Pembina Pipeline Corp (PBA) 2003 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Provident Energy Trust announces year-end conference call and Web cast.

I would now like to turn the meeting over to Mr. Thomas W. Buchanan, Chief Executive Officer of Provident Energy. Please go ahead, Mr. Buchanan.

Thanks, Jenny. Good morning and welcome to Provident Energy's 2003 year-end and fourth quarter results call. Participating with me on the call today is my business partner, Randy Findlay, who is president of Provident Energy. We are also joined by members of Provident Energy's senior leadership team.

I am pleased to report that 2003 was a defining year for Provident Energy. We added a new dimension to the trust with our decision to implement a balance portfolio strategy, diversifying the midstream services business and to acquire the Redwater NGL processing system. As a result of these actions, we are a stronger trust today.

Our asset base is more diversified, our cash flow and distributions are more stable and we are now positioned to deliver long-term value to investors, given that we have two solid growth platforms for accretive growth in our oil and natural gas production business and our midstream services business.

Having acquired the midstream services on September 30 of 2003, this is the first time Provident has reported segmented results.

This morning, I will review the fourth quarter financial and operating results for the oil and gas production business or the OGP business, as we refer to it.

And Randy will talk to our oil and gas year-end reserve evaluation results, the midstream services business and, as well, how we see opportunities shaping up for 2004.

First of all, let's address the financial and OGP operating results. Unless otherwise indicated, all values are in Canadian dollars and conversions of natural gas lines to barrels of oil equivalent are at six to one.

Since inception on March 6, 2001, Provident's philosophy has centered around delivering to unitholders stable cash distributions and accretive growth of our underlying business.

In 2003, we performed well against these objectives. Provident generated a total return of 25%, measured by cash distributions and capital appreciation. From inception, March 6, 2001 to December 31, 2003, Provident's total return to unitholders has been 58%. This total return includes $6.63 per unit of cash distributions of which approximately 50% was return of capital.

The 2003 cash flow from operations was 135.7 million or $1.98 per unit compared to 97 million or $2.41 per unit in 2002. Fourth quarter 2003 cash flow from operations was 33.3 million, 41 cents per unit, compared to 36.3 million or 63 cents per unit for the fourth quarter of 2002.

Distribution to unitholders in 2003 totaled 129.6 million, $2.06 per unit, compared to 81.5 million or $2.03 per unit in 2002. Fourth quarter 2003 distributions totaled 32 million or 39 cents per unit, compared to 30 million or 57 cents per unit in 2002.

In 2003, Provident maintained a high pay-out ratio. Provident believes cash flow remaining after taking care of debenture interest and capital obligations should be distributed to unitholders.

In 2003, Provident paid up all of its adjusted cash flow as that was able to satisfy it's 31.6 million capital program with funds received from the distribution reinvestment program and minor property dispositions.

For residents of Canada who were unitholders, distributions received in 2003 were determined to be 59% taxable and 41% deferred return of capital.

For U.S. federal income tax reporting purposes, Provident is considered a corporation. As a corporation, Provident distributions to U.S. unitholders can be considered qualified dividends as determined under the new U.S. Internal Revenue Code rules and U.S. Internal Revenue Service reporting guidelines issued in 2003.

For 2003 and subsequent years, Provident's distributions will either be qualified dividends and eligible for the 15% tax rate or will be a return of capital. For further information on U.S. tax disclosure, we put out a press release last night and I encourage people to refer to the press release.

Specifically addressing OGP's 2003 contribution, in 2003, cash flow from the OGP business unit was $126.7 million compared to 97 million in 2002. The significant increase is primarily due to annual production volumes - as a result of increases in annual production volumes, primarily as a result of the acquisition of new order (ph) resources at the end of 2003.

During the fourth quarter of 2003, cash flow from OGP was 24.4 million compared to 36.3 million for the year-ago period.

In 2003, Provident realized results of its oil and natural gas production business, achieving a 95% success rate in its drilling program, adding approximately 3,200 barrels of oil equivalent per day of initial production at a cost of approximately $8,800 per flowing barrel.

Of the 3,200 boed, 2,650 barrels a day was added in the Lloydminster area and the remaining balance was added in southern Alberta, primarily our shallow gas and light oil area. Provident's total capital program in 2003 was 31.6 million, of which 7.5 million was spent in the fourth quarter.

In the fourth quarter of 2003, 300 barrels of initial production was added. We are very enthusiastic about the work completed in 2003 by Provident's exploration, geological land and engineering teams on properties acquired in 2002.

As a result of the team's work, Provident has identified over 100 opportunities, more than two-thirds of which are shallow gas related on properties located in southern Alberta to Saskatchewan.

To capitalize on these opportunities, the trust has increased its 2004 capital budget by 45% over 2003, to $46 million. Randy will speak more specifically about this at his discussion on the outlook for 2004.

Despite our early success in 2003, operationally, we had mixed results in our oil and natural gas production business.

Although average annual production increased from 21,801 barrels a day in 2002 to 27,314 barrels in 2003, Provident fell short of its average daily production target of 28,500 barrels a day. This shortfall was mainly due to higher natural gas declines in both its Gilby and Brazeau fields, project referrals and the fact that the trust chose not to complete a significant oil and natural gas acquisition in 2003.

Average production in the fourth quarter of 2003 was 26,193 barrels a day compared to 30,790 barrels a day for the same period in 2002. Provident's 2003 daily production mix was weighted 46% to natural gas, 29% to light/medium oil and NGLs and 25% to heavy oil.

Field netbacks of $15.19 per boe of in 2003, were flat over the year-go period, primarily due to higher operation costs and opportunity costs associated with Provident's Commodity Price Risk Management Program.

In 2003, the oil and natural gas sector generally realized increased costs due to higher costs for processing, propane, electricity, well servicing and workovers. Provident's operating costs increased approximately 15% year over year from $6.63 per barrel in 2002 to $7.66 - I'll repeat that -- $7.66 per barrel in 2003.

During the fourth quarter, Provident's operating costs were $8.99 per barrel compared to $6.52 per barrel in the year-ago period. The fourth quarter 2003 operating costs were higher as a result of $1.08 per barrel in prior period adjustments incurred in the fourth quarter - and booked in the fourth quarter, primarily due to processing fees, adjustments and down-hole service, fuel and electricity costs.

Provident has already initiated a number of activities to effectively control operating costs including reorganization of operating teams.

In 2004, due to higher commodity prices and the effects of increased energy activity on the skilled labor force, we expect operation costs will average somewhere between $7.50 and $8.00 per boe for Provident.

Before delving into the specifics of our Commodity Price Risk Management Program, I want to take a moment to outline Provident's risk management approach. Risk management is the key management tool employed to protect Provident's employees, stakeholders, assets, environment and reputation. It is also used to achieve predictable and stable cash distributions.

Provident is exposed to all the normal business risks and market risks inherent in the oil, natural gas and natural gas liquids business, including commodity price risk, foreign exchange risk, interest rate risk and counter party credit risk. Since inception, Provident has used financing, financial hedging instruments to manage the commodity and foreign exchange exposures associated with its revenue stream.

In 2003, Provident broadened the scope of its risk management activities, hiring additional expertise and implementing an integrated risk management program that cuts across the business lines and commodities and incorporates systematic programs to identify, monitor, measure and mitigate business and market risks.

The trust also established an officer level risk management committee, members of which include myself as CEO, Randy Findlay as president, Mark Walker, our chief financial officer, and Gary Kline, our vice president of commercial development and risk management. The risk management committee reports directly to the board of directors and is responsible for approving strategies and monitoring results of the risk management programs.

As it relates to mitigating our commodity price risk, Provident's Commodity Price Risk Management Program or the CPRMP, as we refer to it internally, involves a disciplined hedging strategy and the use of derivatives instruments to minimize price risks associated with the volatility of commodity prices.

Strategies are selected based on their ability to protect to help Provident to provide stable cash flow and distributions per unit rather than to simply lock in a specific price per barrel or MCF of gas.

In 2003, Provident realized an opportunity cost of almost $50 million - $48.9 million - or 73 cents per unit compared to 6.5 million or 16 cents per unit in 2002. In 2003, 46% or 22.6 million of our opportunity cost was incurred in the first quarter.

During that period, world commodity stock prices were pushed higher and prices at which Provident had cashed through the fourth quarter. The squat price increase was primarily due to market perception of the supply shortage created by a petroleum workers strike in Venezuela and reduced exports from the Gulf resulting from the U.S. invasion of Iraq.

In the fourth quarter of 2003, opportunity cost were 4.9 million compared to $4 million the same period in 2002. While Provident experienced opportunity costs in 2003, the trust remains committed to its Commodity Price Risk Management Program since it was implemented at inception. Provident's hedging programs achieved the goal of helping stabilize cash flows.

At the same time, it has allowed Provident to capture the higher commodity prices realized in the market during 2003 on the unhedged portion of our production. Over the long-term, we believe a disciplined and consistent approach to commodity price risk management will provide for a more predictable range of distributions for our unitholders.

I will now transition to Randy Findlay, for a review of our oil and natural gas assets, 2003 reserve evaluation and a discussion of our midstream service businesses unit.

Thank you, Tom. There's been a lot of talk and anticipation in the marketplace about the new disclosure standards as mandated by the Canadian Securities Administrators National Instrument 51-101, their standards for disclosure of oil and gas activities. So let me address this first.

Provident's oil and natural gas reserves as of January 1, 2004 were evaluated and reviewed by McDaniel and Associates. McDaniel evaluated the properties that comprised approximately 75% of the value of the trust, with the properties making up the remaining 25%, evaluated by qualified Provident staff and ultimately signed off by McDaniel. This is the third year McDaniel has evaluated Provident's reserves so they have a high degree of familiarity with our assets.

Under McDaniel's evaluation, prepared in accordance with NI-51, Provident had minimal revisions to its reserves on a company interest basis. Before accounting for production, proved plus probable reserves for this year were compared to established reserves reported January 1, 2003 were up 1%. Proved developed producing reserves had a slight downward revision 1.5%.

While total proved reserves categories was revised downward by 5.6%, primarily as a result of competitive drainage at Brazeau and Gilby natural gas fields.

Year or year, we realized a 3% increase in our proved developed reserves as a percent of total proved reserves, moving from 82% in 2003 to now, we're at 85%. Provident also had a three-year average total proved and probably finding development and acquisition cost of $12.77 per boe. And that includes future development costs and the NI-51-101 revisions.

We believe that taking the three-year average of FD&A is the appropriate method in which to look at reserve add costs because it takes into account more full cycle economics as well as the means through which reserves are added.

It's also important to recognize that, as a trust and not an exploration oriented venture, Provident is naturally going to focus capital and other resources on reserve promotes between categories. In 2003, as a result of in-fill drilling, we promoted over one million boes of reserves into the proved developed producing category.

However, this is capital spend and it increases FD&A costs, it does create production in cash flow. Production in 2003 totaled approximately 10,000 million boes - 10 million boes. And along with additions and revisions, resulted in proved plus probable reserves, opening balance at January 1 of 2004, of 54.9 million boes. This compares to 64.5 million boes on January 1, 2003.

Based on McDaniel's evaluation, Provident's total proved plus probable reserve life index for its oil and natural gas assets was 6.6 years on January 1, 2004 compared to 6.7 years reported a year ago. The ROI was determined by applying the average 2004 production rate from McDaniel's evaluation to the remaining volumes as of January 1, 2004.

We realize that Provident is at the shorter end of the reserve life spectrum. It's important to note, however, that as a result of the addition of long-term stable cash flow from the midstream services business, Provident's economic life, as a measure of future cash flows, has been significantly extended beyond that which is typically measured by the reserve life index of Provident's oil and natural gas assets.

This leads me to speak about our midstream services business. Certainly, for Provident, the highlight of 2003 was the adoption and execution of our balanced portfolio strategies and Provident's subsequent expansion into the midstream services business, with the acquisition of the Redwater NGL processing system. I think a little background on our decision to adopt a balanced portfolio strategy and expand our business scope along the energy value chain is important to share with the investors today.

In 2002, Provident's board of directors and management team spent a good deal of time evaluating Provident's long-term strategies.

The conclusion we reached was that, based on Provident's cost of capital, the proliferation of oil and natural gas trusts and the escalating competition for mature oil and natural gas properties, Provident should consider expanding the scope of its business. Such an expansion would enable Provident to continue to deliver upon our value proposition of generating stable distributions and growth of our underlying business.

As a result, Provident's strategy of being a consolidator of shorter life oil and natural gas assets evolved to the balanced portfolio strategy.

Our balanced portfolio strategy directs Provident to seek opportunities across the energy value chain that are not only accretive in the short term, but will provide greater balance and stability of cash flows in distributions over the long term.

In 2003, the valuation arbitrage opportunities that existed between junior oil and natural gas companies and larger, more liquidly traded energy trusts eroded substantially. As a result, Provident found it difficult to create significant unitholder value through the acquisition of companies, trading at multiple of cash flow not supported by the value of the underlying assets.

We remain disciplined in our approach to acquiring assets. Our strategic decision to seek accretive growth across the energy value chain was rewarded when we announced - when we were announced as the success acquirer of the Redwater NGL processing system.

In conjunction with the acquisition, Provident closed a bought-deal financing for total net proceeds of approximately $263 million, at that time, the largest bought deal in the history of the conventional oil and natural gas trust sector. The financing including total issues of 19.2 million trust units at a price of 10.50 per unit and $75 million of five-year 8.75% convertible debentures.

A world-class asset, the Redwater NGL processing system is a long-life physical asset with stable long-term fee for service and fixed margin contracts, with major oil and natural gas producers and petrochemical business with credit ratings of double B plus to double A plus.

The average contract life at Redwater is 11 years with more than two-thirds of the plant's output contracted for 10 years or longer. In fact, one-third of Redwater's volume is contracted for 22 years.

Strategically located in one of the four main NGL hubs (ph) in North America, Redwater now has a 30% share of the NGL (inaudible) capacity in western Canada and is the most modern and cost efficient integrated NGL system in the country.

The Redwater system includes a 43.3% interest in the 38,500 barrel per day younger NGL extraction plant in northeast B.C., a 100% interest in the 565-kilometer natural gas gathering line and a long-term shipping arrangement on the Panama piece pipeline system and a 100% interest in the five-year-old, 65,000 barrel a day Redwater fraction agent storage and distribution facility.

Located just outside of Edmonton, the Redwater facility contains six million barrels of underground salt traveler (ph) strorage, a 32-squad rail loading raft and a 150-railcar switching yard, two full truck loading facilities and 12 pipeline receipt delivery options. Redwater is also one of two facilities in western Canada capable of processing ethane plus volumes of NGL mix.

The midstream investment complements our oil and natural gas production business and enhances the stability of Provident's cash flow and distributions. Further the Redwater NGL processing system is a long life stable asset that, unlike our oil and natural gas and production investments, does not decline and only requires minimal, annual capital investment of $1 million annually to sustain the cash flow levels.

From September 30 to December 31, 2003, midstream services EBITDA was $10.2 million and $9 million of cash flow, on target with our expectations. There's not comparable period given in the fourth quarter of - no, given - the fourth quarter of 2003 is the first quarter of recorded contribution for the midstream services. In 2004, the midstream services business is forecast to account for 25-30% of Provident's cash flow, the balance of which will be derived from our oil and natural gas production business.

As a result of the long-term cash flow forecast for the midstream asset, the trust's economic life has been extended significantly.

As I mentioned earlier, perhaps as much as 40-50%. Further, by adopting a balanced portfolio strategy, Provident has significantly reduced the need to replace declining production from OGP business in order to sustain distribution levels.

To wrap up the call, let me touch upon 2004 and the business plan upon which Provident is executing as well as why we believe an investor with an eye to the future should invest in Provident energy today. Provident is growing to first enterprise, uniquely positioned among Canadian energy trusts.

Our balanced portfolio strategy, multi-mix of assets and industry expertise create the strong platform for continued growth and generation of solid unitholder returns over the long term.

Having been in a trust for three years, Provident has matured as a business and organization. In addition to being focused upon executing the next accretive acquisition, we are dedicated to improving the mechanics and performance of our existing operating businesses.

We believe steps implemented in 2003 have put us on the right track for meeting our performance objectives in 2004 of generating stable distributions and increasing the value of our underlying assets.

In 2004, Provident anticipates the oil and natural gas acquisition environment will remain extremely competitive as more expiration of production companies convert into trust and more income trusts compete for the assets in the Canadian Western Sedimentary Basin.

As a result, we have increased our focus on internal development of shallow gas and heavy oil prospects in southern Alberta and Saskatchewan and in the Lloydminster area. We have also increased our focus on prosecuting halo (ph) acquisitions around our core properties and we will continue to pursue highly accretive opportunities within and outside of western Canada.

The infrastructure market will continue to hold opportunity for Provident, given the barriers to entry that remain high for conventional oil and natural gas trust without specific competencies in pipeline, NGL processing or power generation. The pullback and exodus from major infrastructure investments in Canada or (ph) traditionally U.S. midstream infrastructure owners and marketing oriented ventures should provide acquisition opportunities.

Additionally, Provident will build upon its Redwater footprint to provide innovated, value-added services and products to existing and new customers. The market's positive reaction to Provident's expansion into the midstream services business indicated investors have an appetite for more transactions that lead to stabilization of cash flows and longevity and the trust.

Provident remains committed to executing an integrated risk management program as we believe it protects the stability of cash flow and distributions and our myriad of stakeholders from the business and market risks.

From a financial perspective, we will continue to mitigate our exposure to commodity price volatility by selling forward a portion of our oil, natural gas and NGL production. We will also work to capitalize our synergies between the midstream services and oil and gas production businesses in order to optimize cash flow opportunities and hedge commodity risks.

And we will continue to accept the process in place at the operating, strategic planning and organizational levels of trust to minimize business risk. As a management team, we're excited about the prospects before us in 2004 and beyond.

We have the right business model to deliver value over the long term and asset mix that provides solid platform for growth across the energy-value chain and on the natural gas production, midstream service and energy infrastructure, and the right employee team to optimize existing operations, serve our customers, care for our stakeholders and find innovative means to create long-lasting unitholder value.

We would like to acknowledge out employees for their contributions in 2003 and shared commitment to Provident's values of respect, integrity, creativity and excellence. To our board of directors, we thank you for your counsel and guidance.

To our unitholders, investors and other stakeholders, we appreciate the trust you have placed in us and we will continue to work hard to reward you for your investment in Provident energy. With that, our formal remarks are concluded. Tom and I would be pleased to answer any questions as well as the other members of the management team that are here.

Thank you, Mr. Findlay. We'll now take questions from the telephone lines. If you have any questions, please press star, one on your telephone keypad.

If you're using a speakerphone, please lift the handset and then press star, one. If at any time you wish to cancel your question, please press the pound sign.

Please press star, one at this time if you have a question. There will be a brief pause while participants register for their questions. Thank you for your patience.

The first question is from Craig Shaw (ph), Sundy (ph) Securities. Please go ahead.

Good morning. I actually have a couple of questions for you. The first question is can you provide the engineering capital - the total engineering capital associated with the reserve report?

Second question - I'll just run off all the questions. Second question - is the level of participation in your GRIP (ph) compared to what it was last year? And your U.S. ownership position and if you can outline sort of plans to deal with the competitive drainage issue.

OK. It's Randy Findlay. Let's start at the ones that we - so, to start with your last question, Craig - competitive drainage.

Yes?

Particularly in the Brazeau area, the - we had the newer wells and they came on quicker, with higher rates. And that worked - that worked very well for us, for the first year or so. But what we're seeing now is that both our wells and the unit wells are essentially declining at the - at the same rate.

So I think, as far as the competitive drainage goes, we're in a position where, you know, each competitor is going to get their fair share now. I think what - the situation where we were last year was we probably - we probably had booked more than our fair - McDaniel's had booked for us more than what our fair share of the drainage was.

OK.

So that's - I guess the long - or the short answer to that is that's a stabilized situation right now. Tom, do you want to take over the - a couple of the other ones?

Sure. Craig, it's Tom. U.S. ownership currently fits around 70-75%, a little higher maybe. Certainly no concern to us as we continue to comply with all of the mutual fund trust rules under the income tax act. GRIP participation levels are currently sitting around 20-25% of our unitholders.

And that would be down slightly from about 35% last year. The reason for that would primarily be the - that the U.S. holders do not participate in the GRIP program or in the premium GRIP (ph) program, anyway.

The capital for the reserve reports - for 2004, the future development capital reserve reported $11.2 million. I don't have the numbers beyond that in front of me, but I'm happy to get those for you if you want to call us back.

Thank you, very much.

Thank you. Once again, please press star, one at this time if you have a question. The next question is from Frank Ritter (ph), private investor. Please go ahead.

Congratulations on a good year, guys. What do you foresee as far as the yield going up or down over 2004 here?

That's a tough question, Frank. We're - the business strategy that we have is generated around providing more economics like the trust and that is by doing a balanced portfolio of accretive oil and gas acquisitions and backfilling with a very stable suite of infrastructure type assets that have generally typically long life type assets. The market itself will take care of our yield, based on the market's belief of the longevity and the stability of the trust.

Currently, our yield's sitting around 13, 13.5% and, based off our run rate on distributions, that would be our 12 cents a month that we're currently distributing. If you ran that out, that will translate into the yield. So if the market continues to support our strategy of developing and implementing and executing our balance portfolio strategy and we continue to do a good job executing on that, over time, the market becomes more comfortable with our distribution stability, the yield will tighten.

Can I ask you if - what percent of your production is hedged for 2004?

About 50% of our oil and natural gas productions are currently hedged for 2004.

OK. And do you anticipate the current price staying where it's at or are you looking at a drop when thing move down internationally?

Well, I can tell you, for budget purposes, we're running - we ran our budget in November at $25.75 U.S. and 5.75 - 75? Canadian price.

And currently, obviously, we're well above that. We would love to see a production - or the market rates come up or commodity prices stay where they are, but our belief is at some point they will come off. But we're certainly comfortable with the numbers that we've budget for this year.

Thank you kindly.

Thanks.

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Buchanan.

Well, if there's no further questions, I'd like to thank everybody for participating in our conference call. We are certainly excited about the prospects for 2004. We're pleased with the results for 2003 and if anybody has any specific questions they would like to address, they can call ourselves or Jennifer Pierce here at our office and we look forward to continuing to deliver our business plan. Thank you.

The conference has now ended. Please disconnect your line at this time.

We thank you for your participation and have a nice day.