable to stronger commodity prices and lower operating costs, again relative to the first-quarter 2015.

Moving to slide 10, since the second quarter is affected by spring breakup conditions and the impact of new development additions is muted, we felt it would be helpful to take a broader view and look at the same bridge analysis on a six-month basis and compare performance in the first half of 2015 over the second-half 2014. What this analysis confirms is that even in a constrained capital spending environment and less programs and people have delivered new production additions that exceeds base declines over that time period.

On this next slide, we've been illustrating now that this decreasing trends in total cost for several quarters and continue to be successful in bringing cash costs down. Year over year, cash costs are down 25%. We understand that remaining competitive on cost structure is important to our success in a cyclical industry. We will continue to pursue reductions in G&A and operating costs structures and expect that our cost profile will continue to improve as a result of our ongoing continuous improvement activities.

Clearly, the improvements we have made over the last 12 months has put the Company in a better position to be competitive in the slow commodity price cycles.

In the table at the bottom of slide 12, you can see the development activity in the quarter was largely focused on completions in the Cardium and drilling completions in the Viking. In the Cardium, activity was evenly split between Willesden Green in the south and Pembina in the north. And in the first half of 2015, total well costs were reduced by over 20% at PCU 9, Pembina Cardium unit #9, J-Lease and Easyford. Because there was limited development activity in the second quarter and, therefore, no change from costs reported with our Q1 results, we expect to resume reporting on the cost performance in our four areas, including the Cardium with our third-quarter results.

Cardium well results as a whole remain generally in line with internal expectations, despite variances between individual wells or groups of wells. Development in the Pembina region was focused in the J-Lease and PCU 9 area during the first half of the year. Term performance in J-Lease wells continued to exceed expectations, while limited regions of lower pressure in PCU 9 are modestly affecting the performance of certain wells.

In Willesden Green, production performance on recently drilled wells has exceeded our internal expectations as we continue to further the Company's understanding of the reservoir pressure regimes in the area. We would expect that as we advance our understanding of the pressure regimes in the Cardium will ultimately result in less variability in well performance over time.

Cardium development teams initiated postbreakup activity with one rig started in late June and have since added four rates for a total of five currently operating.

After reviewing regional results on wells utilizing a sliding sleeve design, Penn West intends to pursue a cemented glider pilots in PCU 9 in the third quarter. The cemented liner system is expected to increase production control and subsequent water injections for improved water plug performance over time, which is in turn expected to improve overall project economics.

The team's second-half 2015 drilling plans include drilling and bringing six PCU 11 wells on production later this year. This is an emerging area for Penn West with the potential to expand the Company's inventory in an area that has not seen much development activity for the past several years.

In the Viking, the teams were able to accelerate planned second-quarter completions and tie-in activity due to dry spring conditions. Planned maintenance and downtime has also shifted from the second quarter to the second half of the year. As a result of these events, Viking production is up meaningfully relative to internal estimates.

For the second half of 2015, Penn West has improved furlough costs in part by transitioning to completions on a 12 stage, 12 ton technique from the previous 15 stage, 15 ton design. This innovation has resulted in per well savings of approximately CAD100,000 per well and is expected to further improve the Company's economics in an area that has seen meaningful recovery to date, despite potential for slightly lower initial production rates.

In the first half of 2015, the Company lowered its drilling and completion costs by over 15% from the second-half 2014. In the Company's second-half programs, the teams will be drilling several wells with longer horizontal sections in order to produce from reservoir beneath areas with surface access restrictions. While this will reduce the number of wells drilled, the expectation is to maintain overall economics and production rates.

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

Thanks Clayton. I spoke earlier about our review of our programs heading into the second half and how we remain confident in our business and our plans to continue to invest in and pursue our programs in a price environment that has moved from generally constructive in June to one that is more challenging. While I think the current macro is generally unsustainable, we continue to view a recovery to a more normal longer-term replacement cost world in my view $85 WTI as being skewed toward the end of the decade. In other words, a lower for longer scenario.

To that end, I thought it would be useful to share a couple of charts that might be helpful in illustrating why we continue to invest in our programs and why we believe investing in Penn West is a compelling option. Slide 13 maybe a bit busy, but it hits a number of themes we think are important.

First, in the top panel, this chart is one example of the work that is repeated by various investment firms that rank North American hydrocarbon plays. In this case, on a profit to investment ratio. Penn West core business and investment focus areas rate well on this comparison with the Viking plays being top quartile.

In the lower left, we focus on one area that is often overlooked when investors look at companies with a Canadian focus, the effect of foreign exchange. The weakening of the Canadian dollar has, in fact, buffered the most recent price swing.

Our example here shows our Edmonton par exposure at $50 WTI as approximately CAD60. Now this compares to actual numbers in the first quarter of this year's of $48.63 WTI yielding a par price of only CAD51.76. As we have virtually no exposure to US dollar service or supply costs, currency weakening has a positive effect on our investment metrics.

Finally, while we remain focused on debt reduction as a key priority, our current leverage position as demonstrated by the lower-right panel has improved measurably when cast on a dollars per barrel of crude developed producing reserves basis. We have the current liquidity and the asset base to work through this issue, even in the present environment.

Turning then to slide 14, we provide two graphics that show as various flat price scenarios the economic performance of our completed first-half programs in the Cardium, Viking and crop areas, which can also be used to estimate our performance in the remaining and similar second-half 2015 programs we are currently pursuing. Our analysis indicates even in the present WTI $50 world, our programs deliver solid operating net backs and rates of return. We believe this validates our long-term strategy of changing the Company by focusing our activities in our high-quality liquid space plays, namely the Cardium and the Viking.

Of course, the compelling value story in the Company is the deep inventory of opportunity we have in these core areas. Literally thousands of wells ahead of us. It's a fair statement to say we own our future.

We continue to make progress on our delivery model and are operationally stronger as a result of the changes that have been achieved since we announced our long-term plan of two years ago. Our focus today is squarely on making the business resilience in the current commodity cycle while maintaining our leverage to a recovery in crude oil prices whenever it occurs.

Again, thank you for your time and attention this morning, and we look forward to your questions.

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

(Operator Instructions) Travis Wood, TD Securities.

Just wanted to get a sense of production, if there is a chance that you could break down where the Cardium and Viking volumes are on average for the quarter, and do you have a sense of where those are at accurately?

This is Gregg Gegunde. In terms of the production volumes, the breakout from the Viking in terms of new developments, we added approximately 2,000 barrels of production here year to date. In the Cardium, the production that contributed to that number is approximately another 5,000 to 6,000 barrels and crops added another 1,000 barrels.

Okay. And then for the quarter itself, do you have a sense of where aggregate volumes are at when you add the vintage space volumes?

Yes, so the aggregate volume in total is just under 9,000.

Right. But if I breakout maybe another way the average of 91,000 for the quarter, how much of that was Cardium and Viking?

So the 91,000 average, yes, the Viking production average is about 2,000 barrels, and on the new development, 7,000 on the Viking, total production average, and the Cardium average production on there is approximately 28,000.

Perfect. And then with guidance unchanged at 90,000 to 100,000 for the year, what type of levers do you think you have here for call it halfway through the year to push volume at the top end of that range?

Well, Travis, I think that's a difficult ask because, as I said in my remarks, and kind of the way we run as a Company is we are focused on margins because we're focused on delivering economic performance here. And so we are not going to push to drive volumes to the top end of our range by exceeding our capital estimates in what we think is going to be a weak commodity space.

Thanks, guys. That's all for me.

(Operator Instructions) Brian Kristjansen, Dundee Capital Markets.

A couple of questions. Can you comment on the total current production or alternatively the volumes that were sold with the CAD97 million noncore sale?

[Kevin]?

We have not given that granularity.

Okay. With respect to -- can you provide some guidance on second-half royalties, because it looks like excluding the GCH, true-up royalties would have been single-digit in Q2?

Well, with the low commodity prices, obviously royalties are on a sliding scale, so you are quite right. They were single digit, and we would expect if commodity prices would continue on their current trajectory, that we would experience similar royalty rate through the third quarter.

Okay. And then lastly, on the CAD50 million CapEx cut, you mentioned a portion being cost savings, a portion being deferrals. Can you comment or quantify the portion that you are attributing to cost savings and deferrals, and then what has been deferred?

Again, Brian, we are not -- we did not give that level of detail in our press release.

Okay. Thanks, guys.

This concludes today's Q&A session. I would now like to turn the call back over to Mr. Clayton Paradis.

Thank you, Steve, and thank you all for your participation today. That's all the time we have for this morning, and we do look forward to speaking with you again when we report our third-quarter 2015 results in early November. Thank you very much.

This concludes today's conference call. You may now disconnect.