Obsidian Energy Ltd (OBE) 2016 Q2 法說會逐字稿

Good morning. My name is Chris and I will be your conference Operator today. At this time I would like to welcome everyone to the Penn West second quarter financial and operational 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). Thank you. Paul Surmanowicz, Investor Relations, you may begin your conference.

Good morning and thank you for joining us on this conference call discussing our second 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 of Finance, David Hendrick.

On this call we will provide a discussion referencing a web cast presentation which is also available on our website at pennwest.com before moving on to Q&A. Before we begin I would like to point out that we will refer to Forward-Looking Information in connection with PennWest and the subject matter of today's calling. By its nature this information contains forecasts, assumptions and expectations about future outcomes so we remind you it's 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 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, and good morning everybody and thank you for joining us on the call today. Penn West had a notable second quarter delivering strong operational and financial results. Second quarter production of 63,568 barrels of oil equivalent per day exceeded consensus estimates due to a combination of continued strong performance from cardium wells we drilled last winter and continued improvements in the reliability of our base production.

In the second quarter we remained focused on cost control and challenged our teams to find further efficiencies in their field operations. This led to a significant decrease in operating costs well ahead of expectations.

In addition, we deferred some discretionary expenses related to turnarounds and work over activities to the second half of the year. The cumulative results of these efforts led to second quarter operating costs of CAD12.70 per barrel of oil equivalent. The steps we took to reduce debt in the second quarter put our balance sheet on a much more solid footing.

We closed approximately CAD1.3 billion of asset dispositions in the quarter including the sales of our Saskatchewan and Slave Point assets. In addition, subsequent to the quarter we have signed agreements for an additional CAD75 million in non-core asset dispositions. We have now reduced our pro forma net debt to approximately CAD491 million from CAD2.1 billion at year-end 2015. These sales have confirmed our compliance with all of our financial covenants and allowed us to remove the going concern note previously included is our first quarter results.

We have already made progress on our previously announced Phase two of the Company's transformation plan to sell our remaining non-core assets by the end of the year. With the additional CAD75 million in signed disposition agreements since the end of the second quarter the Company is on track to reach our target proceeds range of CAD100 million to CAD200 million, and on track to complete the final phase of our transformation.

With our balance sheet concerns in connection to our debt for the foreseeable future behind us we are excited to get back to work and begin a sustainable (inaudible) development program. The Company is increasing our capital program for the year by approximately CAD40 million to once again start growing production in the cardium and the Alberta Viking.

Importantly, our increased capital program will be fully funded from this year's funds flow from operations. Our increased second half capital program is expected to add approximately 3,000 barrels of oil equivalent per day to our 2016 exit production and will set us up for continued growth into the next year and beyond. With that, I will turn the call over to David Dyck for further comments.

Thank you, Dave, and good morning. In the second quarter we effectively de-leveraged our balance sheet and reduced our net term debt by over 70%. Net term debt has done from CAD2.1 billion at the end of 2015 to a pro forma net debt of CAD491 million, a reduction of CAD1.6 billion in our debt which we consider very meaningful.

We have proven our ability to transact on asset sales in a very difficult price environment and are committed to maintaining our balance sheet strength going forward. At the end of our 2016 second quarter we were fully compliant with all of our financial covenants.

At June 30th our senior debt-to-EBITDA ratio was 3.9 times relative to a 5.0 times limit. Additionally, we had CAD374 million remaining in cash proceeds from prior dispositions on hand which is expected to be used for future debt repayments.

If these proceeds had been applied at June 30th, our pro forma senior debt-to-EBITDA ratio would have been 2.3 times. We expect to remain compliant with all of our financial covenants for the foreseeable future and we have removed the going concern note from our financial statements.

During the second quarter funds flowed from operations totaled CAD55 million an CAD8 million increase from the first quarter. It is important to note that the CAD55 million is net of CAD7 million one time financing cost associated with our dispositions in the quarter. Normalizing for this funds flow from operations would have been CAD62 million in the quarter. The higher funds flowed from operations was primarily driven by a significant reduction in operating costs.

This once again demonstrates our team's excellent work at finding operating efficiencies and continuing to drive down our cost structure. Net revenue was essentially flat with the improvement in commodity prices from the first quarter offset by lower production due to asset dispositions.

The first half of 2016 marks an improvement in our operating cost structure from 2015. Our second quarter operating costs of CAD12.70 per barrel oil equivalent came in well below our internal projection and well below consensus estimates. This was a result of operating efficiencies and our well programs leading to go a decrease in operating costs. We also deferred several discretionary expenses primarily related to turnarounds and work overs in the second half of the year and as a result we expect a modest increase in our operating costs in the third and fourth quarters.

On full year basis we expect our 2016 operating costs to average between CAD13.50 per BOE and CAD14.50 per BOE. Going forward in our core areas we expect operating costs in the range of CAD10 to CAD12 per barrel of oil equivalent. In light of our new financial flexibility afforded through debt reduction efforts to-date we are increasing our capital budget for 2016 by CAD40 million. This increase in our capital program will be fully funded from full year 2016 funds flowed from operation demonstrating our ability to grow profitably and sustainably.

We expect the incremental second half drilling program will add approximately 3,000 barrels of oil equivalent per day of exit production in 2016. This capital will be allocated to the Viking and Cardium programs in Alberta.

Our second half development program in the Peace River is relatively unchanged from our original budget. The CAD40 million increase in spending will bring our 2016 exploration and development capital budget to CAD90 million within additional CAD15 million to be spent on decomissioning expenditures.

We are also updating our full year guidance. We expect our 2016 corporate production to average between 55,000 to 57,000 barrels of oil equivalent per day and production in our core areas is expected to average between 22,000 and 24,000 barrels of oil equivalent per day. We expect our full year operating cost to average between CAD13.50 and CAD14.50 per barrel of oil equivalent and our G&A guidance is unchanged at CAD2.50 to CAD2.90 per BOE.

We conducted review of our preliminary 2017 plans and we anticipate spending up to CAD150 million in total capital expenditures next year targeting development in our core areas. Cardium continues to be the foundation of our development program and will be supported by incremental growth in the Alberta Viking and meaningful cash generation at Peace River.

We expect the 2017 program to grow core production by 10% from the fourth quarter of 2016 to the fourth quarter of 2017. Our 2017 capital program will be fully funded by funds flowed from operations. We have built next year's capital program to be flexible with spending weighted towards the back half of 2017. We are very aware of the recent weakness in crude oil prices over the last two weeks and we will adjust the capital program if needed when we get closer to the end of the year.

I will now turn the call over to Greg Gegunde to discuss our operating results for the quarter.

During the second quarter we performed a comprehensive review of our core assets particularly the growth potential of the Cardium and the Alberta Viking. This analysis reaffirmed that our assets are able to deliver strong economic results in the current price environment and support the further development of plays in these areas. Given the improved financial flexibility afforded to us and our increased capital budget for the second half of 2016 we plan to restart developmental drilling in the Cardium and in the Alberta Viking.

In the Cardium we plan to drill and complete five wells in the second half of the year. Two wells will be drilled in the J-Lease field of (inaudible) and three wells in the Crimson Lake field of Willesden Green.

The J-Lease well will be completed using a cemented liner system for approved production performance and improved reservoir management to enhance longer-term water flooding control. Also in Crimson Lake we plan to convert an existing horizontal well to water injection well in order to increase and maintain reservoir pressure to support production from offsetting wells. Our Crimson wells drilled in the fourth quarter of 2015 continue to perform well ahead of type curves making these wells some of our most productive Cardium wells drilled to-date. In the Alberta Viking we plan to drill and complete 11 wells in the Esther area.

These wells will be drilled using a one-mile well bore design previously used in the Dodsland area of the Viking that resulted in excellent reductions of development costs. We expect the technical skills learned and our experience in the Saskatchewan Viking will directly transfer into success in our Alberta Viking program. We continue to drill and bring on wells in our third core area of Peace River. In the second quarter we drilled and brought on production two gross wells. In the second half of the year we expect to drill 19 gross wells with a full support of our joint venture partner. Peace River area continues to provide stable production metrics as the cash generation vehicle for the Company. I will now turn the call back to David.

As you can see on this slide, we have successfully completed phase 1 of the Penn West Transformation Plan. We have worked tirelessly to fix our balance sheet and have done so by selling approximately CAD1.3 billion worth of assets since the beginning of 2016 at very attractive multiples.

From these dispositions we have reduced our net debt by over 70% to approximately CAD566 million at the end of the second quarter from CAD2.1 billion at year-end 2015. And with the additional CAD75 million in signed disposition agreements subsequent to the second quarter our pro forma net debt to-date is CAD491 million. We now have competitive and sustainable go forward leverage metrics and are excited to focus on our long-term organic growth.

As we have mentioned previously, phase two of our transformation plan will rationalization our remaining non-core assets that is currently underway. As evidenced by our additional asset sales subsequent to the second quarter we are confident in our ability to further reduce our debt and we anticipate transacting on our remaining non-core properties by the end of the year. We are focusing on growing production sustainably generating funds flow from operations in excess of our capital spending. I will now turn the call back to Paul to conclude our discussion.

Thanks, David, and that concludes our formal remarks. So at this point I would like to turn the call over to the Operator for the questions.

The first question is from Jason Frew, with Credit Suisse. Your line is now open.

Hi there. I just wanted to maybe check in with you, David, on there's another big difference between funds flowed from operations and what you call funds flow, I guess FFO and funds flowed from operations. So really I just want to get a sense here if you have a view that those numbers will converge over time or is this more of an accounting choice that we live with? I just want to get a better sense of what the drivers around those numbers are?

Yes. Jason, thank you. So in our MD&A we outlined the differences and we show the migration from funds flow to funds flowed from. So I think all the details are there. Overall we would expect these numbers to migrate together over time, but there are going to be certain anomalies which I have identified in my comments here this morning that will create some differences from time to time and those are just differences in the way we're accounting for things. But I'm hopeful that people will take a look at the detail we provide in our documents and understand what the true numbers are.

Right. So I think it said the restructuring and the FX charges on the maturities that are the big pieces within there. So are you expecting then the restructuring to fall away over time and maybe comment on what's driving the FX on the maturities?

I mean restructuring by its nature is not an ongoing thing. We have obviously gone through a significant change at Penn West here and so we would expect any restructuring charges to dissipate, if not go away completely and as we get into normal operations. And the FX on maturities is just a function of changes fluctuations in foreign exchange rates. As we reduce our debt that number should go down because our US component of our long-term debt will decrease.

Okay. Thank you.

Thank you.

(Operator Instructions). It looks like we have no further questions at this time. I will turn the call back to the presenters.

Thank you. That concludes the presentation. We look forward to updating the market with our further plans in the coming months. Thank you.

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