Obsidian Energy Ltd (OBE) 2016 Q1 法說會逐字稿

Good morning. My name is Melissa and I will be your conference operator today. At this time, I would like to welcome everyone to the Penn West first-quarter financial and operational results conference call.

(Operator Instructions)

Thank you. Mr. Paul Surmanowicz of Corporate Planning and Capital Markets, you may begin your conference.

Good morning and thank you for joining us on this conference call discussing our first-quarter operational and financial results. With me this morning is 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, 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 now like to turn the call over to Dave Roberts.

Thanks, Paul. Good morning and thank you to everyone for joining us on the call today. We should first pause and extend our collective thoughts to those affected by the wildfires in the northern part of the province. We hope everyone's friends and family are safe during this very difficult time.

2016 has persisted in a challenging commodity price environment for both the industry and the market. However, in the face of this difficult time, I'm pleased to report that we delivered a strong quarter operationally thanks to the relentless efforts of our teams. The great work accomplished in 2015 allowed us to start 2016 on very solid operational footing.

We continue to experience strong production performance from both of our two core plays, the Cardium and the Viking. As a result, our volumes considerably exceeded expectations, with average production of 77,010 barrels of oil equivalent per day, well above our 2016 full-year guidance. Additionally, a lower amount of production volumes were shut in than previously anticipated, which also contributed to our strong results.

All this is a direct result from our continued production reliability and exceptional operational execution that we had been building on over the preceding three years. We continue to endow our teams with the task to further discipline to strengthen our cost structure, and this quarter was no exception. We demonstrated excellent cost control and executed successful cost reduction initiatives, all of which have positively benefited the Company as evidenced by our results.

Our operating costs were significantly lower than guidance, at CAD13.02 per barrel of oil equivalent, and this was achieved from our ingenuities and persistent hard work to achieve stronger operational performance. In addition, G&A costs were CAD1.97 per BOE, again well below our guidance, due to the realignment of our staffing levels to best reflect our expected activity level throughout 2016.

We believe we can reduce our absolute G&A costs by an additional CAD15 million to CAD20 million in comparison to 2015, and we will continue to find ways to drive our cost structure down and improve our business. Consistent with our commitment to reducing our indebtedness, we were able to execute several dispositions, which contributed to improving our financial flexibility.

We announced in the first quarter approximately CAD230 million in dispositions. I believe we can achieve more and we will continue to strive for additional asset dispositions to further reduce our debt. Our top priority for 2016 remains the improvement to the health of our balance sheet, which I believe can be accomplished as we continue to seek improvements in our cost structure and our debt levels, so that we are well-positioned to move forward once commodity prices recover.

Although our path remains challenged at this point in time, I believe this Enterprise will persevere. We have the portfolio of assets, we have the talent in house, and we are working to have the financial strength to emerge from this depressed cycle even stronger than when we entered. With that, I'll turn the call over to David Dyck for further comments.

Thank you very much, Dave, and good morning, everyone. Let me start out by addressing our current senior debt compliance, and I would like to make it very clear that we were in full compliance with all of our financial covenants, as at March 31, 2016, including the senior debt-to-EBITDA covenant that was 4.4 times relative to a 5 times limit.

Additionally, and subsequent to the quarter, we paid our normal course senior note maturities on May 5, 2016 of CAD30 million using our existing revolving credit facility with our banks. We currently have CAD686 million of unused credit capacity available on our CAD1.2 billion credit facility and CAD224 million of cash from A&D proceeds. Consequently, we have more than adequate liquidity to meet our upcoming May 29, 2016 senior note maturities of CAD185 million.

As we have previously disclosed, we are currently engaged in negotiations with our lenders to amend our financial covenants prior to the end of the second quarter of 2016, which if successful, will mitigate the risk of default in 2016 and further into the future at prevailing commodity price levels. A successful agreement with our lenders will allow us to continue focusing on operating our business and addressing our debt levels.

These negotiations are complex and take time, as it is critical to get the proper deals done in place that meets both sides' needs. Accordingly, we have hired two very capable advisors supporting the negotiation process: investment banking firm Rothschild out of New York and Calgary-based PricewaterhouseCoopers. We are focused on reaching an agreement with our lenders in the current quarter; otherwise, at current commodity price levels, we believe we will not be in compliance with our existing financial covenants at the end of the second quarter.

In addition to engaging with our lenders, and in order to reduce the risk of default, we are continuing to pursue additional asset dispositions and considering several other options which may include obtaining additional sources of capital from strategic investors. As mentioned by Dave earlier, our top priority remains reducing our debt and improving the health of our balance sheet.

Although we have raised over CAD1 billion in cash proceeds from our disposition programs since the start of last year, we believe that there is still more that needs to and can be done. We have proven that our ability to transact remains strong throughout this price environment and we are confident that we can continue to execute on accretive deals.

We understand this is an uncertain time for our shareholders; however, while there are no guarantees, we believe we have the ability to move past this in hopes to continue our strategy of reducing debt, improving our balance sheet, achieving operational excellence, and ultimately increasing shareholder value.

As a result of asset dispositions, the monetization of foreign exchange contracts, and strong funds flow from operations, our net debt decreased by approximately CAD200 million compared to the fourth quarter of 2015 and by approximately CAD0.5 billion within the last six months. In addition, our net debt does not currently reflect previously announced proceeds from the sale of Slave Point and other non-core assets totaling approximately CAD180 million in proceeds.

We recognize that we must further reduce our debt through additional asset sales and stay focused on ways to improve our cost structure. During the first quarter, funds flow from operations totaled CAD47 million compared to capital expenditures of CAD18 million, demonstrating our commitment to live within our means. The increase to funds flow from operations was primarily due to our successful operating and G&A cost savings, which more than offset a reduction in net revenue from the weaker commodity price environment in the quarter.

We expect to continue our strong cost reduction efforts throughout the remainder of this year. As a result of successful cost savings initiatives and production results in the first quarter, we are pleased to announce that we are updating our 2016 full-year guidance metrics. Our exploration and development capital budget for the year remains unchanged at CAD50 million, with an additional CAD20 million to be spent on decommissioning expenditures.

Our annual production is expected to remain unchanged between 60,000 and 64,000 barrels of oil equivalent per day, after the effect of property dispositions closed during the first quarter, and including the approximately 3,900 barrels of production associated with the Slave Point disposition.

We are reducing our operating cost guidance to between CAD17 per BOE and CAD18 per BOE, down from CAD18 per BOE and CAD18.75 per BOE. We expect our G&A for the year to remain between CAD2.50 per BOE and CAD2.90 per BOE. I'll now turn the call over to Gregg Gegunde to discuss our operations.

Thank you, David. Last quarter, we demonstrated that despite the commodity price environment, we were able to continue our strong momentum from the fourth quarter of last year to execute on our program and meet or exceed our key operational targets. During the quarter, Viking and Cardium activity was limited to completing and bringing production on from previously drilled wells. We brought online 21 wells in the Viking and five wells in the Cardium.

On our Viking play in Dodsland, we continued the application of the 12-ton, 12-stage completion technique on the half mile laterals. This drilling and completions method has allowed us to realize additional cost reductions within the area. Moreover, eight of the 21 wells that were brought on production this quarter were drilled and completed utilizing a one-mile well bore design.

The stabilized wells have shown production performance to date that is well in excess of their respective type curves. We expect that the new application of the one-mile lateral design on our high-graded reservoir acreage will result in a reduction of our go-forward finding and development costs by an impressive 30%. We anticipate implementing this design where supported by our land position as we move forward with the expansion of our Viking play.

In our Cardium play, we brought one well on production in the Crimson area and four wells in the Pembina J-Lease area. In PROP, over the past year we have improved our drill, complete, equipping, and tie-in processes, consequently achieving significant improvements in cycle times. In addition, our spud to first production cycle time has been reduced by an impressive 90 days to 14 days through improved simultaneous operations.

We have experienced per well savings of approximately CAD1 million from the improved operational changes that we have implemented. For 2016, we are running a two-well rig program. This quarter, we drilled seven gross wells and brought 10 gross wells on production. Our activity for the remainder of this year is focused in PROP, where approximately 90% of our working interest expenditures continue to be paid by our joint venture partner.

Our capital program this year really allows us to focus on our strong asset base and continue to fine tune our processes for optimal performance and results. Our J-Lease program, including the wells brought on production in the second half of last year, continue to exceed our expectations with strong performance and low decline rates. In addition, in our Crimson area, we are also continuing to exceed expectations with production well above type curve.

Waterflood implementation and design work is proceeding in the Crimson area, as well. Last year, we announced that our J-Lease program was impacted by infrastructure constraints, as we experienced several gas gathering line failures, which restricted our production volumes. During the first quarter, we replaced 7-kilometers of the Station 8 pipeline to improve the reliability of the gas gathering system.

The project was completed under budget and significantly ahead of schedule. The pipeline has generated positive results by increasing oil production by approximately 1,000 barrels of oil equivalent per day post repair, with several fourth-quarter 2015 wells still being optimized.

In Willesden Green, we achieved stronger results in the second half of 2015 and first quarter of 2016 by targeting higher pressure zones with nearby waterflood support. The performance from these wells continues to exceed our expectations.

This slide is a great representation of successful cost-saving initiatives that we have undertaken. We have reduced our absolute operating costs at our existing properties by over 20% since 2013. This is primarily a result of our focus on operational excellent practices, resulting in improved run times, successful cost reduction strategies, staff realignment, and lower-than-anticipated macro cost environment.

In addition, we are confident that we have the ability to further reduce our absolute operating costs by an approximately 20% on a year-over-year [safe] yield basis excluding the impact of dispositions. I'll now turn it over to Paul to conclude our discussion.

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

(Operator Instructions)

Your first question comes from the line of Greg Pardy from RBC Capital Markets. Your line is open.

Thanks, good morning. Just a couple of questions. One is I'm just curious as to how much heavy oil you've now got shut in? Is it of 1,000 to 5,000 barrels a day? Then the second question is unit OpEx is going to have just a huge bearing on driving your numbers through the balance of the year and then into 2016, and a lot of the commentary you've made has been around reducing absolute costs, which would suggest those unit numbers will remain in relatively good shape even though your volumes are coming down. Could you give us any color on both those?

Greg, this is Gregg Gegunde. Your first question, in terms of how much heavy oil we have shut in, we have been just selectively choosing what type of production we have. It's not necessarily heavy oil. I can't really answer that question effectively in terms of what percentage is heavy oil, but the oil we have shut in is a combination of some heavy oil. There's other areas where operating costs were just a little bit higher and some gas production, as well so, it's a combination of all three elements. In terms of our operating--

And how much would that be then just in total on a BOE basis?

On a BOE basis, we're somewhere in the range of about 2,000 BOEs roughly.

Okay thanks.

The second part of your question was, if I heard you correctly, is how we are continuing to drive our operating costs as a function of declining production rates?

Exactly.

We, as I mentioned in the discussion there, we see approximately 20% reduction in our operating costs. Some of the things that we've done here over the past three years, as we refocus our efforts in terms of better planning, understanding our operations to a higher extent, we see our operating costs continuing to come down as we move forward with this. The offset, in terms of production losses, will carry essentially, but we see our overall costs coming down significantly.

Yes, [Greg]. I'll just add a little color to that. Because you're asking the question about what's the marginal number going to be, and you've probably already done the math, but I think the upper end of our prior range is suggestive of what our in-quarter costs could ultimately get to, so still really good performance, less than CAD19 a barrel.

Okay. Thanks for that, Dave. So you're suggesting it's potentially CAD19 by the fourth quarter of this year?

Yes, I think that's the upper end.

Okay, thanks a lot.

Your next question comes from the line of Brian Kristjansen from Dundee Capital Markets. Your line is open.

Thanks, guys. Following up on Greg's question with respect to shut-ins, you mentioned, Dave, at the beginning of the call, that part of the reason Q1 was better was because some of the previously shut-in volumes came on. Can you quantify what that amount, specifically in Q1, was? And is the 2,000 what is currently shut in?

This is Gregg here again. In Q1, the total amount that we've shut in, as I mentioned with the previous caller, is approximately 2,000 barrels of production, or BOEs, that we've shut in. Largely, that volume was in Q1, so that's approximately 2,000 barrels.

Okay, and there weren't previously shut-in barrels that came back in Q1?

No, there wasn't.

Okay, thanks.

(Operator Instructions)

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

Thank you, everybody, for joining us on the call today. We look forward to updating you on our progress when we provide our 2016 second-quarter results in the coming months.

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