Obsidian Energy Ltd (OBE) 2016 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Sally and I will be your conference operator today. At this time I would like to welcome everyone to Penn West third quarter financial and operational results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. (Operator instructions)

I will now turn the conference over to Mr. Paul Surmanowicz, Corporate Planning and Capital Markets. Please go ahead.

Good morning and thank you for joining us on this conference call discussing our third quarter operational and financial results. The format of this call will be audio only today. With me today is President and Chief Executive Officer David French; Senior Vice President and Chief Financial Officer, David Dyck and Senior Vice President Exploitation Production and Delivery, Gregg Gegunde. Before we begin, I would like to point out 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 of future outcome. We remind you it is subject to the risks and uncertainties affecting every business including ours. Please refer to our public disclosure filings available on both the SEDAR and EDGAR systems for a full discussion of significant factors and risks that can affect Penn West or affect future outcomes for Penn West.

I would now like to turn the call over to our new President and Chief Executive Officer David French

Thank you Paul. And thank you all for -- thank you to everyone for joining us on the call. As clearly the shortest tenured member of the Penn West team it feels good to start the discussion of a good quarter, an important moment of time for the company. It is a privilege to step into Dave's shoes with a table that has been nicely set for the next stage of our journey. I have followed Penn West's story for years and especially this most recent challenging time and admire all of the hard work that has gone to placing this company on more solid ground our transformation is nearly complete. Some clear themes emerged from this quarters results and they will set the tone for how to think about Penn West going forward.

First we delivered on our expectations for production and costs. I expect this to be a common and repeating theme. Production in the third quarter averaged 41, 233 BOE per day as our base production volumes continue to perform above our forecasts and operating cost of CAD13.40 per BOE were on the low end of our guidance range. Across the company the discipline to deliver what we say will be critical. This combination of hitting volumes and lower costs contributed to a strong funds flow from operations in the quarter of CAD32 million or $0.06 cents per share.

Second, we kick started our development. I have only been here a few short weeks, but I am quite encouraged by the work of our asset teams that have laid the groundwork for a successful end of 2016 and exciting 2017. I look forward to the results of latest 15 well program across the portfolio and it is clear we have attractive positions in the Cardium, Viking and Peace River to steer forward. We will disclose these results as they become available. While we are still putting the final touches on next year's budget you will see us pour 2017 with at least two portfolio aims. Under (inuadible) strong based business through integrated water flood development to reduce corporate declines and balance our portfolio options with short and long-term returns and volumes to offer consistent disciplined growth.

This will be the mainstay of the company. These two themes would not be possible without the third. We are in the eighth inning of our balance sheet restructuring and literally this phrase would resonate better if the Toronto Blue jays were still in the playoffs, but we are almost done with recasting the business. Our leverage metrics are now in line achieving a senior debt to EBITDA of less than 2 times this quarter.

We remain on track to meet our disposition targets this year, but the heavy lifting has been done. We still expect Q4 to see resolution of our divestment program. You may have noticed across the wire today a deal of Mitsubishi's interest in Cordova. The acquisition by Penn West of Mitsubishi's 50% interest in the Cordova joint venture is not material to us. We currently do not have development plans in the area and continue to assess market conditions to determine whether or not there is a strategic buyer for our entire interest in the Cordova area.

As to the rest of the business, although we will not lose sight of cash management and continue a constructive hedging program we have moved beyond a pure focus on the balance sheet. It is time to show everyone in the investor space that our assets will compete to draw capital and offer returns I will put up against anyone in our competitive landscape. I look forward to telling you more over the coming months, and it is very good to be here. With that I will now turn over the call over to David Dyck to talk more about the quarterly results.

Thanks, David and good morning. Penn West had a strong third quarter delivering operational and financial results that were ahead of analyst consensus. Third quarter production of 41,233 BOE per day was above forecast, due to a combination of continual improvement in our base production and reliability and continued strong Cardium Well performance from new wells brought on last winter.

Production in our core areas averaged 21,911 BOE in the quarter. This year we continue to improve our cost structure as we progress on several cost-savings initiatives. Operating costs in the third quarter of CAD13.40 per BOE were a result of continued cost efficiencies as well as poor weather delaying -- poor weather delaying some discretionary expenses until the fourth quarter. We are maintaining our full year operating cost guidance at CAD13.50 to CAD14.50 per BOE.

Funds flow from operations in the third quarter was CAD32 million or CAD0.06 cents per share exceeding consensus estimates. Funds flow from operations was supported by strong production volumes and lower than expected operating costs. in the third quarter we closed asset sales for proceeds of approximately CAD75 million and associated production of approximately 6,000 BOE's per day. We remain confident in our ability to sell additional non-core assets and generate between CAD100 million to CAD200 million in total disposition proceeds in the second half of this year and that is inclusive of the CAD75 million closed in the third quarter. At the end of October we prepaid CAD437 million of cash on hand to our senior note holders at par and repaid CAD11 million of indebtedness to our syndicated bank facility. this prepayment reduced the outstanding principal on our senior notes to approximately CAD130 million, lowered the average interest rate on our debt and reduced the number of note holders from 36 down to 2.

On September 30th, our senior debt to EBITDA was 1.95 times relative to a 4.5 times covenant threshold which marks a meaningful step down in leverage. Going forward we expect to remain in full compliance with all of our financial covenants. Due to the dispositions completed in the third quarter and anticipated in the fourth quarter we are adjusting our full year 2016 production guidance. We expect our corporate productions to average 52,000 to 55,000 BOE's per day for 2016. The rest of our guidance remains unchanged. I will now turn the call over to Gregg Gegunde to discuss our operations.

Thank you, David. In the third quarter we took advantage of our reclaimed financial flexibility and got back to work in the field. We embarked on the development program to restart growth in the second half of the year and our program is now in high gear with four rigs active in the quarter. We expect to complete the program on budget and on time by year-end. The production impact of our development program will be realized in the fourth quarter. We expect production from our new horizontal drills to add approximately 3,000 barrels of oil equivalent per day to our exit volumes. In the Cardium we successfully drilled two horizontal wells independent of J-Leasein field in late September. Both wells have now been fracture stimulated using a cemented liner system and work is now underway to equip and tie into wells. We also focus on water flood optimization and reservoir surveillance to optimize water injection targets in key areas. This included the conversion of one horizontal production well to a horizontal injector for pressure support in the surrounding area.

In the Crimson Lake field of Willesden Green we have successfully drilled the first horizontal well of our three-well development program and expect to finish drilling and completions by late November. During the quarter we initiated work on upgrading water flood infrastructure in the area to provide support to existing horizontal and vertical producers. Looking forward in the Cardium our preliminary 2017 plans contemplate spending the bulk of our total development capital in (inaudible) in Wilesden Green areas.

Our focus next year is two fold. First integrated water flood development. This is a combination of drilling horizontal oil production wells supplemented with additional water injection at the time of drilling. Secondly we plan to bolster water injection in surrounding areas to elevate reservoir system pressure in preparation for 2018 development activity and beyond. Additionally we are very excited about our perspective multi horizon potential, particularly in the Willesden Green area. We have begun development plans targeting the Manville formation in the back half of 2017. Recent well results and offsetting competitor activity give us confidence in the potential value proposition of this. In the Alberta Viking we successfully drilled or planned 11 horizontal wells in (inaudible) field. These wells were drilled using a one mile lateral well bore design and will be completed with a cemented liner system in early November with production expected to begin in December. Drilling was finished ahead of schedule and drilling costs per well are trending approximately CAD50,000 below budget.

We plan to evaluate results from the Alberta Viking later this year and our findings will determine the pace of spend in 2017. Currently we expect a similar program as this year in the second half of 2017. In Peace River we initiated a two-rig development program and drilled and brought on two gross wells. Despite wet weather delays we remain on track to drill the remaining 17 wells and complete the program by the end of the year. We believe our Peace River play offers some of the most compelling heavy oil economics in Western Canada. Next year we plan to increase the pace of development to bring forward the value of our joint venture carry. We expect next year's program will deliver core production growth of at least 10% from the end of 2016 to the end of 2017 and will be fully paid for by funds flow from operations. We expect to release our detailed 2017 plan in the coming months. I will now turn the call back over to David French for some closing remarks.

Thanks, Gregg. We will now turn the call over to the operator for any questions.

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

Hi, David. I wonder if you could spell out for us how your background at Bankers might translate into executing on Penn West's asset base.

Hi, Jason how are you doing -- hi, Jason, how are you doing this morning?

Good.

Jason, I guess 25 years in the oil patch. Most of my tenure in western New Mexico, working water floods and gas development as well as mature asset redevelopment all over Delaware Basin in New Mexico. I also spent three years up running the Western Canadian business for Apache and then a lot about commercial work both internationally and abroad.

If you look at the work we do now even at Bankers,Bankers was a disciplined development company. Focus was on delivering very stable growth quarter to quarter on ensuring we have the least cost high margin asset. I think when I was at Bankers we took CAN8.00 a barrel out of the operating costs and turned the business into growing 3% to 5% at quarter. The business here has focused a lot on how do we take both development drilling in the Viking which is going to be short-term kind of near term development with high IPs and fit it in a portfolio that is going to ultimately (inaudible) water flood management. I am probably 20 years into thinking how water flows the right way. I look forward to bringing that to Penn West.

Thanks.

Your next question comes from the line of Juan Jarrah from TD Securities. Your line is open.

Thanks. Good morning, guys. One of the comments you made was that in Q3 some of those op costs were workovers and delayed to Q4. Can you quantify a little bit? How should we think of Q4 in terms of op costs? I know your guidance hasn't changed.

This is Gregg. The way you would think about our operating costs in the fourth quarter is it will go up slightly. We have a few workovers left remaining and there are some turn arounds we are catching up on and of course we always factor in for cold weather delays. Essentially it will come up slightly from where we are currently sitting at for Q3.

Great, thanks. The other question I had was there is a lot of very strong talk in terms of the remaining dispositions happening in Q4. Obviously you can't comment on that, but can you give us a sense of how much that could reduce your abandonment expenditures going forward basis?

It is David here. As you know and as you have seen with the dispositions that we have completed this year, we continue to work through properties that we are not capitalizing on and in some cases have some significant abandonment liabilities associated with them, particularly the ones that we have closed already. The properties we are looking to sell prior to the end of the year actually, are pretty decent properties. They have some upside. We are getting a lot of traction on those in terms of interest. And our disposition team is very busy and we are -- as I said in my remarks we are very confident of putting us well within the range of CAD100 million to CAD200 million and that will come with some reduction to our abandonment liabilities and improve our overall rating.

Thank you.

(Operator instructions) Your next question comes from the line of Jeremy McCrea, from Raymond James. Your line is open.

Hi, guys. My question is related to your Cardium locations at the 1500 that you say in the presentation. I just want to get a bit more context in terms of how much of those 1500 locations are in high pressurize regions. I have to think that some may not be, but how quickly can you repressurize some of the areas here in the area and keep that pace of development so basically every well you are drilling for 2017 then 2018 are going to be in the high pressure area. Do you feel like--do you have some kind of context in terms of how many of those 1500 locations are in those high pressure regions and how you can ramp that up with the water flood?

Yeah, Jeremy it is Gregg again here. By the 1500 well locations that we have bolstered I would say that the higher pressure locations will be between 100 to 200 essentially. The way we are looking at this It is really bolstering that up with supplemental water flooding. So, our view on this is that we want to get ahead of that curve start injecting water into the ground repressurizing the reservoir so we have more of those high pressurized locations that we continue to drill and develop this organization with.

Basically almost keep a year ahead of schedule. How many Cardium wells are planned for next year here, roughly speaking?

We are still going through the plans right now. It is a blend of both drilling horizontal producers and supplemental, horizontal and vertical injection wells in key areas.

Okay. Thanks.

And your next question comes from the line of Ken Gilpin with Sound Investments Inc. Your line is open.

Good morning, guys. Congratulations on what you are doing there. I was looking at the longer range. What kind of cash flow would you expect going into 2018 and 2019?

We are just in the process of finalizing our budget for 2017 and what we said for 2017 is that we are expecting cash flow in the range of plus or minus -- right around a CAD200 million. With that we plan to spend about CAD150million dollars. We will provide details on that. We typically don't provide guidance, out beyond the next 12 months and so for now we are going to be focusing on 2017. There are a number of analysts that might have models that go a little further. I direct you to those. As a corporation we do not provide any detailed guidance out beyond the next 12 months.

Okay.

And there are no further questions at this time. I will now turn the call back over to Mr. David French.

Appreciate the questions, guys. I want to thank everyone for attending the call today and I look forward to laying out the plan for 2017 soon. We will be back to you to talk about where Penn West is heading, but I can tell you from the results of the quarter and the early indications of our drilling activity heading into next year it is going to be exciting times. Thanks everyone. Have a great day.

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.