Pembina Pipeline Corp (PBA) 2004 Q1 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Provident Energy first quarter results conference call. I would now like to turn the meeting over to Mr. Randall J. Findlay, President of Provident Energy Trust. Please go ahead, Mr. Findlay.

Thank you. Good morning and welcome to Provident Energy's first quarter 2004 results call.

With me today are a number of members of our senior management team, Gary Kline, Mark Walker, Bill Cromb, Dave Fricker, Cameron Vouri and Jennifer Pierce.

Provident experienced a solid start to 2004. Our financial results met expectations, oil and gas production and mid stream services operations were on track. And executing upon our balanced portfolio strategy, we took actions during the first quarter, closing the Bod deal (ph) financing, and negotiating the Olympia and Viracocha transactions, the results of which fortify Provident Capital and generate accretive growth of our underlying business.

This morning I shall review first quarter financial and operating results for each of our business. In doing so, I shall update our capital plans for 2004, and speak to the benefits of the recently announcement acquisitions of Olympia and Viracocha. Following my formal remarks, I shall take questions from the callers.

Now to address Provident's first quarter performance. Cash flow from operations was $39.2 million or 45 cents per unit, compared with $42 million or 69 cents per unit. The decrease was due primarily to lower production volumes and realized prices in the first quarter, in our oil and gas production cash flow of 28.8 million offset by the addition of our stable mid stream services business unit, which contributed 10.4 million of cash flow for the quarter.

Distributions in the quarter totaled 31.0 million or 36 cents a unit, compared to 33.1 million or 60 cents a unit in 2003. Representing the first quarter 2004 pay out ratio of cash flow from operations of 79%. On an adjusted cash flow basis, Providence pay out ratio is 86%. Provident uses the term adjusted cash flow to refer to cash flow from operations, net of the interest paid on the subordinated convertible debentures. Management reviews adjusted cash flow in setting distributions and has historically paid out the majority of the suggested cash flow as distributions to unit holders with the drip program funding capital programs.

For the first quarter, Provident had a net loss of $2.3 million or six cents per unit, compared to an $8.7 million or 17 cent per unit loss for the same period in 2003. The implementation of the new Canadian institute of chartered accountants, guideline 13 called hedging relationships, resulted in a pre-tax, non-cash reduction in revenue and earnings of $22.2 million and a net loss for the first quarter of 2004. Details on the income statement effects are - the details of this are on our guideline 13, outlined in note two of our financial statement.

So addressing specific business unit performance. First of all, in Provident's mid stream services bidding unit, we generate cash flow by providing fee based services, including extraction, transportation, storage, distribution, and marketing of natural gas liquids to petroleum producers, refiners, petrochemical companies and marketing firms. For the first quarter of 2004, Provident's mid stream services business unit generated $10.4 million in cash flow from operations, on target with our expectations. Throughput at the Redwater fractionation facility averaged 58,600 barrels per day, while throughput at the Redwater facility averaged less then 63,000 barrels per day, Provident was able to optimize existing capacity and contractual arrangements to achieve our financial objectives.

April first was the start of the new NGO contract year. And while a significant portion of our supply is based on long-term contracts, some of the supply is contracted on a year-to-year basis. As a result of efforts during the first quarter, Provident successfully renegotiated contracts with its NGO suppliers at terms consistent with our plan. The increased focus on natural gas exploration and production on Northwest Alberta, in Northeast VC, combined with the fee stock requirements of Alberta's petrochemical industry has created a robust market for Provident's midstream services business unit. Provident's NGO assets are well positioned to capitalize upon customer driven opportunities. And we continue to assess opportunities to expand our NGO asset footprint. Deal flow in the mid stream has been very good so far.

Now turning to Provident's OGP, or oil and gas production unit. Our OGP unit produces cash flow from the development production, and sales of natural gas, light, medium oil, natural gas liquids and heavy oil. In the first quarter of 2004, OGP generated 28.8 million of cash flow from operations compared to 42.0 million earned for the same period of 2003. The year-over-year decease in OGP cash flow from operations is attributable to lower production volumes, higher operating cost, and a decrease in natural gas prices, and in OGP's realized crude oil price due primarily to the increased strength of the Canadian dollar, compared to the U.S. dollar.

First quarter 2004 production averaged 24,300 barrels a day, compared to fourth quarter 2003 production. We were down 1,900 barrels a day due to natural declines, as well as increased downtime and weather driven delays impacting the timing of our southwest Saskatchewan and southern Alberta drilling programs. Production for the first quarter 2004 was 44% natural gas, 29% medium and light oil, and natural gas liquids and 27% heavy oil.

Operating costs were at $8.36 for BOE during the first quarter, compared to $8.99 in the fourth quarter of 2003. Due to higher, fuel, chemical and power price environment and increasing service cost, Provident now expects our operating cost for 2004 to average between eight and 8.50 for BOE.

Year-to-date Provident $10.9 million in development capital including half a million dollars in Lloydminster and $2.2 million in West Central and Southern Alberta on re-completion and drilling activities. Approximately $7.8 million was spent primarily for three acquisitions of mineral rights in southeast and southwest Saskatchewan with significant shallow gas drilling opportunities. Provident executed several property acquisitions in the first quarter of 2004, acquiring 380 barrels of oil equivalent day of production, and mineral rights in Lloydminster and Southern Alberta core areas for about $6.6 million. Provident also divested of non-core assets in Westard Ho and Dog Land (ph) receiving proceeds on $6.4 million.

While our shallow gas development activities were delayed in the first quarter, due to the effects of poor weather conditions, Provident began shallow gas drilling in southwest Saskatchewan in April. Provident's heavy oil activities will begin in late May. For 2004, Provident has increased its capital budget from approximately 47 million to $66 million. The capital budget increase is primarily due to re prioritization and high grading of Provident's development plans including $6.9 million of additional capital, for shallow grass drilling in southwest Saskatchewan. Three point eight million dollars for land acquisition in southwest Saskatchewan. Six point six million dollars associated with capital spending on assets acquired through Olympia and Viracocha transactions, which will produce incremental production of approximately 850 barrels of oil equivalent a day. And about 1.1 million for mid stream and corporate programs.

Provident now estimates it will add approximately 4,900 barrels of oil equivalent a day of initial production, 1,900 barrels of oil equivalent a day more than originally budgeted. Production should be weighted 62% to natural gas. Twenty-three percent light medium oil and NGOs and 15% to heavy oil.

As mentioned, Provident took specific actions in the first quarter, which will provide the trust with greater financial flexibility and strength. One of these actions was the closing of a broad deal financing and the issuance of 4.5 million trust units at a price of $11.20 per unit. The net proceeds of $47.9 million were used for debt reduction and to fund ongoing capital expenditure programs.

Another action was, of course, initiation of negotiations on concurrent acquisitions of Olympia energy and Viracocha energy. Upon culmination of negotiations on April sixth, Provident announced it had executed two separate and independent arrangement agreements to concurrently acquire all of the out standing shares of Olympia and Viracocha, for non-cash consideration of 218 million and $206 million respectively. The transactions are payable through the issuance of Provident units and the assumption of debt and working capital. Specific terms of the arrangement agreements which included the formation of two explore co's may be reviewed by visiting our Web site.

Circulars were mailed by Olympia and Viracocha last week, and their respective shareholder meetings are scheduled for May 27th. Based on this information we expect the transactions to close on May 28th. Consistent with Provident's balanced portfolio strategy of acquiring highly accretive oil and natural gas producing assets, and long-life stable infrastructure assets, the transactions separately, and on a combined basis are accretive to Provident's cash flow, production and reserves on a per unit basis. The production assets acquired by Provident as characterized by high working interest, and weighted toward natural gas, and light, medium oil. Additionally, there is significant overlap of existing production assets which will provide the great potential to capture economies of scale, and expand internal development opportunity within core operating areas of West, Central and Southern Alberta.

Upon closing, Provident estimates the acquisition of Olympia and Viracocha will increase Provident's 2004 average daily production to approximately 30,000 barrels of oil equivalent per day. On a pro forma basis, production will be weighted 45% natural gas, 33% light, medium oil, and NGO's and 22% heavy oil.

To conclude activities with the first quarter demonstrate our ability to execute upon our balanced portfolio strategy and delivery results. As a result, I think it would be fair to say that we at Provident remain steadfast in our focus on generating long-term value for unit holders by being astute and disciplined operators of our existing businesses. And by making sure and accretive acquisitions of oil and gas, and energy infrastructure assets. Our plan going forward is to do more of the same.

With that, our formal remarks on the first 2004 results are concluded. We would now like to move question-and-answer period.

Thank you, Mr. Findlay. [OPERATOR INSTRUCTIONS]

Thank you. The first question is from Jerry Turk (ph), a private investor. Please go ahead.

Thank you. Great talk. And I enjoyed listening to all of the numbers. But they add up to one thing that I'd like to know is back in November, roughly you dropped your distribution rate. And during my discussion with your office one time, I was told well about the middle of this coming year, we expect it to go up. And based on the things you've done with these accretive additions, I would think that's true. Do you have any prognostication of when you think you might be increasing your distribution rate, again?

Thank you very much for your question. And I find it difficult to believe that we would prognosticate that we would be increasing our distributions that far out in to the future. That's something we haven't done in the past.

But to get to the main point of your question, as you know, a significant portion of our production is hedged at various prices. But there does remain a certain amount that is unhedged. And to that extent we are subject to, you know, the whims of commodity prices including the exchange rate on the Canadian U.S. dollar. So I'm not going to say that we're going to increase our or decrease our distribution, but we are commodity price driven. And as the best we can do is to continue to look forward and see what commodity prices are doing.

And as a board, the board makes its judgement on what its distribution is going to be on a month-to-month basis, keeping an eye on commodity prices. Certainly the two acquisitions are accretive to our cash flow. But it's the board's decision as to whether they wish to distribute that additional accretive amount.

One question that goes with that, is I also understand you were in to this distribution company that you bought for gas, how does that add in to your figures?

Distribution company for gas, I'm not - are you referring to our prior ownership in Energy Trust Marketing limited, sir?

I was told that you had bought some kid of a company where you would be able to handle distribution of gas, which you would then be able to do the work for a lot of the other small producers. And thereby, get additional income from this. I don't know what the company's name was, but I understood you had bought something.

We have an interest in an oil marketing company called Matrix. And your description is exactly right. What we do is we market our own crude oil, but we also market for smaller entities as well. And that has been successful for us increasing the price that we have received for our crude oil. But it has made a novel amount of contribution to our bottom line right now. It's really been up running for about six months. We think that it may make a contribution in the future. But that's - we're just in the early stages right now, in terms of marketing third party volumes.

Very good. Thank you.

Thank you. The next question is from Jason Crumbly (ph) from Dundee Securities. Please go ahead.

Hi, thank you. Just curious as to what the U.S. ownership levels are at.

Our U.S. ownership is around 70 to 75%.

OK. Thank you.

Thank you, the next question is from William Kline (ph), Private Investor. Please go ahead.

Thank you. I would like to find out if PVX is doing any long-term planning on acquisitions of pipelines or constructions of pipelines to tie in to the Alaskan pipeline that Warren Buffett has talked about with Met American.

OK. Mr. Kline, that's a - it's a good question, because where our midstream assets are located, which is in essentially in Edmonton, Alberta, which is the center for NGO processing in - certainly in western Canada. Depending on the root of that pipeline, and there's a lot of talk that the pipeline might come down through northern Alberta and drop off some liquids in the Edmonton area, while there's no guarantee, no certainty that that would happen, all I can say is that the facilities that we have are in an ideal location to take advantage of that. And to do some expansions around that, if that does come to pass. So we're strategically positioned, I guess, if that should - if those events should come to pass in that order.

First of all the building of the pipeline, and then of it passing through the Edmonton area.

Right. I'm wondering is there any way to like contact the Canadian government to help it along? Since there is, you know, a large infrastructure there in that area, it seems - and the pipeline structure, and the right of ways and so on and so forth, it seems like it would be very advantageous all the way around.

Indeed, it would. And in this case, it's the Alberta provincial government has been lobbying quite strongly with both the state of Alaska, as well as the potential pipeline builders, to do exactly what you're saying, sir.

Great. I appreciate your time.

Thank you.

Thank you.

Thank you. The next question is from Brian Prokop from Peter's and Company. Please go ahead.

Great. Hi, Randy.

Good morning.

A couple of quick questions here, on your op cost guidance, have you included the Vericocha and Olympia numbers, just looking at some of the lower operating costs they ran with, and I think you're now seeing eight to $8.50 is that all included?

That is, Brian. Their costs are about $7 of BOE. So while it's lower than what ours are, it's not hugely lower to, you know, bring the average down. And we're just seeing what the high cost of energy, you know, higher operating cost coming through. And as you can appreciate, we're also - we find it makes a lot of economic sense to continue to produce low productivity, wells and things that have higher operating costs. But when you go get to the net back, you still have a positive cash flow net back.

Right. You also did some divestitures during the quarter. I'm just wondering if you're looking at doing further divestitures to get rid some of the higher cost assets? Or what are your plans on that?

That is something that's under consideration is to, I guess, do a bit of a clean up on some of our - some of the assets that are non core to us. And generally, it would fall in to that category. We have no - nothing specific. We don't have packages out. But, you know, we're approached all of the time by folks who are interested in taking over properties that are noncore to us.

Right. And final question, on the U.S. ownership, you mentioned 70-75%, what's your plan to deal with it in light of the federal budget?

Well we're - Brian, I wish I could you we had - you know we had specific plans in place. We've been in contact with probably all of the legal firms in town here as to what - you know, what opportunities exist to do that, as well as - and no one has come up with a perfect solution by any means.

I don't think there ever will be.

And so we're reviewing it. We're monitoring where we're going. And, you know, we have until January '07, but that being said, we're not sitting back and not taking any action. So we're doing a lot of research, I guess, would be the proper thing to say, Brian. And we've looked at a number - a couple of different alternatives. And I guess, that's about all I can say at this point.

So you don't have any preferred alternatives. And hopefully, we'll hear something in the next couple of quarters?

Yes. It's - I can pass on to you that at our board meetings, it's probably the number one or two item that we discuss. So we're taking it very seriously.

Very good, thanks.

Thanks, Brian.

Thank you. [OPERATOR INSTRUCTIONS] The next question is from Kenneth Morray (ph) from - it's a private investor. Please go ahead.

Hello.

Hello.

I was wondering about in this report, you talk about crude oil prices of $9.60 a barrel and what we hear all of the time $39 oil. Why the large discrepancy?

Mark.

I believe the number you're referring to sir, is the opportunity cost on our commodity price risk to management program in the first quarter.

Right.

We had a cost. And that would have been the first quarter of 2003, we had a cost on that of $9.63 a barrel that would have been netted off the prices we would have otherwise received. But no, a lot of (inaudible). Sorry?

And what are we getting for our oil these days?

Well we have different qualities of crude oil like medium and heavy oil, but in general for the light medium, grade we would be getting in and around $43 Canadian. And for our heavy oil, we've be getting closer to $30 Canadian.

OK. One additional thing, the market hasn't like your first quarter reports very well. Can we expect that price to share some pick up later this quarter?

Well I think, sir, we're sticking to our plan. And you've heard what our - what we're planning on doing in terms of internal development plans, and continue to look for accretive acquisitions. And I think that's how we run the business, and pretty much the unit price will take care of itself.

All right. Thank you very much.

Thank you. There are no further questions registered at this time. I'd like to turn the meeting back over to Mr. Findlay.

Thank you. Thank you all of the participants on the line for participating in our conference call. And we'll talk to you again at the end of the second quarter.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation. And have a great day.