Obsidian Energy Ltd (OBE) 2018 Q4 法說會逐字稿

Good morning. My name is Marcella, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Obsidian Energy's Year-End Results Conference Call. (Operator Instructions)

Kyle Doucet, Corporate Planning and Strategy Analyst, you may begin your conference.

Thanks. Good morning, everybody, and thanks for joining us. This morning, we will be discussing our 2018 year-end financial and operational results.

Format of this call will be audio only. With me this morning and speaking on the call is David French, President and Chief Executive Officer; Michael Faust, Incoming Interim President and Chief Executive Officer; David Hendry, Chief Financial Officer; and Aaron Smith, Senior Vice President of Development and Operations.

The rest of the leadership team is also in attendance. Before I turn the call 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 that it is subject to these risks and uncertainties affecting every business, including ours. Please refer to our public disclosure filings available on SEDAR and EDGAR systems for a full discussion of significant factors and risks that could affect Obsidian Energy or could affect future outcomes of Obsidian Energy. Go ahead, Dave.

Thank you, Kyle. Good morning to everyone on the call. We appreciate you joining us today. I think it goes without saying that there is a fair amount of news in our press release this morning, covers off the full year 2018 financials with regard to guidance, an update on our primary Cardium program, progress on our cost structure, commentary on our ARO as well as a bit of divestment and hedge unwind activity. I have the privilege of telling this story as I pass the baton to Mike Faust, who has joined us on the call.

There's much to be proud of together, and I look forward to the next phase of Obsidian Energy's journey, which he will steward. Before I introduce Mike, I have a few thoughts on the year and where we're headed. 2018 is a tale of 2 halves of the year. As we discussed at Investor Day in November, the first half of 2018 had some production shortfalls associated with our integrated waterflood development and that only 2 -- only 1 of the 2 Deep Basin wells drilled last year performed as expected. We looked over our portfolio and made the choice in late spring that we needed to focus on doing a few things very, very well rather than drill throughout our acreage.

As many of you know, we announced at our AGM a pivot of the company. We would prioritize, reorganize and fund an acceleration of the primary development potential in our industry-leading Cardium acreage. That meant limiting rig moves, standardizing the play fairway, utilizing existing infrastructure and focusing the intellectual horsepower of the company on manufacturing repeatable, predictable Willesden Green wells. We brought in Aaron Smith to lead a new major projects team and our fall development program operational results speak for themselves. Although, I'm sure Aaron will say a few words on this after me on the call.

That program should have put an exclamation point on the 2018 financial results, but was muted with widening differentials and a decreasing WTI price. That situation fostered the Alberta government to curtail liquid volumes in the new year. It is important to understand that the macro landscape does not diminish what the team did, replaced reserves in the Cardium by 150% and 140% on a 1P and 2P basis, replaced overall reserves by 109% and 102% on a 1P and 2P basis, all while beginning to shut in --- again, remove underperforming legacy production from our books.

This is the second year in a row the company has achieved over 100% replacement of the prior year's production. We also delivered 2P finding and developing costs from our operating activity of $13.40 per BOE, which was especially gratifying given the capital shift to primary quicker payout wells over longer-cash cycle integrated waterflooding. The pricing challenges of 4Q were unprecedented in my nearly 30-year career in the acuteness and violence in the fall of netbacks. This doesn't change our outlook for 2019. Obsidian Energy demonstrated leading costs, rate and reserve Cardium wells, which form a foundation for 2019 and beyond.

We have already indicated to the market our plans are to balance well activity with funds flow from operations. We hold a deep set of drill-ready options for the second half of the year. As I mentioned with the legacy shut-in, Obsidian Energy has taken a proactive approach to the management of its well, pipeline and facility abandonment liability. As part of the AER's area-based closure program, the company began to take down our marginal legacy portfolio in Q4 of 2018. This meant we were able to shut in approximately 1,300 BOE per day within our legacy properties at minimal cost to the company. As a result, our legacy operating cost will be reduced by an additional $4 million in 2019. This activity helped reduce our overall decommissioning liability by a discounted $24 million versus the third quarter of 2018. This is just the beginning of our ARO evolution.

We plan to continue this momentum into 2019 and target to reduce the average cost of abandoning wells by approximately 30% on a program basis. If you consider that wells make up 63% of our book to ARO, this is an important initiative. In addition to these company efforts, we're taking action to eliminate the uncertainty regarding our New York Stock Exchange listing. We had expected to cure the New York Stock Exchange listing in the fall, as we demonstrated the results from our Cardium program. That didn't materialize when the historic widening of Canadian oil differentials in Q4 combined with volatile WTI prices and a challenging political environment caused the sentiment of the sector to shift.

That left OBE with 2 options: to propose a share consolidation for -- or naturally roll out of the New York Stock Exchange. This was not a decision management or the board took lightly. We carried out a thorough analysis of the options before us, which included shareholder outreach and feedback and financial analysis with a third party. We concluded that a share consolidation is in the best interest of our shareholders on both sides of the border. That brings Obsidian Energy back in line with peers of its size in terms of the number of outstanding common shares and allows for a broader universe of current and potential investors to participate in the story. The proposed ratio of 7:1 will ensure the share price listing requirement is met for the foreseeable feature. We are confident this is in the best interest of all our shareholders, and the resolution will be voted on at the upcoming AGM.

Before we turn to a financial review of 2018 and an Ops update, I want to address my decision to step down from the company and say a few words about Mike Faust, my successor. First, I have to say that despite our recent operational successes, we all share frustration with the performance of the sector and our share price. Since I joined Obsidian in late 2016, we have faced challenges from our past and several that were of our own accord. However, we have adopted a more disciplined strategy, sold noncore assets and refocused our development plans on the company's high-quality Cardium acreage. I am proud of what we've accomplished with the results of these efforts.

The Cardium is the future of this company. It is a natural time to transition to new leadership. I have had the privilege of working alongside Mike, this last year, as he joined the board and rolled up his sleeves on our reserves and operations committee. Mike brings a steady and driving hand to Obsidian Energy. He brings a wealth of experience as a certified petroleum geologist and has a career that spans basins throughout the world. Mike comes to us from leading exploration and land at ConocoPhillips Alaska and Quartz Geophysical.

I'm confident the company will continue to build on the positive momentum under his leadership. Mike, welcome to the family.

Thanks, David. Good morning, everyone. As Dave mentioned, Obsidian is turning the corner and has a clear path to creating significant and sustainable shareholder value. Clearly, we still have a lot of work to do and much to prove, but we have exceptionally good assets, a clear strategy and a very talented team in Obsidian.

In the past few quarters, we've seen the results that we could achieve by focusing our efforts on our strengths. My plan is to continue on this momentum by continuing to establish Obsidian as a leading Cardium-focused company with superior growth prospects.

Since coming onto the board at the last AGM, it has become very clear to me that we have a very enviable acreage position in the Cardium. Willesden Green has proven to deliver excellent results from primary development, and we have vast resources still to be developed at PCU 9 and PCU 11 as well as a very promising stack of opportunities at fairway. It's also very clear to me that Obsidian Energy has exceptional personnel in the office and in the field. I'll continue to evaluate noncore assets for potential divestment allowing us to further high grade our asset base, and most importantly, optimize our financial performance and strengthen our balance sheet.

So if you want to know what's important to me, it's like this: teamwork, first and foremost; everyone pulling in the same direction; helping each other be successful; safety in everything we do. If we treat each other as family, looking out for each other, we'll all go home in the same shape as we came to work in. Environmental stewardship, I see us as guests on the land that we develop, someone lives there. And we promised them that we'd leave the land exactly as we found it. No spills, no leaks, no failures. That takes a tremendous amount of focus and teamwork, and it's a priority everywhere I've worked.

Getting the very best technical understanding of the subsurface is absolutely critical to our development plans. We need to do the work to know where our best opportunities are. That's what I've done my entire career, and that's what Aaron and his team have been doing over the past few quarters. We need to continue that work. Finally, execution in the field. We must and will constantly look for opportunities to improve efficiency and lower cost. We'll do this while never compromising on safety or the environment. So it's pretty simple stuff, right? We do these things to the best of our abilities, it's basically the blocking and tackling, everything else will follow: better production, better cost performance, better shareholder returns.

I'm really excited about the opportunities ahead, and I look forward to speaking with our shareholders, analysts, all of our valued Obsidian stakeholders over the coming months. Finally, on behalf of the board, I want to thank Dave for his contributions and his assistance in making this a smooth transition.

I'll turn the call back to Dave.

Thanks, Mike. And let's move the discussion to the financial results. And with that, I hand the call to David Hendry, our CFO.

Thanks, Dave. Good morning. The full year 2018 funds flow from operations came in at $92 million. In the fourth quarter of 2018, funds flow from operations was negative $2 million. FFO for the quarter was heavily impacted by the historically wide differentials, which averaged USD 26.30 per BOE for Edmonton light and USD 39.42 per BOE for WCS heavy compared to the third quarter of 2018 of USD 6.83 per BOE for Edmonton light and USD 22.25 per BOE for WCS heavy.

In 2018, our capital spend totaled $177 million, including $9 million of decommissioning expenditures, well below our budgeted $190 million, which included 36 gross operated wells and the commissioning of the PROP gas gathering system and associated infrastructure. $13 million of savings was due to the deferring, nonproductive capital and cost reductions on both drilling and decommissioning. Overall, production for the year averaged 28,953 BOE per day at the high end of our revised guidance range.

Production in the fourth quarter averaged 29,905 BOE per day, an 8% increase versus the third quarter of 2018. On a full year basis, operating cost came in at $147 million or $13.89 per BOE and G&A came in at $24 million or $2.24 per BOE, both within our guidance ranges.

In the fourth quarter of 2018, operating expenses were $33 million or $11.82 per BOE, and G&A costs were $5 million or $1.95 per BOE. This is the lowest operating and general and administrative cost per BOE metric achieved in over 10 years. The reduction was due to successful cost-saving initiatives across the company and added Cardium volumes.

Net debt at December 31, 2018, was $497 million, which includes $337 million drawn on our syndicated credit facility and $82 million of senior notes. In the first quarter of 2019, the company reached an agreement with the holders of our senior notes to amend our senior and total debt-to-adjusted EBITDA covenants to a maximum of 4.25:1 for 2019. The amendment provides flexibility to execute the 2019 program within covenant limits. Although, we have budgeted our 2019 capital program to be balanced with our fund flow from operations, the covenant release allows for more headroom to protect from short-term volatility in commodity prices. In 2019, we will continually work at managing our debt levels to remain compliant within these covenants.

In late 2018, with the decrease in WTI prices, we were able to restructure part of our existing hedge book by removing a 1,000-barrel per day WTI swap in the third quarter of 2019 for proceeds of $500,000. Also, in late December, the company monetized the physical delivery contract for 15 million cubic feet per day to Northern Border Ventura for USD 10.5 million or CAD 14 million due to the expansion in the forward curve spread between AECO and Northern Border Ventura gas pricing. These proceeds were used to reduce debt.

As a result of volatile heavy oil differentials and our legacy shut-in program at year-end, the company recorded noncash impairment charges in our Peace River and legacy assets totaling $97 million. Lastly, subsequent to the year-end, the company signed a purchase and sale agreement to sell the associated production and mineral rights below the Cardium formation from its Carrot Creek property for $12.5 million, while allowing the company to still retain the rights to the Cardium formation. The company plans to apply the proceeds against debt.

I'll now pass the call to Aaron Smith to discuss our fourth quarter operational results.

Thank you, Dave, and good morning, everyone. 2018 was a transformational year for the company, with a strategic decision to concentrated -- to concentrate on the light end of the barrel and focus on primary Cardium development. The year started out with operational challenges in PCU 9, which saw higher water cuts than initially anticipated; and our first Deep Basin well, which had strong liquids production but lower-than-anticipated dry gas and total volumes. These were offset by exceptional results in our Willesden Green Cardium and PROP wells, which exceeded expectations, with the Willesden Green Cardium wells averaging IP30 rates of 650 BOE per day and our PROP program averaging IP90 rates of approximately 400 barrels per day.

Due to the strong results, the decision was made to reallocate our Alberta Viking capital into 4 additional PROP wells in the second half of 2018. We also added an additional $50 million of primary Cardium development, our 14-well Willesden Green program. Our strategic shift into focused, primary Cardium drilling in Willesden Green has enabled us to deliver exceptional, cost-efficient and repeatable results.

All 14 wells have now been successfully drilled, completed and brought on production. We are expecting well performance to deliver 12-month capital efficiencies of approximately $18,500 per BOE per day, with costs coming in below our forecasted estimates. Of the first 10 wells in the second half, IP30 rates have successfully yielded between 328 and 860 BOEs per day. The remaining 2 pads have been brought on production and have initial rates which point to similar results.

The second half 4-well PROP drilling program was completed on time and on budget. The first pad was brought on in -- on production in early October and showed initial peak rates of greater than 300 barrels per well per day. However, we decided to shut in all 4 wells due to widening differentials and to defer peak rates to a more favorable pricing environment. Now that WTI pricing and differentials have improved, we have very recently brought all 4 wells on production.

Our single Deep Basin well drilled in the second half of 2018 showed strong performance, and the company will continue to -- its delineation of the Deep Basin play in 2019. In 2019, we are expecting to spend approximately $120 million, including decommissioning expenditures. In the Cardium, we plan on drilling 16 Cardium wells for a total cost of $74 million. Five of these wells have been drilled with production expected by the end of March. The remaining 11 wells will be drilled in the second half of the year, and given better pricing, we could add additional locations.

Our team continues to build out our inventory of highly economic locations in the Cardium, and currently have 50 executable locations and more than 600 total Cardium locations across our entire asset base. We also plan to continue opportunistically leveraging our Deep Basin land position by drilling 2 wells in the second half of 2019. The pad sites of the proposed Deep Basin wells is shared with Cardium locations, which will improve cost, and ultimately, the economics of the project. However, our main forecast -- focus remains steadfast, the Willesden Green Cardium play.

With that, I'll now turn the call back to the operator.

(Operator Instructions) Your first question comes from the line of [Tyler Crawford] from Obsidian Energy.

Yes, sorry. I'm just a private investor. Based on your presentation, if prices pick up in the oil market, you may have some additional cash of, maybe, $60 million to $90 million. I know a lot of that will go toward debt. At what point will you consider allocating some of that toward possible share buybacks?

Share buybacks are going to be linked to the level of cash proceeds that we likely get back from doing further asset dispositions. So after we would get away a meaningful asset disposition, we would look at how we would best apply that proceeds, and one of those considerations would definitely be looking at share buybacks.

Okay. So there is -- if there is a pie in the sky target, oil prices go up quite a bit higher, I don't anticipate that, but there is really no point at which you would say, "You know what, a small percentage of this would go toward buybacks?"

Tyler, this is Dave French. Under the normal course operations of the business, the funds flow we would look at its use, but it would normally take a change in the asset base for us to consider a buyback just because of the way our existing RBL facility works. So it would be based on the proceeds of a sale rather than just a normal change in price.

We do -- we are optimistic, obviously, on changes in oil prices in the second half of the year. And so you'll see us continue to think about the use of those dollars. But there'll probably be some combination of development and debt first, and then to the extent, we looked at proceeds from sale that would -- we would look at buybacks as an option.

Your next question comes from the line of [Scott Stewart] from [Caliber Investment.]

Yes, I'm sorry, guys, I missed the first part of the call, but could you tell us how you are going to address the stock price and the delisting date to get the price above $1?

Yes. This is David French. In my opening remarks and it's in the release as well, we're going to go to an AGM vote related to a 7:1 share consolidation. We've -- we looked at a number of options including just allowing the delisting, allowing people to seek liquidity on other trading platforms. That was -- for us, that did not look as attractive, especially we do have a fair amount of shareholders that are south of the border. And so we view the best interest for them is to do a consolidation. So that will be brought to the shareholders for the upcoming AGM, a 7:1 reverse split.

(Operator Instructions) Your next question comes from the line of Chip Parker from Register Financial.

Has the company addressed the size of the board and the compensation for the board? I think for a company your size, it appears to be pretty much out of line for a company of your size. The compensation appears to be pretty rich. And in light of the stock price performance, I think the shareholders would like to see the management give something back that might be reflected in the price of stock.

Yes, Chip, this is Dave French. I think the board is continuing to look at what the suite of electors will be for the AGM. So that decision made. As you know, I will not stand for the Directors, so the number will go down as you move forward. I think they're looking at that optimal size and scale, but that will come out as -- with the proxy season and events at the AGM this summer.

(Operator Instructions) There are no further questions at this time. I'd like to turn the call back over to Mike Faust for closing remarks.

Well, thank you, everyone, for joining us on the call. I'd like to just take a brief moment and thank Dave for his leadership and wish him well in his future endeavors. I look very forward to communicating with you all in the future. Again, thanks very much for joining us. Have a great day.

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