Pembina Pipeline Corp (PBA) 2004 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to the Provident Energy Trust's third quarter results conference call. I would now like to turn the meeting over to Mr. Tom Buchanan, Chief Executive Officer of Energy Trust. Please go ahead, Mr. Buchanan.

Good morning. Thank you for joining our conference call this morning to talk about Provident Energy's third quarter 2004 results. I am pleased to have the opportunity to review with you today Provident's performance for the third quarter and year-to-date. This morning I am joined by - I won't introduce everybody, but some key members of our senior leadership team who are available for questions after my discussion would be Andy Gruszecki, who leads our Midstream Services business unit; Cam Vouri, Chief Operating Officer and business unit leader of our Canadian Oil & Gas Production. Randy Breitenbach is unable to join us today from BreitBurn, our US subsidiary. So we have Chris Williamson, (ph) VP of Operations for BreitBurn on the line with us. In addition Mark Walker, our Chief Financial Officer and Jennifer Pierce, our Senior Manager of Investor Relations also join us this morning.

Provident Energy is a very different Trust today than it was just twelve months ago. As a result of pursuing our balanced portfolio strategy, diversification in the Midstream Services and the acquisition of long-life US production, Provident has differentiated itself from other energy trusts and matured into a trust with a focused management team with experience or expertise across several different segments of the energy value chain; production that is weighted more than 80 percent to natural gas and light medium crude oil; a portfolio of quality oil and gas producing assets with a reserve life of about 8.7 years now and a combined economic life in excess of twelve years when coupled with the economic life of our Midstream infrastructure assets; an inventory of internal oil and gas and Midstream development projects in Western Canada and Southern California; as well as in-house exploitation, development, optimization, marketing, and risk management expertise. Three distinct platforms for growth are available to us now. That includes - Midstream Services; Canadian Oil and Gas Production; and U.S. Oil and Gas Production and significantly improved stability in cash flows and distributions.

This morning I shall review Provident's third quarter and year-to-date financial and operating results. Following my formal remarks I shall take questions from callers.

As outlined in our press release, third quarter highlights include the announcement of the $C58 million acquisition of the Orcutt field in California; a $C125 million equity financing; and strong results achieved from our Canadian Oil and Gas producing heavy oil assets and shallow gas internal development program.

From a financial perspective, we have achieved our third quarter objectives generating cash flow from operations of $C58 million in the quarter, or 45 cents a unit compared to 28.9 million or 44 cents a unit in 2003. This quarter we declared distributions of $C46.5 million, 36 cents a unit compared to $C29 million or 47 cents a unit in 2003. We maintained a conservative payout ratio of cash flow from operations of 80 percent and a payout of adjusted cash flow of 86 percent. Year-to-date operating cash flow was $C136.7 million or $C1.28 per unit, compared to 102.4 million or $C1.63 per unit for the same period in 2003. For the first three quarters of 2004, Provident declared and paid distributions of $C112.6 million or $C1.08 per unit compared to 97.6 million or $C1.67 per unit for 2003. For the last twelve months Provident has maintained a monthly distribution of 12 cents per unit and sustained that distribution. As a result, for the nine months ended September 30, 2004 Provident's payout ratio from operations was 82 percent and a payout ratio of adjusted cash flow was 89 percent compared to 95 percent and 100 percent respectively in 2003. So we think that it's important that you note that we've taken a much more conservative approach to our payout ratio this year than we did a year ago.

A highlight of the third quarter was Provident's announcement of a bought-deal financing for gross proceeds of $C125.7 million net proceeds of 119.4. The deal closed at the beginning of the fourth quarter on October 4. Financing included 11.48 million units issued at a price of 10.95 per unit. The net proceeds of the issue were used to pay down debt and to fund the $C58 million or $US45 million acquisition of the Orcutt property by Provident's US subsidiary BreitBurn Energy Limited partnership. The Orcutt property acquisition was consistent with Provident's strategy to expand its US production base in the US with quality, mature, long-life assets that provide stable long-term cash flows and low-risk optimization potential. BreitBurn has demonstrated its technical competencies and ability to increase the ultimate recovery of original oil in place from mature fields in the Las Angeles Basin. In the Orcutt field, the BreitBurn management team has identified opportunities that have potential to increase production, to improve operating practices in addition to strengthening Provident's underlying asset base. The equity offering completed in conjunction with the Orcutt acquisition combined with Provident's lower payout ratio added strength and flexibility to Provident's balance sheet.

Let's talk a little bit about specific business unit performance. First of all, the Midstream Services business unit. We acquired that business unit at the end of the third quarter in 2003. Provident's Midstream business generates cash flow by providing services including extraction, transportation, storage, distribution, and marketing of natural gas liquids to petroleum producers and refiners, petrochemical companies, and marketing firms. For the third quarter of 2004, Provident's Midstream business unit generated earnings before interest, taxes, and depreciation - EBITDA - of $C11 million and cash flow from operations of $C9.5 million. Year-to-date Midstream has earned an EBITDA of $C32.1 million and cash flow of $C28 million on target with expectations. With an average throughput of 66,000 barrels a day September, reported as one of Midstream's business service unit-one of their best months. As a result, third quarter throughput at the Redwater fractionation facility averaged 55,759 barrels a day. And despite weather-related outage in the Liquid Gas Gathering system, which contributed to a reduction in mix inventory at the end of the quarter, the outage was substantially mitigated through deliveries on alternative pipelines. We are extremely pleased with results achieved in our Midstream business unit, particularly in light of operational challenges experienced in the pipeline outages.

As expected, Provident's Midstream Services business adds stability and sustainability to Provident. It provides diversification to our cash flows and helps to differentiate Provident from other energy trusts. In light of these factors, strong market fundamentals, and increasing valuations in the infrastructure acquisition market we continue to evaluate the organic growth opportunities to expand our footprint around the Redwater facilities and to add new transportation, storage, and processing services for our customers.

Let's talk a little bit about our U.S. Oil and Gas business unit. Provident's US OGP business unit produces cash flow from the production and sale of natural gas and medium oil located in the Los Angeles and Santa Maria basins. Provident Energy LP - we call it BreitBurn, I’m sorry-- BreitBurn Energy LP, referred to as BreitBurn here on, of which Provident owns 94 percent interest, owns and operates 100 percent of the production. This is the first full quarter of operations for BreitBurn since Provident closed the acquisition on June 14, 2004. In the third quarter of 2004, US OGP generated $C10.4 million of cash flow from operations. Third quarter 2004 OGP production averaged 3,569 barrels per day equivalent and was weighted 92 percent light medium oil and 8 percent to gas. Third quarter was lower than initially expected due to delayed capital spending at Santa Fe Springs and rig downtime at West Pico as well as lower-than-budgeted new-well performance on certain wells drilled in West Pico. As a result of less-than-expected incremental production due to timing and delays in drilling activities, the US OGP operating costs were $C15.74 cents per boe during the quarter. Just a note - US operating costs are typically higher because of the mature nature of these fields. But we are very comfortable going forward that our operating costs will trend downward slightly with added new production. With incremental production coming on in the fourth quarter, operating costs are expected to come down to about 12 to 12.50 per boe for the remainder of the year. Speaking of incremental production, the US OGP production for the fourth quarter is expected to average 5,150 barrels per day equivalent. Production estimates include results of capital spending at West Pico and Santa Fe Springs and production from the Orcutt field, which was acquired and closed on October 4.

The Orcutt properties include 5,000 acres of surface acreage and are located in the Santa Maria Basin of Southern California, which is just north and a little bit east of Santa Barbara. The properties produce approximately 1,400 barrels a day of medium grade oil. The acquisition included 9.1 million barrels of proved producing reserves and 9.7 million barrels of proved plus probable reserves based on July 1, 2004 reserve report completed by the independent engineering firm of Netherland, Sewell & Associates, which was in accordance with NI 51-101 standards.

Located 175 miles northwest of Los Angeles, the Orcutt field has been on production for over 100 years with original oil in place of approximately 500,000 million barrels. The cumulative production to date has totaled 170 million barrels. Acquiring approximately 60 percent of the Orcutt field, BreitBurn will operate and have an approximate 99.6 percent working interest in the assets that we have acquired. The historical annual decline of Orcutt properties has been less than 5 percent, resulting in an estimated proved producing to total proved reserved life index of 17.8 years and 18.5 years on a proved-plus-probable basis. Combined with Provident's existing total proved and proved-plus-probable reserves, which include Olympia, Viracocha and BreitBurn as of January 1, 2004 the total proved plus probable reserve RLI of the Trust are now 7.2 for proved producing and 8.7 years for p-plus-p respectively. The transaction further extends Provident's economic life to well over 12 years when combined with our Midstream assets.

Now the Canadian Oil and Gas Production business unit. Provident's Canadian Oil and Gas business unit produces cash flow from the production and sale of natural gas, light medium oil, natural gas liquids, and heavy oil to energy marketers. Provident's operations are concentrated in five core regions in Western Canada - west central Alberta; Lloydminster; southern Alberta; southwest Saskatchewan; and southeast Saskatchewan. Third quarter was particularly good for our Canadian Oil and Gas business unit. Having fully integrated the Viracocha and Olympia acquisitions, which occurred in late May, the team focused on production optimization of existing wells and developed new plays in our core areas of operation. In the third quarter of 2004, the Canadian Oil and Gas business unit generated 38.2 million of cash flow from operations compared to 28.9 million for the same period in 2003. Year-to-date, cash flow for that business unit has earned 98 million of cash flow from operations compared to 102 million for the same period in 2003. The year-over-year decrease in cash flow from operations is primarily attributable to lower realized prices and higher operating costs. Third quarter 2004 Canadian Oil and Gas production averaged 32,452 barrels of oil equivalent compared to 27,701 boed for the same period in '03 and 26,408 boed for the second quarter of 2004.

Canadian Oil and Gas production for the third quarter 2004 is weighted 45 percent natural gas, 34 percent light medium oil and NGLs, and 21 percent heavy oil. Third quarter production was better than original estimates primarily due to better-than-expected production rates from Provident's Lloydminster heavy oil drilling program and reactivation program and drilling results on a natural gas well in the area called Belloy located on our west central Alberta region, as well as higher-than-forecast production from various well workovers completed during the quarter. Year-to-date Provident's Canadian Oil and Gas production averaged 27,746 boed compared to 27,691 boed for the same period a year ago. Canadian Oil and Gas operating costs were 8.96 per barrel equivalent during the third quarter compared to 7.46 per barrel during the same period last year and 7.75 per barrel in the second quarter. The quarter-over-quarter increase in operating costs in primarily due to one-time turnaround costs in the third quarter that were incurred on primarily a lot of turnarounds and workovers that we completed during that quarter. Year-to-date, Canadian Oil and Gas operating costs were 8.41 compared to 7.24 for the same period a year ago. The year-over-year increase was primarily due to processing fees, down-hole costs, and higher fuel and power costs, which is a trend that we're seeing right across the industry. Operating costs are still expected to average between 8 and 8.50 for the year.

During the third quarter of 2004, Provident invested 18.2 million of capital compared to 5.5 million of capital expenditures made for the same period in 2003. During the quarter, 4.2 million was spent in the Lloydminster area on nine heavy oil wells and several well optimizations and on pipeline construction. In west central and southern Alberta 8.1 million was spent on operated and non-operated drilling activities combined with well optimizations and facility upgrades. And in southwest and southeast Saskatchewan, 5.5 million was spent on operated drilling activity and re-completions. Year to date, Provident has invested 39.9 million on internal development activities, which included drilling activities, re-completions, equipping, seismic, facility upgrades, and the acquisition of mineral rights in the five core areas. This compares to 24.1 million a year ago.

Provident remains focused on drilling its heavy oil prospects in Lloydminster and southwest Saskatchewan shallow gas opportunities. To date, 17 shallow gas wells and eight re-completions have been undertaken in southwest Saskatchewan. I expect it to bring on approximately 4 million a day. Results are encouraging. Fourth quarter activity will include several more new drills and production coming on-stream in early 2005. The heavy oil program has drilled and completed 10 wells to date producing in excess of 850 barrels a day. The work has resulted in additional locations in the Lloydminster area, which we shall develop in the near term. 2004 production is expected to average 28,380 barrels a day. The December exit rate is expected to be for Canadian Oil and Gas activities 30,200 barrels a day incorporating a base decline of approximately 21 percent. On a consolidated basis, including the US operations Provident is expected to exit 2004 with production a little in excess of 35,000 barrels a day. That includes 5,100 barrels a day in the US.

Now to wrap up. In addition to leaving you with the message that we met, and in many instances, exceeded our third quarter expectations, I want to leave you with one more thought. That is what differentiates Provident from the other trusts - diversity. We believe that unlike any other energy trust, Provident's diversified asset portfolio, which strikes a balance between stability and risk, puts us in a unique position to generate more stable distributions and long-term value for our shareholders, or for our unit holders. This year's acquisition of long-life production assets in California combined with our existing western Canadian Midstream Services opportunities and traditional oil and gas production differentiates Provident and makes us a leader in an increasingly competitive field, something investors may want to consider when trying to distinguish one trust from another.

With that, I conclude my formal remarks. I'd open it up, Operator, for questions.

Thank you. (OPERATOR INSTRUCTIONS). Gordon Tait. Please state your company name,

BMO Nesbitt Burns. What is your CapEx budget for next year? Where will that be allocated? Which divisions will receive how much of that?

Our capital spending budget for next year is a little over $C100 million. It is expected - $C104.6 million we're budgeting, of which in Canada we will spend 68.8 million. The balance, with the exception of about $C2 million for our Midstream Services unit, will be spent in the US.

Okay. One other question on the US. Why are the G&A costs per boe so high in the US?

When we bought BreitBurn, it was a typical junior company that was on a growth trend. It's staffed up to accommodate some growth. I think that you'll see, like a lot of junior companies up here, their G&A costs per barrel reflected their expectations around some growth. We feel very comfortable with the G&A in place on BreitBurn today. We should be able to accommodate fairly good growth opportunities in the US with minimal G&A additions.

Alright, thanks.

(OPERATOR INSTRUCTIONS). There are no further questions at this time.

Operator, we'll give folks a couple more seconds. If there are no further questions, we'll wrap up.

Okay. Don Short.

I have a question about the gas production on the Canadian assets. It was a little higher than I was expecting. Is that primarily the workovers? I know you mentioned the Belloy well, but didn't give any details on it. Is that a gas well?

Yes. Let me turn this over to Cam Vouri, our business leader in Canada. He can answer that for you.

The reason for the production increases in the gas is primarily due to the Belloy due to some of the activity that we have been undertaking in Belloy, which involves drilling for the most part. We have seen, in some of our non-op (ph) production as well some increase in workovers and so on throughout our non-op entities, which has also provided some better-than-expected results. In Lloydminster, on the other hand, it's the heavy oil drilling, which is in liquids production where we've seen our increase.

As well, I think I'd add to that that we expect to see about 4 million come on in the fourth quarter from our southwest Saskatchewan drilling initiatives that we didn't see on the third quarter numbers.

Okay, thank you.

There are no further questions at this time.

Okay. With that, Operator, I'd like to thank everyone for their attendance on today's call. If you have any questions that you'd like to speak specifically about with any one of us, please do not hesitate to call us. We look forward to chatting with you at that time. Thank you again for joining the call.

This concludes today's call. Please disconnect your lines. Have a wonderful day.