Pembina Pipeline Corp (PBA) 2004 Q4 法說會逐字稿

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

Good morning and welcome to Provident Energy's year-end conference call. Provident Energy ended the year with a very different trust from 2003. Our top news in 2004 was the acquisition of long life reserves in California, making Provident the first oil and gas trust to acquire a US oil and gas company. This exciting new addition to our portfolio represents a significant step in our ongoing evolution, bringing another level of diversification to our asset base, to further differentiate Provident from other trusts. These newly acquired mature US producing oil and gas fields, our western Canadian Midstream services business that we acquired in 2003, and our western Canada oil and gas production assets provide three distinct platforms for growth, and long-term sustainability and stable distributions for our unitholders.

Before market opened today, Provident released our 2004 year-end financial results. For consolidated and segmented financial and operational results, please refer to our press release, which can be found on our web site.

This morning, Randy Findlay, my partner and President of Provident, and I would like to take a few minutes to outline the highlights of 2004, and discuss where we are headed in 2005. Following our remarks, we are happy to answer your questions. We are also joined this morning by other members of Provident's leadership team, including our Chief Financial Officer, Mark Walker; our Vice President, Production Operations, and Chief Operating Officer Cameron Vouri; Dave Fricker, our Vice President of Corporate Development; Bill Crum (ph), our Controller; Jen Pierce, Senior Manager Investor Relations and Communications; and Floyd Siegel (ph), our Senior Manager of Reserves Reporting; as well as our US co-CEOs, Hal Washburn and Randy Breitenbach, of BreitBurn Energy.

When Provident was formed in 2001, we were the first oil and gas company to convert to a trust. Our business objectives model was based on consolidating undervalued junior oil and gas companies. Within a year of our conversion, some 15 other oil and gas companies had converted as well. As a result, the competition for assets in western Canada increased significantly.

In 2002, Provident's Board of Directors and management team spent a good deal of time evaluating Provident's long-term strategy. The conclusion we reached was based on Provident's cost of capital, the proliferation of oil and natural gas trusts, and the escalating competition from mature than short lifelong gas Provident properties in Canada. Provident should diversify beyond western Canada basin oil and gas, and look for other assets outside of the basin. Based on that conclusion, and the result of our strategy of being -- consolidate our shorter life reserves, we evolved to a balanced portfolio strategy, a strategy that directs us 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 flow and distributions over the long-term.

With the valuation arbitrage opportunity between junior oil and gas companies and Energy trusts, all but eroding in 2003, we made the strategic decision to execute our first step-out transaction, entering the midstream services business through the acquisition of the Redwater of natural gas liquids processing system. A world-class asset, the Redwater system is a stable long life physical asset, with long-term fee for service contracts. The midstream investment has been a sound investment for Provident. We bought the asset for 7 1/2 times cash flow, and based on recent acquisitions in that sector, it is reasonable to assume that that asset today is valued north of 10 times cash flow. Midstream is also responsible for approximately 15 to 20% of our annual cash flow today and requires only 1 to 3 million a year in annual maintenance capital to sustain the asset.

In 2004, it should be said that Provident was still very active in western Canadian basin through our internal development activities, which Randy will speak about in a moment, and the acquisitions of Virachoca Energy and Olympia Energy, but the acquisition of BreitBurn Energy in US was a standout transaction for the year. It diversified our asset base, and significantly enhanced the stability of the cash flows and sustainability of the trust. The BreitBurn transaction was also the exact type of transaction that we were striving to achieve when we mapped out the objectives for a balanced portfolio strategy back in 2002. We take a great deal of pride in the success of our balanced portfolio strategy, because the benefits to unitholders and the fact our approach differentiates Provident from our competitors.

In 2004, Provident continued its commitment to providing more stability and monthly cash distributions to unitholders, diversifying and expanding our energy holdings and pursuing value driven acquisitions to enhance overall sustainability. Today, our portfolio of high-class oil and gas production properties has a proven reserve life index of more than nine years, and an economic life of over 13 years, when combined with our midstream infrastructure assets.

2004 highlights include $191 million acquisition of BreitBurn Energy in California, with approximately 3500 barrels a day of production, and a reserve life index of over 20 years. The acquisition increased Provident's net asset value, extended the trust reserve base by 39.9 million BOE, and enhanced our already strong management team with the addition of US-based operations and management expertise, strategically positioning Provident for further acquisitions in the US.

Demonstrating BreitBurn was a platform for growth, only months at the Provident acquired the majority of the Company, BreitBurn acquired the Orcutt Field, 175 miles northwest of Los Angeles, which BreitBurn now operates. The $60 million property acquisition added approximately 1400 BOE of incremental production and 12.2 million BOE of proven plus probable reserves. The concurrent acquisitions of western Canadian assets of Olympia Energy for 228 million, and Virachoca Energy for 210 million, which combined, added 9000 barrels a day of production, increased cash flow per unit, and overlapped existing production assets to create economies of scale and further internal development opportunities, occurred in early June of this year.

Midstream services exceeding EBITDA expectations by generating $50.1 million of EBITDA in 2004, was well above market expectations of 38 to 42 million. This extraordinary financial results were achieved despite third-party operational challenges and a business model premised upon fee for service business, not fracs spread points(ph). Solid annual oil and gas production in western Canada of 28,780 BOE per day compared to 24,360 BOE per day forecast a year ago, and an internal development program that replaced approximately 40% of our Canadian asset portfolio's production, 36% on a trust wide basis.

In addition, a more than doubling of Provident's consolidated proof plus probable reserves from 55 million BOE's to 130 million BOE's, increasing our reserves per unit by 39% from 0.66 BOE's per unit, to 0.92 BOE's per unit, through a combination of internal development in western Canada, acquisition of long life assets in US, and strong commodity prices.

Finding and development and acquisition costs, including future capital and revisions based upon NI 51 101 guidelines, were $14.07 per barrel for proved reserves, total proved reserves, and $11.58 per barrel for proved plus probable reserves. Provident's three-year average total proved plus probable finding, development, and acquisition costs, were $10.68 per barrel, including future development capital in NI 51 101 revisions.

Excluding future development capital, 2004 FD&A costs were $11.14 per barrel for proved reserves, and $8.82 per barrel for proved plus probable reserves, well below the average of $15.93 per barrel, and $11.64 per barrel respectively reported by the oil and gas industry so far to date this year.

Provident's PV8 net asset value per unit increased 37% from $6.41 per unit in 2003, to $8.78 per unit at the end of 2004. We also earned a total return, including cash distributions and capital appreciation of 15% for 2004, and 240% since inception as a trust in March 2001. Throughout 2004, Provident maintained its monthly distribution of $0.12 per unit Canadian, and achieved a payout ratio of cash flow from operations of 89%. Total 2004 cash flow from operations was $185.2 million, or $1.59 per unit.

Please note as well that Provident has adopted -- early adopted and retroactively applied the classification of convertible debentures as debt and netted the interest expense from cash flow in income. Consequently, adjusted cash flow that has been used in prior years is no longer considered a relevant measure.

Now I'll turn it over to Randy, for discussing the operations.

Thank you, Tom. Despite our successes in 2004, 2004 was not without its share of disappointments. The good news was the rising price of oil and natural gas, however, as with many of our industry peers, we weren't able to take full advantage of those high prices, because of our hedging program, which is forward sales of production at set prices. Our opportunity cost was $66 million or $0.59 per unit, with $55 million related to crude oil, and $10 million related to natural gas.

The price increase also contributed to an increase in our Canadian operating costs from a budgeted $7.35 per barrel to $8.58. This was due to the corresponding commodity price-sensitive costs, such as power, fuel, downhole (ph) and processing fees. We'll be working hard toward reducing these costs wherever possible in 2005, but if economics makes sense, we will produce higher costs wells to capture returns in a high commodity price environment.

While we cannot predict absolute commodity prices for 2005, we certainly expect volatility. As a result, Provident will continue to execute an integrated risk management program to mitigate the effects of price volatility on cash flow, but on a modified basis. As part of Provident's risk management program, we will sell forward a portion of our oil, natural gas, and NGL production to protect the stability of cash flows and distributions. The financial instruments we will use to hedge our cash flows however, will enable Provident to participate to a greater degree on the upside of pricing, while still providing the trust with some protection from severe negative price swings.

To provide for more stable distributions, and enhance the sustainability of the trust, Provident will continue its strategy of balancing accretive value driven acquisitions with internally generated opportunities across our three business units for the greatest creation of value for our unitholders. In 2005, Provident's capital budget at this time, excluding acquisitions, has been approved at $112 million, with $69 million allocated to the Canadian oil and gas development, $41 million for US oil and gas development, and $2 million for midstream services maintenance costs.

Continuing internal development programs is on the top of our list for our Canadian oil and gas business units. Key focus areas in 2005 include a continuing shallow gas initiative in southwest Saskatchewan further exploitation of heavy oil opportunities in Lloydminster, and exploitation of light oil and natural gas in southern Alberta. We will also focus on the development and optimization of undeveloped land through joint ventures.

We plan to continue developing our US asset base through internal growth and acquisitions that have significant development potential. We are focusing considerable effort on screening and evaluating numerous acquisition opportunities, brought to us through BreitBurn. About half of the trust US capital budget in 2005 will be directed to the West Pico and Santa Fe Spring fields in the Los Angeles Basin. 2.7 million will be spent at Orcutt, and another $6 million will be directed to capital programs on the newly acquired Nautilus properties, located in the Bighorn and Wind River basins of Wyoming. Provident closed on the $95 million Nautilus acquisition on March 2, 2005, adding approximately 2300 barrels a day, primarily of crude oil production, and 20 million barrels of proved plus probable reserves.

In 2005, Provident will further develop our midstream services business unit, including expanding the Redwater footprint by providing additional services to our customers. We're reviewing a number of investment opportunities at Redwater for 2005 that will grow our EBITDA this year and in subsequent years. In the longer term, we also see a great potential to anticipate in oil sands development through our midstream services, including processing, blending and transportation. And the proximity of our Alberta operations to the future Alaska and McKenzie Delta pipelines, will provide Provident further opportunity for expansion in the years to come.

As a management team, we are confident in an exciting future for Provident and our investors in 2005. We will continue to build on the solid foundation of our unique diversified business model, which are (inaudible) across the energy value chain in oil and gas production in Canada, oil and gas production in the US, midstream services, and energy infrastructure. We have a progressive leadership team and dedicated employees in place to serve our customers and stakeholders, and to create long-term unitholder value and loyalty.

Before concluding our formal remarks, Tom and I would like to acknowledge the hard work and dedication of all of our employees, whose invaluable contributions throughout the past year, have been key to our success. Our Board of Directors, we thank you for your counsel and guidance. Our employees and the Board's commitment to a corporate philosophy and to our core values has been an important factor in making Provident Energy the company it is today.

To our unitholders, we place a very high value on your trust in us, and we'll strive to continue earning the trust in 2005. With that, we conclude our overview of Provident's 2005 performance, and would like to turn the call back over for questions and answers.

To place yourself in the question queue, please press star one on your touchtone phone, and if you're using a speakerphone, please pick up your handset and then press star one. If your question has been answered and you'd like to withdraw your request, you may do so by pressing star two. Please go ahead if you have any questions.

Once again, for any questions, please press star one on your touchtone phone. Your first question comes from Michael Harmon (ph). Please go ahead.

Yes hi, I was wondering if you could address some of the advantages you've gained through the acquisition of BreitBurn, their use of technology to increase existing proved plus probable reserves, and extend the life beyond 9.3 years in the existing properties you have.

Sure. It's Randy Findlay, I'll answer part of that, and then I'll turn some of that over to Hal Washburn and Randy Breitenbach to fill that in. We're very excited about the US opportunities that we see. We see more opportunities for acquisition with less competition than what we see in Canada, and generally, we see reserves in basins that are very attractive to oil and gas income trusts. What I mean by that is it had a long production history, they still have a good life left in them, but they're very predictable, and of course, predictability is key to an income trust. Maybe I'll turn it over to Hal and Randy, and I can comment on some of their techniques for increasing recoveries.

Thank you Randy, this is Hal Washburn. We do a lot of technical work, as you're well aware. We do a lot of reservoir simulation, a lot of geoscience, and we're basically working in large old oilfields that a complex geologically structured strata graphically, and we're looking for bypassed oil, we're looking for oil that isn't going to be produced with current operating practices. A lot of infield drilling, a lot of enhanced waterflood, and other secondary and tertiary recovery techniques are used. A big part of what we do is just understanding the fields and reservoirs. For example, when we acquired the Orcutt field in the Santa Maria Basin, we acquired about nine million barrels of proved reserves. Within the first three months, we were able to through technical revisions, just better understand the field, add about 800,000 barrels of new reserves, almost a 10% increase in about 90 days, just through engineering and understanding the reservoirs, and being able to put wells back online in areas that weren't going to be produced.

I think I'll just comment to Hal and Randy -- or add on to Hal's comment is that while the modeling -- the reservoir modeling techniques that we use are highly sophisticated, the actual infield type of operations that we use are pretty much regular blocking and tackling types of operations that has been used for a long period in the oil and gas industry, so we're not trying to introduce new production techniques, but it is high-tech on the modeling.

Any further questions, operator?

Any further questions, please press star one on your touchtone phone. You have a follow-up question from Michael Harmon. Please go ahead.

Yes hi, regarding the midstream, I was curious about their ability to increase their rates and capitalize or take advantage of the higher commodity prices.

Our midstream business is a fee for service, and a marketing service type business, so the higher prices don't have a huge impact on the profitability. The profitability is more related to the type of services we do, and whether we're at higher prices or low prices, these types of services are required by the industry, so we -- so that's what we provide. We're rather insensitive to the higher-priced. The only thing that higher price does for us is that it generates -- because the drillers are more active, it will generate more liquids for us to process, so it does allow us to take advantage of that, and run higher volumes through a facility.

OK. But don't you have the ability to charge a higher fee for the services you're providing?

Certainly, we have that ability because you know as a percentage of the net back that produces a making, our fees can increase proportionately. To all our customers who are listening out there, it is a competitive market, and we still have to compete with others, so there's a limit as to what we can do in terms of charging our customers.

Thank you.

Your next question comes from Nick Altimus (ph). Please go ahead.

Yes, good morning. Could you go a little bit into and outlook for 2005, and also how you're changing your hedge program a little bit?

So -- you mean our general outlook for 2005?

Yes, and also how you're changing your hedging program a little bit. You mentioned ...

Sure, we can -- Yes, so we production in some way between 35 and 36,000 barrels a day, for 2005, with about 27 or 28 coming from Canadian operations, and about 8000 or so coming from our US operations. That would take into account a forecast of modest success coming out of the capital programs that we have on both sides of the border. So a focus is on internal development. We see -- we have a good program in Canada that was very successful last year. We're anticipating it will be as successful again this year, and certainly in the US, it's a great story in terms of development opportunities that exist with the legacy properties from BreitBurn and also from Orcutt and from the recent Nautilus acquisition, so we're quite pleased with what we've got to do on internal development side. Acquisition will still play a big part of our business, as we go forward. We'll look in Canada, but frankly, we'll continue to look very hard in the US, because we just see better economics in the US on a go forward basis.

Our midstream business, you know, our forecast for EBITDA is in that range of the low forties for this year, coming down from 50 million that we turned last year, which we see no particular reason for for any downturn in that, other than just being, you know, conscious of the competition out there for our gathering barrels to produce -- to fractioning.

Our hedging program, what we're talking about is in the past years, we had done a lot of fixed for floating swaps, where we would take our floating price and lock in at a fixed price. It was very good at protecting the downside on our distributions, because we knew exactly what price we were going to get for our crude. Unfortunately, in a rising crude oil market, and a rising natural gas market, that results in opportunity costs or hedging losses, and you know, as we talked, it was in the range of $60 million of hedging losses for last year.

So what we've been doing, is we really started this last year, in the middle of last year, was putting on -- buying puts, which allow us to participate to 100% in any of the upside, also doing some participating puts, which allows us to anticipate to a certain extent in the upside, and the other product that we've been using a very wide costless callers that provide some downside protection, but still gives some room for upside, so that's the change that we're making on our hedging program, which is really to move from fixed for floating type swaps into instruments that a lower us to anticipate in the upside, but still give us some downside protection.

Thank you. Am I still connected?

You are.

Yes, one other question, how do you see your distribution percentage this year, this coming year 2005? Do you expect to maintain it around 89% or where do you see that fall?

We're targeting a distribution payout ratio of between 85 to 90 -- a little over 90%, and primarily, that's driven for -- by the fact that 20% of our cash flow on the midstream services business has no real demand for capital. So we will fund our internal development activities on the oil and gas side through retaining some cash flow and using a little bit of our operating lines.

All right, thank you very much.

Thank you.

Once again, for any further questions, please press star one on your touchtone phone. There are no further questions in queue.

We'll just give it perhaps one minute, operator, in case anybody's contemplating asking a question.

OK operator, I think if there's no further questions, we'd like to conclude the call. We'd like to thank all of the participants, and this will be available on our web site, for anybody who wishes to listen in. Thank you.

Ladies and gentlemen, this does conclude your conference call for today. Thank you all for your participation, and please disconnect your lines.