Pembina Pipeline Corp (PBA) 2004 Q2 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Provident Energy Trust second-quarter results conference call. I would now like to turn the meeting over to Mr. Randy Findlay, President of Provident Energy Trust. Please go ahead, Mr. Findlay.

Good morning and welcome to Provident Energy second-quarter 2004 investor call. I'm pleased to have the opportunity to review with you today the results we are achieving from the execution of Provident's balance portfolio strategy. With me today are Dave Fricker, our VP of Corporate Development; Gary Kline, our VP of Risk Management; Bill Cromb, our Controller; and Jennifer Pierce, our Senior Manager of Investor Relations and Communications.

Provident is a very different trust today that it was 12 months ago. As a result of our diversification into Midstream Services in the fall of 2003 and second-quarter acquisitions of Olympia Energy, Viracocha Energy and BreitBurn Energy, Provident is an energy trust with stable cash flows and more sustainable distributions, production weighted more than 80 percent to natural gas and light medium crude oil, a portfolio of quality assets with a reserve life of more than 8 years and a combined economic life in excess of 10 years; an inventory of internal development projects in Western Canada and Southern California as well as in-house exploitation, development, optimization and marketing expertise and 3 distinct business platforms. Midstream Services, Canadian oil and gas production and U.S. oil and gas production.

Each business platform employs an experienced and talented team of people. Together the platforms provide Provident unique access to value creating opportunities in the oil and gas production and energy infrastructure on both sides of the Canada and U.S. border.

This morning I shall review second-quarter and year-to-date financial and operating results for Midstream Services and Canadian Oil and Gas Production businesses. I will provide an update on capital spending and discuss the value added components of our recent acquisitions. Following my formal remarks, I still take questions from callers.

On to financial results. Provident's second-quarter financial performance was in line with expectations. Of note is the impact of the Viracocha and Olympia and BreitBurn acquisitions is minimal for the quarter as they Canadian transactions closed June 1st and BreitBurn closed June 16th.

For the second quarter, cash flow from operations was $39.5 million or 40 cents a unit compared to $31.6 million or 49 cents a unit in 2003. Cash flow from operations earned to date was $78.7 million or 84 cents a unit compared to $73.5 million or $1.19 per unit for the same period in 2003.

Since November 2003, Provident has maintained its monthly cash distributions of 12 cents per unit Canadian. For the second quarter of 2004, distributions declared totaled $35 million or 36 cents per unit compared to $35.5 million or 60 cents a unit in 2003 representing a second-quarter 2004 payout ratio of cash flow from operations of 89 percent.

On an adjusted cash flow basis, Provident's payout ratio was 96 percent. Provident uses the term adjusted cash flow to refer to cash flow from operations net of the interest paid on the subordinated convertible debentures. Year-to-date Provident has declared and paid distributions of 66.1 million, or 72 cents per unit compared to $68.7 million or $1.20 per unit in the comparable 2003 period.

For the 6 months ended June 30th, 2004, Provident's pay out ratio cash flow from operations was 84 percent, and its pay out ratio of adjusted cash flow was 91 percent.

Addressing specific business unit performance. First of all, with the Midstream business, Provident's Midstream Services business unit generates cash flow providing fee-based services including extraction, transportation, storage, distribution and marketing of natural gas liquids to petroleum producers and refiners, petrochemical companies and marketing firms.

For the second quarter of 2004, Provident's Midstream Services business unit generated an EBITDA of 8.5 million and a cash flow from operations of $8.1 million. Year-to-date, Midstream Services EBITDA in cash flow remain on target at 20.6 million and 18.5 million respectively. Throughput at the Redwater fractionation facility during the second-quarter averaged 48,452 barrels a day and 58,945 barrels a day for the 6 months ended June 30.

Third party pipeline shutdown in May of 2004 constricted supply of NGL mix to the Redwater fractionation facility during the second quarter. Despite these third party supply constraints, Provident was able to optimize existing capacity and other contractual arrangements to achieve its financial objectives for the second quarter and year to date. Supply of NGL mix resumed more normal service delivery once the third-party pipeline was reinstated in service in early of June.

With strong demand for the petrochemical and refining community for NGL products, we continue to assess internal development and acquisition opportunities that will make Provident expand its footprint in the NGL services sector and to add unit holder value. As an example, we're proceeding with an expansion of our condenser (ph) handling storage facilities at a cost of roughly $10 million. The economics of this expenditure are back stocked by a major producer -- by a major producer's long-term financial commitment.

Now moving onto Canadian Oil and Gas Production business. Provident COGP unit produces cash flow from the production and sales of natural gas, light and medium oil, natural gas liquid and heavy oil to energy marketers. It was an extremely busy quarter for our COGP business unit as the group prosecuted internal development and optimization projects on Provident's existing asset base and capitalized on external acquisition opportunities. Despite heavy snow and rainfall in the Lloydminster Southeast Saskatchewan and Southern Alberta regions which pushed back our drilling activities to late into the second quarter, the team was able to optimize existing production and deliver results that met expectations.

In the second quarter of 2004, COGP generated 31.1 million of cash flow from operations compared to 31.6 million for the same period in 2003. Year-to-date COGP has earned $59.7 million of cash flow from operations compared to 73.5 million in 2003.

The year-over-year decrease in cash flow from operations is attributable to the lower production volumes due to natural decline and the delayed development activity that I spoke of earlier, lower realized prices and higher operating costs due to rising commodity price environments.

Second-quarter 2004 production averaged 26,408 barrels a day compared to 26,781 barrels a day for the same period in 2003. Production for the second quarter 2004 was weighted 43 percent to natural gas, 32 percent to medium light oil and NGLs and 24 percent to heavy oil.

Year-to-date Provident's production averaged 25,373 barrels of oil equivalent a day compared to 27,686 barrels of oil equivalent a day during the 2003 year ago period.

Operating costs were $7.75 per boe during the second quarter compared to $7.48 per boe during the second quarter of 2003, and $8.36 per boe in the first quarter of 2004. Year-to-date operating costs were $8.05 per boe compared to $7.13 for the same period in 2003. The year-over-year increase was due to lower production volumes, increased processing fees in (indiscernible) costs and higher fuel and power costs. While operating costs across the energy sector have trended upward due to a rising commodity pricing environment, the addition of lower operating cost production from Viracocha and Olympia combined with cost savings of logistics optimization initiatives underway at Provident are having a positive impact on maintaining reasonable operating costs.

During the second quarter of 2004, Provident invested $10.6 million of development capital compared to $12 million of capital expenditures made for the same period in 2003. During the quarter, Provident drilled 26.4 nat (ph) wells, 15 of which were shallow and gas; performed recompletions of workovers on 15.9 wells; and farmed out 3.5 net wells resulting in initial production of 1150 barrels of oil equivalent a day.

Year-to-date, Provident has invested $22.4 million on internal development activities; drilled 46.0 nat wells, 19 of which were shallow gas; performed recompletions of workovers on 23.9 nat wells; farmed out 3.5 nat wells and generated incremental production of 1800 barrels of oil equivalent a day.

With increasing competition for assets in the acquisition market, Provident has worked hard to cultivate its internal development expertise and build an inventory of development opportunities. This inventory of projects will not only help to maintain current production levels but it may also add to Provident's reserve base.

Year-to-date, we have been very pleased with the results from our heavy oil drilling program as well as the initial data coming out of our shallow gas drilling program. Our year-to-date internal development activity has increased production at a cost of $12,500 per boe day which compares to very favorable to the acquisition market.

For the remainder of 2004, we're looking at capital spending opportunities totaling $60 million, 16 of which is committed to U.S. development activities and the remainder is for Canadian Oil and Gas Production and Midstream Services. With strong commodity prices we will find ourselves in a position where we have a pipeline full of high returning internal development projects. As a result, Provident will continue to be conservative in its payout ratios so that we maintain a strong balance sheet and have the flexibility to best manage the funding of our capital programs and paying down of debt.

Let me move onto the acquisitions of Olympia, Viracocha and BreitBurn Energy. Given our structure and the declining nature of natural gas production investments, Provident will always seek out value enhancing opportunities. At Provident there are a few key questions we must answer affirmatively before executing upon an acquisition.

No. 1, can we manage the business effectively? This is an absolute must.

Question 2; is it accretive to per unit cash flow, production and reserves?

3, does it add value to Provident's underlying business and net asset value? And 4, will it provide a platform for future growth? It is very hard to find a single acquisition that can accomplish all 3 of these requirements. Take Redwater for an example. It was cash flow neutral in the first year; however, it was highly accretive to our net asset value. Given Redwater's long-term contracts and unique operational capabilities, the business will be a source of long-term stable cash flow and our expansion into energy infrastructure also provided a new platform for growth.

Olympia and Viracocha acquisitions on the other hand were highly accretive to 2004 cash flow on a per unit basis. They added little initially to our net asset value but given the overlap with Provident's base production in Southern Alberta did add to our inventory of natural gas development projects.

BreitBurn, the story here is about high-quality medium crude reserves with approved plus probable reserve life index of 22 years, cash flow diversity, a highly technical U.S.-based management team and new platform, new platform for growth through the drill bit and by acquisitions. Drilling continues at West Pico as we exploit up to a dozen infill opportunities and we are drilling 2 infield wells at Santa Fe Springs.

In addition, BreitBurn Energy has been inundated, yes, inundated with acquisition opportunities in California and elsewhere in the U.S. Individually these acquisitions don't meet all our requirements. But when combined they do. You can understand how it is in a matter of 12 months, Provident has transformed its business into one where it generates cash flow from multiple sources, produces a commodity mix weighted 43 percent to natural gas; 40 percent to light and medium oil and NGLs; and only 17 percent to heavy oil; maintain stable distribution; has a reserve base in economic life in the upper quarter of Energy trusts; possesses an inventory of internal development projects in oil and gas in Canada and the US as well as ion Midstream services; and prospects and executes value creating acquisition opportunities across a broader spectrum of the energy value chain.

We believe that past labels and shortcomings of Provident no longer fit because of the changes we have made over the last year and the results we are realizing.

To conclude, in the second quarter and year-to-date, Provident's oil and gas production and Midstream Services business have delivered solid operational and financial results. Given our successful completion of the Olympia, Viracocha and BreitBurn transactions during the second quarter and continued execution of our balanced portfolio strategy, Provident is better positioned than ever to provide unit holders with sustainable distributions and capture opportunities to increase the value of our underlying asset base and we expect the unit price.

With that, our formal remarks on second-quarter 2004 investment call are concluded. I would now like to move onto the questions and answers. Thank you.

(OPERATOR INSTRUCTIONS) Bruce McDonald from Canaccord Capital.

Just looking at your guidance in your press release for production for the second half of the year, your guiding 35,600 boe's a day. And in July when you closed the BreitBurn acquisition you were guiding about 37,000. Can you explain the difference in the production guidance?

Sure, Bruce. Part of the difference is some of the delay that we have experienced in bringing production on in the Lloydminster area as well as in Saskatchewan for shallow gas drilling. Part of that is -- all of that is due to the very unseasonable weather in terms of being wet out there so that has pushed us back on our programs. And in particularly, on the shallow gas program, what it has done is we were drilling that in a phase step so we wanted to drill Phase I, get the completion results and then decide how strong we wanted to go after Phase II. As a result of that Phase II would now be pushed into the late fall, at least for the drilling part of it and that means we can't do the tie-ins and completions until June of next year.

So we have entirely deferred that part of the program off into 2005. That's the major part of the reasons and others -- we've experienced some pluses and some minuses that we see in the Olympian and Viracocha acquisitions.

Is there any guidance on exit rates for this year?

Yes, we do but I haven't got those numbers with me Bruce. I will get back to you on those.

Thanks.

(OPERATOR INSTRUCTIONS) Greg Shaw from Dundee Securities.

Just a couple of quick questions. Can you provide an update on the U.S. ownership status of the unit? The second one would be have you revised your guidance on taxability of distribution? And final question I have is -- is there any changes to your hedge profile? I didn't see anything going through the report. I might have missed it, but if you could update that would be great.

Okay. Dealing with U.S. ownership, Greg, I don't think there's any update on that. We continue to take under advisement what we have to do by January 2007 and looking at various alternatives on that. Watching with interest what other folks have done. I think that's about all I can say on that at this time. Taxable distributions, Bill, do have a comment as to where were going to be for 2004?

Our target I think is 60 percent taxable.

We -- that's been unchanged over the last couple of months, the 60 percent. Our hedge profile, I think we did include in the second-quarter results our entire hedge profile but I think it's looking out into 2005, we're about 35 percent hedged on heavy oil and just under 10 percent hedged on gas. Of course monitoring and watching the continuing high prices here and really holding off putting on some of the positions or some of the extent of the positions that we had in the past.

Just following up on the U.S., what is the nonresident ownership right now?

It's about 65 percent, Greg.

Thank you.

Gordon Sherman (ph) from South Company (ph).

Good conference call so far. I wondered if -- I missed a couple of numbers on operating costs per barrel. Is operating cost per barrel the same as listing costs or is this something different?

The same as listing costs?

Yes.

That would be the same terminology, sir.

You had for '04, 7.75. What was is for in '03?

For '03 in the first half of '03, our operating costs were, what did we just say they were? They were, I've got them here -- they were 713 a barrel in the first half of 2003. We see that increase -- a couple of things on that; 1, it takes us -- we burn energy to do less (ph). Sometimes we burn gas and consume that as part of our lifting costs (ph). Certainly we use electricity which we've seen higher costs pass through to us. And as well with the higher prices, it brought down the economic limit to a lot of the property, so we are keeping producing a lot of properties at lower oil and gas prices; we would probably -- we would probably shut in. But now virtually everything that we produce makes positive cash flow for us. We are going and chasing after low productivity welds that before we may have been shut in.

Do you have any thoughts or would you care to express an opinion what oil prices will do in the next 3 months?

I wouldn't want to express an opinion on that. I can't even tell you what they're doing the next 3 minutes.

They are down a little bit today, so that's good.

Okay.

(OPERATOR INSTRUCTIONS) There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Findlay.

Thank you. Bruce, if you are still on the lining of the question about our exit levels. The guidance we will give its 0 gas production our exit level will be about 30,800 barrels a day and with price burn it's about 5200. Just around that 36,000 barrels a day market is what were like to thank all those folks who for dialing in and listening. We look forward to talking with you again at the end of the third quarter.

Thank you. Bruce, if you are still on the line and you asked a question about our exit levels and the guidance we will give on it. So pertaining to oil and gas production, our exit level would be about 30,800 barrels a day and with BreitBurn, it's about 5,200. So just around that 36,000 barrels a day mark is what we are calling for exit.

That is the conclusion of the conference call. I would like to thank all of those folks for dialing in and listening and look forward to talking with you again at the end of the third quarter.

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