Obsidian Energy Ltd (OBE) 2015 Q4 法說會逐字稿

Good morning. My name is Shaun, I'll be your conference operator today. At this time I'd like to welcome everyone to Penn West's 2015 financial results conference call. All lines have been placed on mute to prevent any background noise.

(Operator instructions)

Thank you. Manager, Corporate Planning and Capital Markets, Mr. Mark Hitscheff, you may begin your conference.

Thanks a lot. Good morning and thank you for joining us on this conference call discussing our 2015 fourth quarter and year-end operational and financial results. Before we begin with our formal presentation, I would like to quickly address the short delay in the release of our results this morning.

Our new distributor, CNW, experienced major technical issues which delayed the transmission of the release. As a result, premarket trading in Penn West shares was halted on the Toronto Stock Exchange. CNW resolved the issue and we were able to disseminate our release prior to market open. We were informed by the Toronto Stock Exchange that Penn West shares commenced normal trading when the exchange opened at 9:30 a.m Eastern time.

We apologize for the delay. This issue was out of our control. We will now proceed with the call as normal.

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 Hendry. 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.

Before we begin, I'd like to point out that we will refer to forward-looking information in connection with Penn West and the subject matter of today's call. By its nature this information contains forecasts, assumptions and expectations about future outcomes so we remind you that it is subject to the risks and uncertainties affecting every business, including ours.

This slide and the appendix contain a summary of the significant factors and risks that could affect Penn West or could affect future outcomes for Penn West, which are discussed more fully in our public disclosure filings available on both the SEDAR and EDGAR systems. I would like to turn the call over to Dave Roberts.

Thanks, Mark. Good morning and thank you for joining us today. 2015 was a year that will be a long time seen forgotten. Many of us mark our careers by the economic cycles of our time in the industry. My own career began as the extended 1980s down cycle gripped the industry.

But, these cycles are necessary parts of our business and they shape us and typically make us better people, create better companies and allow the industry to better serve the world's energy consumers. For Penn West, the increased pressure of 2015 merely intensified the things we have been focused on since our transformation began in 2013. We have been steady and consistent with our emphasis on our operational capability, our cost structure, portfolio focus and reducing leverage.

As 2015 ended, we could reflect on delivering our operational targets through a focused capital program and very good execution. Our cost structure continues to improve at the drill bit, in our operations and in our support structure. It's not been easy. By example, reducing our staff counts by up to 2/3 is as hard as anything I've ever done. But the response of our people has remained positive and we have kept our eyes on the prize, a viable and stronger Penn West.

We remain active and successful in the divestiture market, creating positive value deals that continue to improve our business and portfolio and reduce our debt. The resilience, creativity and effort of our people is emblematic of what I think about when I think about oilfield.

We set about focusing this year on banking all of our successes and tightening down one more notch to live within our means. Continuing to focus on technical excellence, getting our financial house in order and being ready for the turn in commodities.

The important thing is that we are now a company that is fighting fit for a mid CAD40 oil well. The real truths about this Company remain. Demonstrated operational performance, demonstrated transactional capabilities, people who deliver on our debt promises, but most importantly, solid technical, operational, financial and management debt and a long run portfolio in the two most attractive live oil place in Western Canada, the Cardium and the Viking.

Importantly, our well results in both plays in the quarter demonstrate we are getting better. Cost-wise, technical completion skill, and results. And with our running room in both plays, literally nearly a decade, we occupy an unrivaled position.

The fact is, the market will turn and it will be companies like ours that have used this time to get leaner, get smarter, and get tougher that are going to succeed. Couple that with our portfolio and you have the formula for long-run success. That's the Penn West story which I'm proud to be a part of.

With that Ill turn the call over to David Dyck for further color and comments.

Thank you, Dave, and good morning. As Dave mentioned our top priority, 2015 was strengthening our balance sheet. We were successful in a number of initiatives that lowered our overall debt levels and increased our financial flexibility allowing us to exit the year with senior debt to EBITDA ratio of 4.6 times relative to a five times covenant. I'm confident in our ability to maintain the momentum of these initiatives in 2016 as we strive to continue to strengthen our balance sheet.

In the first quarter of 2015, we reached an agreement with our noteholders and banking syndicate to amend our financial covenants. This allowed us to continue focusing on operating our business and addressing our debt levels. Commodity prices have fallen by approximately 50% since that time and we've recently reengaged in discussions with our lenders to provide the financial flexibility that we will require in 2016 and beyond.

We believe that we are likely to be in compliance with our existing financial covenants at the end of the first quarter; however, if current strip pricing prevails, we anticipate that we will not be in compliance with our existing financial covenants by the end of the second quarter of 2016. In order to ensure continued compliance with our existing financial covenants, we are actively pursuing several options, including engaging with our lenders to amend our existing financial covenants, reaching agreements on additional non-core property dispositions and potentially monetizing favorable hedge positions if approved by our lenders.

Last year we generated CAD800 million in proceeds from non-core asset dispositions. This surpassed our CAD650 million asset filled target despite a challenging commodity price environment. We applied all the proceeds from these dispositions to reduce our debt. I remain optimistic that we can continue this positive momentum by transacting on additional non-core asset sales at attractive metrics.

On September 1, we announced meaningful organizational changes designed to streamline and right-size our business, reduce our cost structure and ultimately strengthen our balance sheet. We stated that we will live within our means by limiting our total expenditures to funds full from operations while working hard to continue to drive our costs lower. To this end we suspended our dividend, lowered Board compensation and significantly lowered our current cost structure by reducing our workforce by 40% relative to mid 2015 staffing levels.

We also took significant steps to improve the transparency of our strategic direction, financial position and operating results for our stakeholders. We believe we are well aligned with our investors.

Our ability to deliver full year production capital, operating costs, and general administrative costs within or ahead of our guidance has resonated strongly with our investors. We are confident in our ability to meet our 2016 targets and will continue to demonstrate the consistency and delivery that the market should expect from our Company and that we demand of ourselves.

In 2016, our top priority remains to protect and improve the health of our balance sheet. Our capital program to the extent possible will remain flexible this year to ensure we live within our means. Investment decisions will continue to be driven by near term payout and economics, not production growth. We remain committed to assessing the return on every dollar we invest and where possible, avoiding the use of leverage to fund further growth.

As I mentioned, 2015 was a strong year operationally as we delivered full-year results within or ahead of our guidance. Full year production volumes averaged 86,357 barrels of oil equivalent per day above the midpoint of guidance, and that is despite capital expenditures of CAD470 million which were CAD30 million below our planned spending levels for 2015. Our focus on reducing costs drove full year operating costs of CAD18.96 per barrel of oil equivalent below the bottom end of our guidance range.

As a result of asset sales, our long-term debt decreased by approximately CAD300 million compared to the third quarter and is now below CAD2 billion. Our successful divestiture program was partially offset by an unrealized foreign exchange loss of CAD151 million for the year as the majority of our senior notes are US dollar denominated.

I consider our A&D team one of the best in the industry and I'm very proud of their accomplishments, allowing us to significantly lower our debt in this difficult environment. We acknowledge, however, that we must continue to drive down debt through additional asset sales and continue to look for ways to reduce our cost structure on all fronts, capital, operating, and G&A.

We generated CAD36 million of funds flow in the fourth-quarter which was down by CAD9 million from the third quarter. Importantly, while net revenue was CAD33 million lower quarter over quarter, impacted by the sale of non-core properties and lower commodity prices, this was more than offset by a CAD36 million reduction in operating costs compared to the third quarter of 2015.

During the fourth quarter of 2015, we recorded non-cash property, plant and equipment impairment charges of approximately CAD600 million after-tax. In addition, we fully rolled off remaining goodwill of approximately CAD700 million.

The property, plant and equipment impairments were driven by a decline in forecasted commodity prices and a reduction of future development of capital as several of the affected areas are considered to be non-core and potential disposition targets. Of the total impairment, CAD130 million after-tax was attributed to the Cardium area which in addition to lower commodity price forecasts, was the result of the reduction in future development costs associated with this area to align with our current year capital budget. As commodity price forecast fluctuate we will assess our capital plans which could lead to an increase in activity in the Cardium area and the possible reversal of this impairment.

Goodwill was accumulated in the past through a number of past acquisitions and doesn't necessarily make sense in the current environment. With the decline in forecasted commodity prices and the associated asset impairments booked in the fourth quarter, we fully wrote off the Company's remaining goodwill. All of these impairments are non-cash charges that do not impact our funds flow from operations or EBITDA metrics.

We have a hedging program in place to help reduce the volatility of our funds flow from operations and improve our ability to align our capital programs. During the fourth quarter we were limited in our hedging activity due to the weakness of commodity prices, but we seek opportunities to continue to systematically layer on additional positions for 2016 and 2017 in order to extend the length of our hedging program. All of our existing oil slots are priced at around CAD70, WTI.

Looking forward I want to discuss our 2016 budget and how it reaffirms our new strategy. The capital budget is consistent with the September 1 announcement that seeks to limit total expenditures to fund flows from operations. Note that total capital includes both capital expenditures and decommissioning expenditures.

Our 2016 budget focuses on economics and cash flow rather than production. We are committed to focusing on bottom-line results, not simply top line production.

We are only proceeding on investment opportunities with near term payout. Currently, we believe it is prudent to wait for commodity prices to rise or cost to fall before investing capital to drill Viking or Cardium wells. We have and will continue to shut in production that is uneconomic which enhances our funds flow.

We are also significantly reducing our cost structure. We expect a further 20% decrease in our absolute operating costs in 2016 on a same field basis. This metric excludes the benefit of any A&D activity that we may execute in 2016. This is especially important as it will allow us to lower our operating costs on a per-BOE basis despite declining volumes. Furthermore we expect to reduce our annual G&A by CAD15 million to CAD20 million relative to our September 1 targets.

By running a balanced budget that generates free cash flow at current prices, we have created a culture of focusing on factors that are directly in our control. As factors beyond our control change, we too will change to ensure that we deliver on our strategy.

Last year our capital budget was CAD500 million. Our actual capital expenditures were CAD30 million lower and came in at about CAD470 million. This year we are aggressively responding to the significant decline in commodity prices by planning capital spending levels of approximately CAD50 million or 90% lower than last year's budget.

We expect that 30% of these expenditures will be focused on operating development. In particular we have completed work on wells drilled at the end of 2015 in the Viking and Cardium areas. And we'll fund our portion of development at our Peace River Oil Partnership joint venture net of amounts carried by our partner. At this time we do not anticipate starting work on any new wells in the Viking or the Cardium.

A further 30% of our budget is allocated to nonoperated projects. However, we expect that if current price levels persist our partners will seek to delay spending in some of these opportunities and to the extent that these projects are delayed, we would carefully evaluate whether to reinvest these savings or pay down debt. A significant portion of the remaining capital will be allocated for the replacement of critical infrastructure at core properties largely in the Cardium where some investment is required to maintain the reliability of our base production.

We are maintaining our 2016 guidance previously announced on January 28. Our annual production is expected to be between 60,000 and 64,000 BOEs per day. Our exploration and development capital budget for the year is set at CAD50 million with an additional CAD20 million to be spent on decommissioning expenditures.

We expect our operating costs for the year to be between CAD18 per BOE and CAD18.75 per BOE, with our G&A for the year between CAD2.50 per BOE and CAD2.90 per BOE. I will now turn it over to Gregg Gegunde to give you an operational and reserves update.

Over the course of 2015 we positioned ourselves among the top operators in our core plays. This is an important milestone as operational excellence remains a key tenant in the transformation over the last 2.5 years. Although Viking is a relatively mature play we continue to advance our execution capabilities as we refine our drilling and completions methods.

This year we transitioned our completions to a 12 stage, 12 Tonne technique from a previous 15 stage 15 Tonne design. This innovation in addition to other initiatives has resulted in a per-well savings of approximately CAD300,000, and well productivity has remained steady. We expect our drilling and completions cost in the Viking to be approximately CAD540,000 per well going forward.

We have now reduced our drilling completions costs in the Viking by nearly 40% from the second half of 2014 to what we can execute today. Additionally when we get back to drilling operations we believe that we can further reduce our per well cost by approximately 10% by transitioning our well designs from a 1/2 mile to 1 mile lateral sections, where supported by our land position. In Willis and Green we achieved stronger results in the second half of 2015 by targeting higher pressure zones with nearby waterflood support using an open hole fabric system with a bulk drop completion technique.

Through 2015 we drilled five wells that each averaged over 600 BOEs per day for the first 30 days on production, with one well over 900 BOEs per day. In Pembina at our J Lease area, we also improved well performance as we moved from an open hole to minted liner system with slickwater fractures. Additionally we expect that the cemented liner system will improve waterflood performance through superior water injection control and increase future waterflood economics.

Although the productivity of these wells has been impacted by existing infrastructure constraints in the area, we believe that the strong test results that we've observed are very indicative of the capability of this reservoir. Through 2015 we drilled four wells in Pembina with test reads in excess of 500 BOE in a single calendar day.

Next we look at our year-end reserves on page 15. Our proof plus probable reserve volumes at the end of 2015 were 306 million BOEs with a Net Present Value before taxes and discounted to 10% of CAD3.4 billion. On a total proved develop producing basis which is the most conservative measure the industry typically publishes, reserve volumes were 177 million BOE with a Net Present Value before taxes and discounted at 10% of CAD2.5 billion.

I would also note that nearly 60% of our total crude plus probable reserves were proved develop producing. Our proved plus probable reserve life index remains strong at approximately 13 years. We believe all these metrics continue to demonstrate the significant long term value of our assets. Our operated development cost at just over CAD17 per BOE continues to reflect our efficiency in converting resources into reserves, and undeveloped reserves into developed reserves in our core areas.

We calculate operated development costs as Penn West capital spend on sludge divided by working interest portion of EUR that is based on technical ultimate recoverable volumes. We believe that the operated development cost is among the most tangible metrics to gauge our ability to bring production online in a cost efficient manner.

On slide 16 you can see that the reserves data further supports a strategy to focus our Viking and Cardium core areas. With roughly 75% of the reserve value and approximately 65% of reserve volumes on a proved plus probable basis being attributed to these areas.

On slide 17 you can see how reserves -- our reserve position has changed year-over-year. Approximately 70% of the reduction in reserve volumes was due to either dispositions or impacts of the reduced price environment. Including adjusting our future development capital to a more accurate -- to more accurately reflect the current price outlook. In particular the underdeveloped reserves and associated future development capital forecast was updated to more accurately reflect the current expectations for reduced future capital expenditures based on the low current commodity price outlook and Penn West's commitment to remain within free cash flow.

This process had been refer to on the chart as FDC alignment. FDC alignment accounts for 70% of the technical revisions on both proved and proved plus probable basis. Importantly, we believe that the majority of these future development related reserve volumes will likely enter reserve report in the future in a higher commodity price environment. The resources still in the ground and these locations are still part of our long-term inventory.

I will now turn it over to Mark to conclude our discussion.

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

(Operator Instructions)

Jeremy McCrea, Raymond James.

I'm not quite sure how much you can actually say but if you can, we're getting about three months away from covenants at the end of the second quarter here. What exactly are your lenders looking for from you guys here in terms of providing that covenant relief? If there is anything -- if you can provide any more clarity on exactly how the negotiations are going and what exactly they need to see from you guys before they will provide that covenant relief.

Yes, Jeremy, thank you. It's David. As you know, and as most of our investors know, we've had a very good relationship with our lenders, both the banking syndicate as well as our noteholder. But we really can't say much more than we've said in our comments here.

We're in early discussions with our lenders. Those discussions are certainly going positively and we'll just have to provide updates as they progress.

Okay. And maybe a second-up question, this is probably for Gregg, actually. You talk about drilling some pretty good Cardium results in these high-pressure areas near waterflood areas -- where waterflood has happened before, how many more follow up locations do you have right next to those areas?

And at what point -- what commodity price do you guys go back? Or like what kind of economics are you looking for before you potentially go back and start drilling some wells? I know you said higher prices, but if you can put in the actual number to that, that would be great.

Jeremy, so in terms of the amount of incremental locations that would be in these higher pressure areas, that's a number that we are still essentially working on. The overall area, probably drill in excess of 300 wells-plus. From what we've initially started to look at here, I'm going to say we've got at least another 200 to 300 areas that are in the high pressure zone.

The other thing that we are actually factoring in to this is we're looking at reservoir characterization in terms of beefing up or improving our existing waterfloods to increase that number as we move forward with this. And from the perspective of when do we go back in terms of drilling and things? When we get up into the CAD45 to CAD50 WTI range is when we would actually consider taking a drill back out there.

Okay. Good. Thanks, guys.

(Operator Instructions)

Greg Pardy, RBC Capital Markets.

Thanks, good morning. Just a couple questions from me.

Could you comment just on where your natural declines stands now just on a corporate basis? That would be the first question.

Greg, this is Gregg here. Natural decline on a corporate basis, right now we're in that 20% to 21%.

Okay. And then just with the program that you have laid out. I'm assuming that number is just going to flatten out even further. So you will be 20% or so -- 20% based upon the program this year? What's your thinking there?

I think this year even with the reduce program we will still be in that 20% to 21% range.

Okay. Great. And the other thing is, on the hedging, with the hedges then, is this really a combination of a WTI and an FX hedger, or did you actually just hedge in C dollars?

We hedged in C dollars.

Okay. Great. And then obviously just with respect to asset sales and so on. I will asked the question, I don't know what you're going to tell me, but is there any color you can provide around either targeted reductions in debt or processes underway or what have you? Just on the asset disposition side? As you mentioned, you were quite successful last year in getting things across the line.

Yes, we were, Greg. It's David.

We still see a significant amount of interest in packages we're looking to sell. As is our practice, I really can't give any projections or forecast at this point in time. Other than to say that as we enter into material contracts, we will press release those to the marketplace as required.

Okay. And then just the last question is on the pace of activity. The CAD45 million to CAD50 million number was mentioned. What would be -- any idea of just what the balance of spending looks like right now? That CAD50 million, is it first-half weighted or is it something relatively spread out? Just curious.

Greg, this is Mark. The spending is pretty level loaded. Where we could we've tried to defer the spending to the second half, particularly a lot of the non-op projects that we're still trying to get off the table are to the back half.

Okay. Great. Thanks very much, guys.

Chip Parker, Morgan Stanley.

Hello, thank you. In light of the fact that when most insiders that are there now came to work the Company, there's a good bit of insider buying at much higher levels. I was wondering if there's any anticipated activity now that stock is trading for around CAD1 per share?

Hello, Chip. It's Dave Hendry. Important question and we do appreciate that this is an important issue.

Management is aligned with shareholders in taking the necessary steps to ensure the long-term viability of the Company. And as you know, we've gone through several processes over the last year including dispositions, covenant amendments and our September 1 announcement, and this has impacted Management and the Board's ability for discretionary market purchases of shares. And I'm sure you appreciate the sensitivity and materiality of all these initiatives.

But with that said, we have an ongoing employee share repurchase plan whereby employees, including senior management, effectively direct 25% of our salary to purchase Penn West shares in a systematic, nondiscretionary basis. This insiders must disclose purchases through the automated purchase plans on [SETI], each calendar year by March 31, so in addition we also have the information circular which is filed in the spring. And which also includes the share holdings of our named executive officers.

So to close, the high level is that most of those purchases are done through the employee share purchase plan and that only gets filed once a year. So that's over the next month.

Okay. So that's why it hadn't shown up yet?

Yes.

Okay. Great. Thank you.

You're welcome.

There are no further questions at this time. Presenters, I turn the call back to you.

Thank you for joining us on the call today. We look forward to updating you on our progress when we provide our 2016 first-quarter results in May.

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