Obsidian Energy Ltd (OBE) 2017 Q4 法說會逐字稿

Good morning. My name is Dan, and I will be your conference operator today. At this time, I would like to welcome, everyone, to the Obsidian Energy Year-End 2017 Financial and Operational Results. (Operator Instructions) Thank you.

I would now like to turn the conference over to Brad Monaco. Please, go ahead, sir.

Good morning, everyone, and thanks for joining us. This morning, we will be discussing our strong fourth quarter and year-end 2017 results.

The format of the call will be audio only.

With me this morning and speaking on the call is Dave French, President and Chief Executive Officer; David Hendry, Chief Financial Officer; and Tony Berthelet, Vice President Development and Operations. The rest of the leadership team is also in attendance.

Before I turn the call over to Dave, I'd like to point out that we will refer to forward-looking information in connection with Obsidian Energy 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. Please refer to our public disclosure filings available on both SEDAR and EDGAR systems for a full discussion of significant factors and risks that could affect Obsidian Energy or could affect future outcomes for Obsidian Energy.

Go ahead, Dave.

Thanks, Brad, and good morning, everyone. We appreciate you for joining us to discuss our 2017 fourth quarter and year-end results.

I'd like to start the call by thanking everyone, for the support throughout last year. Despite broad market challenges, 2017 was a breakthrough year for the company.

Commodity prices, differentials and currency exchange rates were volatile and posed challenges to the business.

We remain focused and actively steered ourselves into quality results.

From our January operations update, which highlighted the results from our Q4 program, the recent reserve summary release and this end of year financials results, we mark an inflection point in our business and we look back on 2017 as a pivot point for Obsidian Energy.

We pre-released our production numbers in January and we did exactly what we said we were going to do. Delivered a full year production above our high-end of our guidance. We grew our A&D adjusted production base in 2017 by approximately 10%, kick-starting a disciplined growth story, even while spending less capital and maintaining a focus on our balance sheet strength. Our full year capital came in under guidance with 2017 realizations trading down from 2016, we lowered our projection spend in the middle of the year from $180 million and still delivered historical development results.

Operating expenses were in line with guidance and with our disciplined cost management initiatives across Obsidian Energy as well as our legacy asset disposition. We're able to guide a further reduction in operating cost for 2018, despite rolling out of the Peace River joint venture carry.

This is a testament to the execution capability of the company.

One of our more exciting updates has been the results of our Willesden Green Cardium program. We have long known the potential of this asset and it injects capital with results that stack up against any peer.

We believe, we are creating a distinctive piece of business.

Tony will provide some color later in the call on our current operations there as well as the rest of Alberta.

Although I am not much of a golfer, I have friends, who always remind me that you drive for show and putt for dough.

You have to do the big stuff consistently and nail the little things when everyone is watching.

When I think back on 2017, Obsidian Energy has been great off the tee and in the fairway, but also confident in finishing what we started, from optimizing our based operations, reenergizing our waterflood initiatives and drilling standout development wells, our entire team is up to its game.

I can't say the scores have been fairly judged by the spectators, the same is true for many of our peers, sentiment for Canadian energy space continues to be challenged. The only thing we can do is execute exceptionally well. We work every day to bring investors back to our store and be a leader in the E&P space.

We expect to be the best in the field in every place we operate, and I can assure you that no play, no tool, no approach to increase returns to our shareholders will be overlooked.

We are in this game to win it.

I will now turn the call over to Dave Hendry, to discuss our year-end results.

Thanks. I agree with Dave, 2017 was an outstanding year for the company. I am proud to deliver fantastic fourth quarter and full year metrics.

We landed comfortably within or exceeded guidance on all key metrics and emerged 2017 in a great place. Financially strong, focused and delivering. Funds flow from operations for the year really stood out. Fourth quarter FFO was $52 million or $0.10 per share, comfortably beating our analysts' expectations. If you recall in 2016, we sold a significant portion of our business with the Saskatchewan Viking asset disposition, which generated almost $1 billion of proceeds with that deal alone. Despite the associated drop in production, 42% year-over-year to be exact, we still delivered FFO growth of 5%.

The increase in funds flow from operations to $192 million for the year was supported by higher crude oil prices and more than $100 million less of gross operating expenses.

Both higher commodity prices and higher realized prices contributed to our quarter.

The largest factor was our premium gas pricing at Ventura, which experienced a large price spike in December and contributed incremental FFO of approximately $5 million over and above expectations.

While some of the Ventura marketing agreements sell away in 2017, we still market $15 million cubic feet of gas per day through Q3 2020.

The other important piece was our heavy oil realizations, which improved by 26% in the quarter, relative to benchmark pricing being up only 15%.

This highlights what Dave spoke about in his update video in January and speaks to the efforts of our team to find alternate ways to market crude. Also nice to see heavy differential tighten up in recent days.

Full year operating cost came in, in guidance range for the year at $13.40 per boe net of carry.

In the fourth quarter, operating cost were consistent with expectations and around $2 per boe below first half 2017 due to lower maintenance and turnaround activity.

As a reminder, our Peace River carry on operated and capital cost was fully utilized towards the end of December. When accounting for the role up of this benefit, our current OpEx guidance for 2018 reflects a nice reduction in per boe expenses.

A relentless approach to cost efficiency and the disposition of high-cost legacy properties has made a big difference to the bottom line.

Continuing on the trend of hitting our numbers, capital expenditures for the full year came in at $157 million, relative to our $160 million guidance.

Our $160 million target was reduced midway through 2017, which made our production look even better.

Our net debt was $383 million at the end of the fourth quarter, a drop of $120 million from 2016 and below 2x debt to EBITDA.

This includes $250 million -- $253 million drawn on a revolving credit facility and $106 million of senior notes. We will continue to focus on living within our means by targeting capital spend to be within funds flow from operations while the long-term target is in the 1.5x to 2x range.

Part of that debt reduction during 2017 was the overriding royalty sale in the fourth quarter. The royalties were existing not manufactured. We generated $40 million from that sale alone with all proceeds going towards reducing our debt. We also announced the sale of a significant portion of our legacy production at the end of January. This sale is classified as held for sale in our financials and removes $23 million of ARO at year-end. Not only have we systematically reduced ARO through asset sales, but we have found ways to perform the embedment and reclamation work cheaper as well.

Lastly, I want to touch on the share consolidation we included in the results this morning -- release this morning.

We recognized that we are a different company, not only in name, but also in size.

The outstanding float is large given the current size of the company. At the AGM later this year, we will propose a structure of 1 for 3 for each Obsidian Energy share owned.

We feel this better reflects the size of the company and we look forward to enhancing the marketability of the common shares.

I encourage you to read the management information circular that will be disseminated later this spring.

I will now pass the call to Tony Berthelet, to discuss fourth quarter operational results.

Thanks, Dave. I'm pleased to walk through our recent operations results and give a brief overview of what is currently going on in the field.

We had a busy fourth quarter across our key development areas.

Key execution themes from my perspective are, we successfully executed our first Manville liquids-rich gas program in the Deep Basin.

We achieved strong results in the heart of our Peace River heavy oil acreage. We delivered our second stream Alberta Viking program ahead of industry results and have continued to deliver top Tier Cardium results.

2017 clearly demonstrated the power of our portfolio.

Now for a quick look at our current operations. We recently finished our first 2018 Deep Basin well, which should be coming on production soon.

Initial flowback results are positive and we are excited for the follow-up location.

We have another high-rated Deep Basin opportunity we will drill in the second half.

In Peace River, we are on the third well of a 4-well program and again, initial production results look good.

Our team has continued to deliver in that play and the wells are highly economic at our full 55% working interest.

I'll echo Dave Hendry's comments on WCS diffs. We're happy to see them narrow a bit recently, but these 4 wells did not need to benefit of diffs to create robust rates of return to improve our capital efficiency -- sorry, due to our improved capital efficiency.

Our Alberta Viking program remains slated for the second half of the year and we will look to take advantage of existing multi-well pad infrastructure to maximize capital efficiencies in this year's program.

Our Q1 6-well Pembina Cardium program is currently awaiting final time and we expect it to be on production in the next few weeks.

We continue to focus on integrated waterflood in Pembina and these 6 wells are supplemented with 6 low-cost injector convergence.

What is most talked about is our results in the Willesden Green Cardium and rightly so, the numbers the team delivered stack up against any of our peers in the area.

We have been active in Willesden Green for several years and have an enviable acquisition.

Our 4-well pad drill late in the year at fantastic initial rates of 700 boe per day per well and have held-in nicely.

Again, focused on integrated waterflood in this region of Crimson Lake, these wells will have injector support to manage voidage replacement and reduce declines. Something we believe sets us apart from our peers and will lead to expected ultimate recovery volumes that are best-in-class.

We followed up these strong well results with 2 additional primary short-cycle Cardium locations, just 20 kilometers East.

They came on production in the 3rd week of February and have averaged 450 boe per day per well at almost 90% liquids. Again, consistent delivery within a great play fairway.

The wells have been only on for a short time, but all indications point to IP30 rates well above expectations.

These types of Cardium results in Willesden Green compete very well for capital and accordingly, we plan to add 3 incremental wells to the 2018 program.

We won't draw on cash to do so and instead we'll manage funding through redistribution of existing capital from other programs.

Drilling has begun on the first incremental Cardium well and because we have the luxury of several licensed Cardium inventory projects ready to execute, we will monitor current results before finalizing the remaining incremental capital program.

As stated, we have several strong Cardium investment opportunities to choose from within close proximity to the recent Willesden Green programs.

That concludes our formal remarks. And I'd now like to turn the call back over to the operator to open up for Q&A.

(Operator Instructions) Your first question today comes from the line of Sam Roach with Canaccord Genuity.

Just wanted to understand the $51 million capital program in the Cardium. Can you break that out for me, with the 11 produces? And maybe, give me the estimated well costs for the horizontals of Willesden Green?

Yes, you bet. It's Tony here. So I can talk a little bit about -- we've got a remaining program of -- an initial program of 8 wells that we were drilling in the Cardium, that was 4 wells in PCU 9, 2 wells in PCU 11 and then a 2-well program down in Crimson on the 1401 pad. So the incremental wells that we'll be drilling there will be 3 additional wells down in Crimson area offsetting our recent activity for a total of 11 wells. Our drill cost down in Crimson are all in DCET $2.8 million to $3.1 million and $2.4 at CDC for those wells.

Excellent. Just a quick follow-up on the well design. Has anything changed in the last 6-well programs?

No, Sam, we're still basically running 80 meters to 90 meters spacing on these wells. 25 to 30 stages depending on wellbore length. 20 tonne fracs and -- using 20/40 sand in a slickwater and [edge pipe] slickwater system. So no change from our perspective. That has yielded good results for us and that we'll continue to use that completion system going forward.

(Operator Instructions) Your next question comes from the line of Juan Jarrah with TD Securities.

Back to the Cardium, obviously, that's been a huge success for you guys. Can you talk a little bit about the breakdown of the liquids rates on those most recent 4 wells at Wille Green in terms of NGLs, oil, et cetera?

Yes, you bet. It's Tony here, again. So we're at about 88% to 90% liquids on all of those new wells that we brought on. NGLs is just really associated liquids, which -- with the associated gas, so a small portion of NGLs comes with it. That is a liquids-rich gas, but that's not really the prime mover for revenue from those wells, obviously. So that's kind of the split on oil and gas waiting on both of the 11 and 3 pad and the recent 1401 locations.

And then a follow-on to that is, obviously, you're having success in the [bicerated] zone here at Wille Green. Any sense of what type -- how many locations you think you have? How many net locations you think you have remaining on that?

Yes, we've, kind of, given directions to 50 to 75 locations in that along that halo trend, just at the East of our waterflooded area that would be targeting that true primary development.

Got you. And then last question for me, is any changes to your decline estimates for 2018? Where do you see that going? I mean, you're obviously going to accelerate by 3 wells this year, but where do you see that this year in terms of declines and where does that go into 2019?

No, we'll still hang on to the same guidance that we've put out around corporate decline. We are seeing the -- so we are drilling some incremental wells, but we are seeing the incremental benefit of putting water in the ground up in Pembina, obviously on these new recent Crimson wells, they'll have injection support and the combination of waterflood in Pembina and Crimson, that combined decline arrest will offset the new drills we have coming off a little bit higher declines than the waterflooded stuff. So guidance stays the same.

And I'm showing no further questions in the queue at this time. I would now like to turn the call back to David French.

Thanks for the couple of questions. There are lots of ways to evaluate 365 days when you look back. Investor sentiment needs to turn, but we intend to be the story they turn to. Last year, we kick-started a disciplined growth stories that we plan on continuing. We grew reserves over 125% on both 1P and 2P basis and replaced reserves for the first time in 5 years. We dropped debt by approximately $120 million to below 2x debt to trailing EBITDA, the lowest in 6 years. We dropped ARO by 35% and moved half of our remaining legacy properties out the door. And lastly, we achieved 6% higher funds flow from operations with only 42% less production, that's nearly half the asset base. Those numbers don't speak to a normal year. They frame a narrative on a company that is doing the right things. Obsidian Energy is disciplined, relentless and accountable. We have a solid 2018 in-store and look forward to the results ahead of us. Thanks to everyone for the questions and for your time hearing our quarter and year-end. Have a great morning, guys.

Thank you to everyone for attending today. This will conclude today's call and you may now disconnect.