Obsidian Energy Ltd (OBE) 2018 Q2 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 Obsidian Energy's Second Quarter Results Conference Call. (Operator Instructions) Thank you.

I would now like to turn the conference over to Brad Monaco, Manager of Corporate Planning and Investor Relations. You may begin your conference.

Good morning everyone, and thanks for joining us. This morning we will be discussing our 2018 second quarter financial and operational results. The format of this 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 Aaron Smith, our new Vice President of Development.

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 in the subject matter of today's call.

By its nature, this information contains forecasts, assumptions and expectations about future outcomes, so we remind you they're subject to 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 could affect Obsidian Energy or could affect future outcomes for Obsidian Energy.

Go ahead, Dave.

Thanks, Brad. Good morning, and welcome to the Obsidian Energy Second Quarter Financial and Operational Update Conference Call. We hope everyone is enjoying their summer.

Having spent a good deal of the last several weeks engaging in conferences on the trajectory of our Canadian E&P business, this update feels timely. Many in this industry, especially those in basins that are catching real attention as commodity prices improve, the Cardium being one of them, have optimism about the coming quarters. We certainly share that view. The Canadian P space sees performance improving into next year with sustained higher liquids pricing in particular. The industry question is shifting from will these wells make money at these prices to how deep is our inventory. We, at Obsidian Energy, like our answer to that changing narrative. We've already kicked off the start of our Cardium fast-track program with we expect substantial early 2019 production additions.

We hold the largest acreage position in the Cardium with a deep inventory of both primary and secondary locations. All of this is underpinned by quality operating margins and shallow declines. Obsidian Energy believes that solid netbacks and low declines, coupled with our 80% rate of return in primary development, will screen particularly well as our hedge book rolls over to 2019.

We added an independent analysis from Desjardins to our corporate deck on Page 5 that outlines this potential. Analysts forecast quality growth in cash flow per share for us as we play forward our business plan and highlight how our stock is currently priced against 2019 delivery.

We share the view that this combination positions us very attractively to investors. And the company emphasis now is squarely on our defining project: Cardium Fast Track. Fast Track means essentially one thing over the coming quarters, dedicated manufacturing of Willesden Green wells. The asset quality, capital efficiency and quick cash cycles from that program call for us to fund it. When we look at the second quarter of 2018 itself, it was overall pretty quiet on the new volume activity. Many of the remaining drilling capital are earmarked for the second half of this year. The lion's share of spend across the company in the quarter was clearing the deck operationally for our next round of growth. Of the modest $26 million development capital spend in the second quarter, a large portion went to supporting the commissioning of our Peace River area nonop 50-50 gas plant and cutting our pads slowly over to the new gas gathering infrastructure. This effort is a onetime cost to the business in Peace River and driven by AER Directive 84 compliance. We also systematically completed the largest and most comprehensive turnaround in our fleet at the Crimson gas plant. I cannot emphasize enough that efforts of this magnitude rarely get headlines because they feel like one-offs to the business. However, they are good signals of things to come.

The Crimson plant especially allows us to launch the Willesden Green program confidently with capacity and mechanical integrity to support years of development. The next turnaround in that facility is not scheduled for another 5 years. Quality execution of that magnitude would be important under an ordinary year. This timing supports the demands of a rigorous [oil] development whose associated wet gas is coming its way. It's good to have it behind us. It will not be a surprise to listeners on this call that the biggest challenge for our current financials is the overhang of our corporate cash flow with our hedging program. Although netbacks at the asset level are compelling, we see [muted] participation in 2018 pricing over low $50 WTI. As I previously mentioned, the majority of our hedging commitments roll off in early 2019. With the business freeing up from onetime cost in 2018, we will not be adding any more hedges at this time. We're paying close attention to market dynamics and we'll keep the investment community aware of our plans.

Our funds flow from operation was $32 million, which is slightly off 1Q. And our plant throughput spending brought OpEx per BOE in and around mid-$14 range. Obsidian Energy has line of sight to a less-interrupted and growing second half on volumes at reduced costs. We therefore maintain our current full year guidance. There can be no mistaking that the next several months are operationally critical to Obsidian Energy.

Cardium Fast Track is at the heart of our commitment to create an attractive investment vehicle for shareholders. The concept is simple. Drill repeatable, cost advantaged, liquids-weighted wells in a 50-year-old play with liquids take away, bring those wells on and produce them with leading cash margins. We intend to do just that. Our team is in place with some of the best Cardium technical staff in Canada, including Aaron Smith, Vice President Development, who joined us last month from Sinopec Canada. Aaron is an engaged and experienced leader who will guide delivery of this major project. We ran a robust search for this role, and Aaron very quickly emerged as a top candidate. He has tremendous experience running large resource-style development programs across the basin, specifically right here in the Cardium. We welcome Aaron to our team, and I look forward to all of you meeting him at our Investor Day in the fall. Aaron will join us later on in this call.

There is genuine excitement here that the stage is set for Obsidian Energy's time and investors' reward. We look forward to detailed discussions this fall outlining our 2019 development and long-term inventory of highly respective -- prospective wells in this large asset base.

I believe you will like what you see and like what you hear.

Thanks, everyone. Let me turn the call over to Dave Hendry, who will further outline the quarter results.

Thanks, Dave. Funds flow from operations came in at $32 million, which was slightly below our expectations for the quarter. We did see gains from oil prices in the quarter, but they were offset by realized risk management losses, volatile crude oil differentials and lower production.

Our production for the quarter averaged approximately 28,700 BOE per day. We planned a major turnaround in the corner -- in the quarter at our Crimson Lake and Lodgepole facilities, which were executed on time and on budget. Production was slightly behind overall estimates due to lower rates from our first quarter Mannville and PCU #9 programs.

Average liquid sales price in the second quarter was $65.21 per BOE, and average natural gas sales price was $1.62 per Mcf, both exclude hedging activities.

We continue to benefit from our Ventura marketing arrangement as our realized cash marketing exceeded AECO pricing by more than 45%. Operating costs for Q2 were $14.47 per BOE. The 12% decrease from Q2 2017 was mainly attributable to our disposal of higher OpEx cost properties earlier this year plus continued cost reduction programs. However, it is higher than our expected annual average due to costs associated with the planned turnaround and maintenance work done. Higher power costs also contributed. We expect to see a noticeable decrease in the second half with less maintenance activity and the impact as developing volumes drive the per BOE number lower.

Net debt was relatively unchanged for this quarter. We were at $408 million versus $407 million for Q1. Of that $408 million, $326 million was drawn on revolving credit facility and $79 million came from our senior notes. We paid $32 million of senior note maturities in the quarter, utilizing the credit facility to do so. That comes with a commensurate increase in our available credit on the bank line to $440 million.

We continue with our disposition mandate of noncore assets and closed a few existing third-party royalty sales and minor land packages. Proceeds totaled $9 million, which was put towards debt. We also closed approximately $5 million in proceeds from royalty sales subsequent to the quarter end, which was also put directly to debt. These royalty transactions are beneficial for the company because there is a negligible amount of production impact associated with the sales, and they go for good metrics.

We continue to progress our small divestiture program, but expect that the bulk of it is over.

I now pass the call to Aaron Smith to discuss our second quarter operational results.

Thanks, Dave, and good morning everyone. I'm very excited to be joining at this defining time in the company's history. The team is in full swing with our busy second half program, and I'm pleased with what I see in terms of readiness and the potential for this next leg of development. This morning, I will touch on the quiet drilling quarter but focus on what I am most excited about, which is the busiest development program for this company in years.

To Dave's point earlier, the concept of what we are doing is simple. The repeatable manufacturing approach will be distinctive for shareholders, and something I look forward to talking about at Investor Day. We will make headway on drill costs and capital efficiencies.

I'll start with the story in Pembina before turning to Willesden Green.

PCU #11 continues to perform after its slower start. As Dave discussed earlier this spring at the AGM, one of the 2 wells had completion issues and we were delayed almost 5 weeks bringing the wells, up due to weather windows.

However, the well results are right on curve now sitting at 200 BOE per day per well, which is a good news story.

In PCU #9, total fluid rates are strong, but with higher water cuts than forecast. We needed to do some infrastructure work in July to offset limitations on fluid handling. We look forward to getting some more work done in Pembina next year and beyond and see significant inventory running room across multiple fields in the area.

Everyone is pretty familiar with our well results to date in Willesden Green, and they continue to deliver. Obviously, the initial rates from our program have been better than expected, and they continue to be at or above type curve. The second half program is in very close proximity to the successful first half wells, which gives me confidence that we have focused on de-risking our development wedge.

We have already started with the summer and fall drilling campaign. We currently have 1 rig active, which just finished drilling our sole Deep Basin well into the Falher formation of the Mannville Group. This well was rig-= released in late July, and we hope to stimulate it shortly. We are very optimistic on the well.

We also had some nonoperated dollars allocated here with our partners in the area, which was referenced in the release this morning. Our second half drilling program will be executing our Fast Track primary Cardium strategy focused in the Crimson Lake area of Willesden Green. We have planned 6 pads with 15 horizontal producers. A mix of 2- and 3-well pads that are positioned in close proximity to the successful 3 pads drilled in late 2017 and early 2018.

We will be running 2 rigs by mid September. The first rig will drill 3 wells within the waterflood unit from 1 pad and move east to join the other rig as we finish out the program. We foresee going at this pace in 2019, aside from the typical breakup season.

We are planning to have 5 wells on by the end of the year with the remainder coming on stream in the January-February timeframe. I'm excited to see the results of this program reflected in our financial statements. A lot of what we have been talking about this morning is future potential, and I look forward to making it a reality.

As Dave mentioned, we'll have a lot more to say on this future potential in the upcoming Investor Day, which will be webcast. The focus for me will be really lifting the hood on the inventory potential of our land base. This is not a story that fizzles out after one growth program. Our land base truly has legs to grow.

Turning quickly to Peace River. We are obviously pleased with the results from our 4-well program in the first half. Production over the first 90 days has averaged 400 barrels per day per well on a gross basis. With these results, coupled with where crude prices are relative to gas, we have decided to reallocate capital from our scheduled Alberta Viking program to 4 additional wells in Peace River.

The wells will be drilled for approximately the same capital cost net to Obsidian Energy, and are expected to come on production in the fourth quarter.

Our Peace River joint gas gathering system and gas plant is proceeding on schedule, and we expect to have this system onstream well in advance of the September 30, AER Directive 84 regulatory deadline. We started routing solution gas at the end of July, and we'll have the plant fully online by mid September.

There was an increase in spending of about $5 million due to construction cost overruns as we finalized the plant last quarter. You see that reflected in our guidance numbers.

All in all, lots to be excited about. I look forward to our Investor Day event this fall and updating everyone on our drilling activities with third quarter results.

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

[Operators Instructions)

Your first question comes from the line of Jeremy McCrea with Raymond James.

This is more related to your primary development at Willesden Green. Just a few questions here. I know you're probably not looking to really give pull guidance here, but I'd just -- I'm more curious what you would like to see. So for 2019, what portion of your CapEx budget do you think you can be directed toward just primary drilling? If you can provide any kind of number of wells and how much growth you expect to see coming out of this area here to start?

Jeremy, this is Dave French. I guess I would say we're putting 15 in the second half of this year. I would assume that pace of development kind of continues both first and second next year timing wise. So similar shape to that. That's going to make up the lion's share of capital for 2019.

Okay. And then, I know you guys have somewhat given growth rates right now, 2017 into 2018. How do you think as you shift your capital budget toward more primary development, how -- or maybe I'll ask it in a different way. What kind of growth would you like to see going forward for Obsidian over the next few years here?

You know, I think, Jeremy, we've talked about it a lot. We're trying to sit in the sort of double-digit range in terms of growth. We think it's going to be the combination of the nice mix of primary development and then our shallow corporate declines sitting around 19%. And so we think that, that's a good platform to sit on top of in terms of development. So that would be the range we'd shoot for. And certainly it's going to depend a lot on we're -- we're certainly going to do our best to live within funds flow in development. So it'll be what funds flow give us as choices, but certainly shooting for a double-digit trajectory is the right answer.

Okay. And then just last question. I know you guys talked about 250 locations in Willesden Green. Is that based on 4 wells a section? Like what do you make of some of your peers who are going down on a 6, 8 wells a section in this area?

Yes. That number's based on the 4 wells per section. For me, I think each peer's development program is going to be geared on the type of rock that they see. For us, I think, the program that we've got designed reflects what we think is optimal on an NPV basis for each section. And so I think one has to be looking very closely at the rock and its quality before assessing the appropriate densities.

[Operators Instructions) Your next question comes from the line of Shailender Randhawa with RBC Capital Markets.

Yes, I just wanted to get additional color on the potential asset sales, David. And just where discussions stand with your partner in terms of Peace River and just thoughts on the Viking? And given that you've already changed capital for the year, any thoughts on use of proceeds over the balance of the year?

Yes, you bet, Shailender. I think as you know I'll probably take those in the reverse order. I think we obviously -- we had a program in the Viking earlier this year that's -- that although the Viking -- the program went very well, we ultimately didn't take an offer that we move forward with. I still expect that we'll continue to look at options around Viking. And so for us you'll notice there's probably a -- where -- we made the decision in the fall to swap out PROP wells for Viking wells. And I think we'll continue to look at the ultimate choice around Viking. Around PROP, those discussions continue. I think we are, as a company, continuing to look at how we think about heavy oil in that business. And so for us that option continues. We certainly have constructive dialogues with that Chinese around their choice and how they think about that joint venture. But as far as we're concerned, it's just an ongoing dialogue. In terms of proceeds from the sale, we obviously would, I think, Dave Hendry would second this as well, we probably would focus on, since we have an RBL in place, we always think about debt first and then the view, the combination of whether we would look at potential buybacks from proceeds or whether we would put it to the drill. But it's going to depend a little bit on the market pricing for where the equity stock is at the time.

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

Thanks guys for your questions. As you can tell from us, there is a sense of anticipation of things to come. The pieces are in place for Obsidian Energy to break out as an investment vehicle. Our job right now is simple: drive manufacturing of the Cardium Fast Track program, do it safely and with organizational discipline. We'll come back to you this fall with early results, a preview of 2019 and let you see what's in store for 2020 and beyond. I look forward to that conversation. Really appreciate everyone's time on the call, and have a great rest your summer. Thanks everyone.

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