Obsidian Energy Ltd (OBE) 2015 Q3 法說會逐字稿

Good morning. My name is Keith, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Penn West third quarter results conference call.

(Operator Instructions). Thank you.

Mark [Hitscheff], Manager of Corporate Planning and Capital Markets, please begin.

Good morning, and thank you for joining us on this conference call discussing our third quarter operational and financial results. With me in Calgary this morning are President and Chief Executive Officer Dave Roberts; Senior Vice President and Chief Financial Officer David Dyck; Senior Vice President, Exploitation, Production, and Delivery, Gregg Gegunde; and Vice President, Finance, David Henry.

On this call we will provide a discussion referencing a webcast presentation, which is also available on our website at pennwest.com, before moving on to Q&A.

Some of the comments made on the call today, and certain statements contained in the presentation constitute or may be deemed to constitute forward-looking statements or information within the meaning of the Safe Harbor provisions of applicable securities legislation. These statements are typically identified by words which suggest future events or future performance.

All forward-looking are expressly qualified by the cautionary statements set forth on page 16 of the presentation, which also identifies the assumptions on which the forward-looking statements are made.

Although we believe that the expectations reflected in this-- in the forward-looking statements and the assumptions on which the forward-looking statements are made are reasonable, there can be no assurance that such expectations or assumptions will prove to be correct. You are cautioned not to place undue reliance on forward-looking statements, as there can be no assurance that the plans, intentions, or expectations upon which the forward-looking statements are based on will occur.

In addition, some of the comments made on the call today, and some of the statements contained in the presentation, reference certain financial measures that are not defined under IFRS. These measures do not have any standardized meaning prescribed by IFRS, and, therefore, they may not be comparable to similar measures presented by other companies.

Further information regarding non-GAAP financial measures can be found on page 15 of the presentation.

Now I would like to turn the call over to Dave Roberts.

Thanks, Mark, and thank you all for joining us this morning. Before I weigh in, I would like to look ahead a week to our celebration of Remembrance Day, and join all residents of Canada in thanking all members of the armed services for past and present service, and making this a great and free nation.

At Penn West, the third quarter continued to focus on our proactive approach to managing the business. Since our transformation of the Company began at the date of this call two years ago, we have been focused on building a competitive enterprise with emphasis on debt reduction, portfolio streamlining, and becoming a leader in operational capability.

That we have managed to stay on these focus areas, and, indeed, continue to meet our goals in the face of the most serious commodity cycle the industry has seen in the past three decades, is a reflection of the quality of our people, plans, and asset base.

It would be easy, I think, to miss in the daily flood of news from companies in our industry trying to weather the current environment, the fact that Penn West continues to focus on and deliver on the strategy which we have pursued since 2013.

We have announced or closed on asset sales of over CAD800 million in 2015. Our senior debt load will soon fall below CAD2 billion, with sale closings. Our cash cost structure is more competitive with a workforce at now one-third 2012 levels, the suspension of the dividend, a sharply focused capital program, and leadership from the Board in reducing their own compensation, as they help lead the Company in these challenging times.

But there's always more to do, and so, as we complete our programs in the Cardium for the year this month, we will only continue our carry programs in Pete's River, and the quicker payout opportunities in the Viking, working only three rigs for the foreseeable future, and in 2016 we expect to announce a spending program that will be balanced with our ability to generate funds, absolutely breaking the cycle of using debt to fund the business, and allowing each of our future asset dispositions, as we continue to hone the Company to its core base, to further reduce debt.

Outside of asset sales, we do expect that production will decline into 2016 at lower planned levels of investment. Our focus remains on the profitability of these investments we do make, and free cash flow generation from our business.

Our core business positions in the Cardium and Viking are resilient at current price levels, and our acreage positions are secure, and our resource base is well positioned for the likely recovery in the medium term for commodities.

In the quarter itself, while we noted some third-party pipeline issues that hampered activities, and which we expect to persist into 2016, we continued to see improvement in the things we do control. Aside from continuing improvement in our cost structure through organizational moves, including a 35% force reduction in the quarter, our teams continued to improve reliability, reduce calls on contracted labor, and improve our operating profit to enhance our effectiveness.

With the limited capital programs we did pursue, I can note some of the following highlights.

Following a disappointing end of 2014 in our Cardium program, as a result of poor initial rates in lower pressure areas of our acreage positions, our integrated approach to the geology and the reservoir characteristics of this quite complex field has yielded continued lower drilling costs, and markedly improved well results, both through location selection, well placement, and our move to more cemented liners in our completion.

We are certainly encouraged that three of our recent wells saw 500 barrels of oil per day rates over three-day periods, with a single day high in one well of over 1,500 barrels of oil per day, reinforcing our position as holders of some of the most attractive acreage in the play, with well results competitive with some of the industry's top wells.

And, while we often think of the Viking as settled science, we continue to press the cost curve lower, with our lower-intensity frac designs yielding similar results to our past practices, while pushing our drilling and completion costs in the quarter below CAD600,000 people well.

This bodes well for us, as we will look to expand the play into other areas of Saskatchewan, and, importantly, into Alberta in 2016. I'm also pleased that we're beginning to see the reservoir effects of our Avon Hills water flood, installed in the beginning of 2015. We're excited about this as we move into the future.

We have a solid strategy, based on valued that we think make sense -- keep a strong focus on what you do well. And for us, that's conventional oil development and production activities in proven plays, the Cardium and the Viking.

Get out and stay out of debt -- and for us, that's asset sales to reduce debt, and cost control and capital disciplines to live within our means.

And let our people be successful. For us, that's a streamlined organization, a culture of accountability, and a pledge to be safe and develop our Company's resources responsibly across western Canada.

Penn West is better positioned today than it at any time in its history to execute operationally and deliver value for our shareholders. If anything, the current commodity cycle has reminded all of the value of operating excellence and financial discipline. That's the culture of Penn West today, and our proactive focus on the future.

I will now turn the call over to David Dyck for some further detail on the business.

Thanks, Dave, and good morning, everyone. On September 1st, we outlined a clear plan to divest of non-core assets in order to reduce our debt levels. Throughout our the third quarter, we continued to surprise the market with our ability to execute upon this plan in a challenged market.

I'm pleased to say that since September 1st, we have been able to reach agreements on two of our non-core assets for proceeds of nearly CAD400 million.

Mitsue, the first of these two dispositions, was announced on September 16, and closed on October 30. In addition to helping reduce our debt, this divestiture had a minimal impact on funds flow from operations, as lost cash flows were effectively offset by expected interest savings.

This property had operating expenses that exceeded our corporate average unit operating cost. The sale of this property, thereby reduced our average unit operating cost by nearly CAD0.75 per BOE, and also increased our corporate average net-back by the same amount. Overall, a very accretive disposition.

Then, on October 1st, we announced the disposition of our non-operated Weyburn unit working interest for proceeds of CAD205 million. Similar to Mitsue, we were able to realize strong metrics such that the lost free cash flow is largely offset by the interesting savings.

Weyburn was a non-operated property that we had no opportunity to influence or control. It made all the sense in the world to sell it and use the proceeds in a more effective way than the cash flow it generated.

Year to date, we have generated approximately CAD810 million in proceeds from disposing of our non-core assets. This means we have surpassed our CAD650 million non-core asset disposition target, despite a challenging commodity price environment. The proceeds from these two dispositions will be applied against our senior notes and syndicated bank facility on a pro rata basis.

At the end of the third quarter, we remained compliant with all of our financial covenants. Senior debt to EBITDA was 4.3 times relative to the 5.0 time covenant. Additionally, at the end of the quarter we had ample liquidity available, with approximately CAD650 of undrawn capacity on our bank lines.

We appreciate that recently there has been a lot of focus regarding bank facility borrowing base redeterminations in our industry, but I would reiterate that we do not have a borrowing base loan. Rather we are a covenant-based borrower, meaning our syndicated bank facility is not subject to redetermination, review, or renewal until its maturity in May of 2019.

Our total debt increased by approximately CAD200 million during the third quarter. Roughly half of this increase was due to a weakening Canadian dollar, which increases the translated amount of our predominantly US-dollar-denominated senior notes.

The other half of the increase in debt was largely a result of our capital program in the quarter exceeding our funds flow from operations. We believe this highlights why we are so focused on ramping down activity through to the -- to year end, and limiting capital expenditures to funds flow in 2016.

Importantly, neither of our aforementioned dispositions closed prior to the end of the quarter, so, our ending debt balance does not reflect their benefit. Pro forma, the application of these proceeds to reduce debt will bring our absolute debt level to below CAD2 billion, and, with the adding working capital deficit, to just around CAD2 billion in net debt.

We agree with various comments made that while we are making good progress on our debt reduction, it is not enough. We get that. We will continue with our divestiture proceeds on additional non-core assets, and will provide updates as appropriate.

Looking at our options for additional divestitures, we feel we have quite a number of levers available to us. Furthermore, the monetization of our existing foreign exchange hedges remains a key lever for us. Given the progress we have made on our disposition program to date, we may no longer need to monetize our remaining foreign exchange hedges until next year.

In the third quarter, we reported non-cash impairment charges of CAD435 million, primarily related to certain non-core properties in the Fort St. John area of northeastern British Columbia, and in the Swan Hills and Wainwright areas of Alberta. This impairment was due solely to a decline in forecasted commodity prices compared to December 31st, 2014.

Additionally, as a result of entering into definitive sales agreements related to the Mitsue and Weyburn transactions we recorded non-cash impairment charges of CAD399 million on these two transactions, as the book value of these assets exceeded sales proceeds. Both of these impairments are non-cash charges that do not impact our funds flow from operations or EBITDA.

We have a hedging program in place to help reduce the volatility of our funds flow from operations, and, thereby, improve our ability to align our capital programs. During the quarter, we continued to systematically layer on additional positions in 2016, and have also started extending positions out through 2017, in order to (inaudible) the length of our hedging program. All of our oil slots are priced at around CAD70 per barrel.

In terms of our 2015 guidance, we have maintained the mid-point of our annual production guidance, but have refined the range to 85,000 to 87,000 BOEs per day from 84,000 to 88,000 BOEs per day.

Our capital budget for the year remains unchanged at CAD500 million. We continue to expect our operating costs for the year to be between CAD19.25 per BOE and CAD19.75 per BOE, with our G&A for the year between CAD2.80 and CAD3.05 per BOE.

I'll now turn it over to Mark to conclude our discussion on the third quarter.

Thanks, David. Looking at our third quarter funds flow from operation relative to the second quarter, we see that the decrease in net revenue represents more than the decrease in total funds flow from operations. Approximately 40% of this decrease was the result of a decline in commodity prices. The remainder was the result of decreased volumes due to several factors, including our dispositions that closed near the end of the second quarter, the third-party pipeline access issues Dave mentioned earlier, as well as the impact of turnarounds that were deferred from second quarter into the third quarter.

As Dave mentioned earlier, one of the key focus areas for us, operationally, has been to curtail our development program that we can reach our go-forward (inaudible) and keep our expenditures within our means. Where at the end of July we had 5 rigs running in the Cardium, we currently have 2 rigs running, both of which will complete their current pads by mid-November, and will be let go early as we head into year end.

We drilled 26 gross wells in the Cardium in the third quarter, but only 8 of these wells have been put on production. During the fourth quarter, we anticipate bringing on to production an additional 14 gross wells at the Cardium.

In the Viking, we drilled 33 wells, and will keep a single rig running through the year end.

In addition to the promising Cardium well performance, as well as the EOR response at Avon Hills that Dave discussed earlier, results on some of our recent farm-outs, as well as regional peer activity in both the Greater Viking and Cardium core areas, have been encouraging.

In the Cardium, we are evaluating the potential of additional variety, including up-hole opportunities in the Belly River, as well as deeper horizons in the Rock Creek and the Manville.

Similarly, in the Greater Viking area, we are looking at the prospectivity of other zones where we hold rights, such as the Manville, and the Bakken.

That concludes our formal remarks, so at this point I would like to turn the call over to the operator for questions.

Thank you. (Operator Instructions). Your first question comes from the line of Travis Wood with TD Securities. Your line is open.

Good morning, everybody. Just on the President's remarks, David, if you could put some color around the idea of ramping down activity to reach target pace and resulting capital run rate? Could you put some numbers to that as we look into 2016, potentially?

Yes, Travis, it's a good question, and we're not prepared to do that, because we're -- we're still talking to our Board, and we've not approved our budget for next year. We plan on doing that in the early part of 2016, but I think my comments and the indications of 3 rigs should give people an indication of the direction we're going.

And then related to the Cardium and some of the infrastructure issues that impacted Q3, do you see any of that coming back, or is there ongoing issues in terms of takeaway capacity as we finish off 2015?

Travis, this is Gregg Gegunde.

I think the issues that we have had over the span of 2015, we're seeing those coming off. We've made a lot of progress in terms of mitigating the issues that we have had with third-party carriers. So, we have a pretty good cleared line of sight in terms of not being impacted into the upcoming year end, more important concluding this year.

Okay, and then the last question, just in terms of what do you have in the market through public process today for more A&D activity, in terms of volumes?

The -- Travis, this is David. The public -- the only public process we've got is we've got a royalty package out there for some of our Alberta royalties.

Okay, that's all. Thanks very much.

Thanks, Travis.

(Operator Instructions). We do have another question from the line of [Su Rusen] from [Radiant]. Your line is open.

Good morning, gents. A question on debt. I know you mentioned (inaudible) not due until 2019, but then you have these other long-term debts, the notes that are due over the next several years. Could you talk about that timeframe and the process. Is it all to be paid through divestitures, or will you have other means to address that -- the payments, the debt coming due.

Yes, thank you. Thanks for your question, and just to clarify, our revolver is not due until 2019. We do, as you point out, have maturities coming due on our long-term senior notes. That maturity schedule is part of our corporate presentation on our website, but we have the ability to repay maturities as they come due on our long-term notes, using our revolver.

I see. Thank you.

Thank you.

Your next question comes from the line of Charlie Pine with Van Clemens and Company. Your line is open.

Good morning, gentlemen. I wonder if you could expand a little bit on some of the issues on the pipeline access that you highlighted in Q3 and that you are anticipating might be happening going forward into 2016, and just provide a little bit more color to us?

Yes. Charlie, this is Dave Roberts. I'll take that. Really we saw two main bodies, some issues with some of the oil-gathering lines in Saskatchewan in the Viking, and that was compounded by some wet weather that didn't allow us to truck. Those were basically turnarounds from the main pipeline carrier, largely completed, and we expect that even though they've had a few hiccups getting back to process that those will be largely sorted as we head into the winter here.

And then, in the Cardium, similar to a lot of people there, our issues relate to the TCPL pressure issues around gas handling, and I think most operators have confirmed that we're working hard with TCPL to allow them to get that work done. There's a lot of work to do, and we have a lot of optionality, because of the extent of our infrastructure in the Cardium, but we have seen those impacts, and we do expect TCPL to still be working on those issues throughout the next year.

So, we'll continue to see limited effects there, the oil effects in the eastern part of our business, not so much.

Okay, thank you. That was very helpful.

There are no further questions at this time. I'll turn the call back over to management.

Thank you for joining us on the call today. We look forward to updating you on our progress when we provide our 2016 budget in the new year. Thank you.

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