Pembina Pipeline Corp (PBA) 2005 Q4 法說會逐字稿

Good morning and welcome to the Provident Energy Trust 2005 fourth quarter and year end conference call for March 13, 2006. Your host for today will be Ms. Laurie Stretch, Senior Manager of investor relations and communications. Ms. Stretch please go ahead.

Good morning and thank you for joining us. The operator said I am Laurie Stretch. On the call today we have Provident CEO Tom Buchanan and President Randy Findlay. Also in the room with us are several members of the senior management team including Executive Vice President and COO Daniel O'Byrne and our new Executive Vice President Finance and Strategy David Holm. Tom and Randy will deliver some prepared remarks and we will then open the line to take your questions.

It is important to note that we will be discussing forward-looking information today and I refer you to the notes about forward-looking information in the quarterly press release issued earlier this morning. We caution listeners that results can vary. We will now begin today's call with Provident CEO Tom Buchanan.

Thank you Laurie and thank you to everyone who is listening in the call today. I know it is a busy disclosure season and it's hard to keep up with all the releases and conference calls and we appreciate your interest in the Provident story. It is a unique story I think because Provident today is like any other income trust -- is unlike any other income trust. We had a record year in 2005 with some major strategic advances that set us up for a strong year in 2006 and a sustainable and dynamic long-term future.

I want to focus mainly on Provident's business prospects today so I will briefly discuss last year's results in each of the business units before moving on to a discussion on how we see the world unfolding. I will turn the call over to Randy to provide more color on our Midstreambusiness. Let's talk about the 2005 results.

We are very pleased to report excellent financial results for 2005 with an increase in total cash flow of 68% and per unit cash flow increasing 20%. We saw net earnings this year of nearly $100 million. These results had a lot to do with high commodity price environment that our industry enjoyed in 2005 but we also saw strong operational performance in each of our business units. In our Canadian upstream business unit as we refer to COGP, the team achieved a high drilling success rate, controlled costs effectively and continued to expand internal development opportunities. In Southwest Saskatchewan they have developed a grass-roots shallow gas play that will provide a quality development drilling inventory for some time to come. More importantly for Provident the COGP team was successful in high grading its asset portfolio, focusing on regions of greatest potential while divesting non-core production.

In our U.S. upstream business or our USOGP business 2005 was a year of developing opportunities. We acquired mature long-life assets in Wyoming with our Nautilus acquisition last February and we began working on an interesting new thermal shallow oil play in the Orcutt field near Santa Barbara. The core producing regions of West Pico and Santa Fe Springs in the Los Angeles area saw steady production in spite of some challenges with equipment and delays.

We were pleased with the upstream reserves results this year as well. As you see in our press release, our one-year and three-year FD&A -- that is finding, development and acquisition costs -- were very reasonable by industry standards. We were particularly pleased with the three-year average number because it shows good capital efficiency performance over time. Our three-year average proved plus probable FD&A cost is $11.94 per barrel. And our proven reserve as replaced 135% of our production which speaks well for our long-term sustainability. 68% of production was replaced through internal development drilling which is consistent with our objective of replacing our production through a combination of internal development and acquisition opportunities. We were also pleased with the 2005 recycle ratio in both Canada and U.S. of 2.4.

Our Midstream Services business had a great year both operationally and financially in 2005 increasing annual EBITDA by over 40% from 2004. We saw strong product prices and premiums, lower operating costs at our facilities and volumes that were about 10% higher than budgeted. Condensate volumes and margins were both higher than expected as we started to rail condensate into Redwater midyear last year.

What we were doing was a slow and labor-intensive process that will be replaced by an expanded and more efficient process once our current off-loading and terminaling project at Redwater is complete in April this year. We are quite enthusiastic about that project because it increases our condensate capacity and with all the oil sands activity these days we are bullish on condensate. Strategically our biggest venture in 2005 was of course the acquisition of EnCana's natural gas liquids business which closed on December 13. Our fourth-quarter earnings include 19 days of operations from that new business. Randy will have more to say about that acquisition and what it does for us in a few moments.

Let's talk about our upstream plans for 2006. Moving now into the business outlook discussion I will start with our two upstream businesses and our plans for 2006 and beyond. We intend to capitalize on internal projects that we see for both COGP and USOGP and also to continue our pursuit of new opportunities wherever we can find the greatest value. From an operating perspective things are going well so far this year and we're meeting our objectives.

In COGP our focus for 2006 is on shallow gas play in Southwest Saskatchewan where we plan to deploy about 40% of our COGP capital program for this year. We have been quite successful in building a land position that we need to realize the potential of that region and individual well results have been strong. We take measured and careful approach to working in this area because we are operating at a natural grassland ecosystem that needs to be protected. So while we saw some delays in 2005 we see a lot of potential in Southwest Saskatchewan and we're currently on track.

We have increased our production from 2.6 billion cubic feet a day out of that area in December '03 to just over 10 million cubic feet per day in December '05. Our other core area in COGP, our operations in west central Alberta, Southern Alberta, Lloydminster and Southwest Saskatchewan -- Southeast Saskatchewan I should say. We have committed capital to pursue the best opportunities in each of these areas and we make additional capital available during the year depending on the results achieved and on the commodity price environment. COGP will continue to focus in 2006 on internal development and on acquisition opportunities as they arise.

Moving on to USOGP in 2006 promises to be strategically significant for the business. BreitBurn, our U.S. subsidiary has grown to an attractive size and scale. At the core of the business are the Los Angeles area assets of West Pico and Santa Fe Springs, where leading-edge recovery techniques continue to find pockets of long-life reserves in this mature but highly prolific basin. Return's more recently acquired assets at Orcutt and near Santa Barbara and in Wyoming as a result of the Nautilus acquisition, both areas have growth potential and we are going to be exploring that potential in 2006 with the anticipation of increasing production in 2007 and beyond. In particular, our press release notes the interesting thermal shallow well play that we are looking at working in the Orcutt area.

This play is similar to another large-scale operation elsewhere in California that has been very successful for a U.S. major company. We did some drilling results in 2005 but showed very promising results. And we will spend another $16 million Canadian in 2006 developing a 30 well pilot project. We expect to see initial production results for the project into early 2007 with production ramping up over the next few years if all proceeds as planned.

As we have diversified at Provident our management focus on the upstream side of the business continues to be on consolidated cash flow and EBITDA. We are seeking high net back production in areas that play to our strengths and balancing our risk profile across all of our businesses. So having covered our plans for the two upstream businesses I would like to now turn the call over to Randy Findlay who will discuss the Midstream business in more detail.

Thanks Tom. As Tom said I am going to talk about Midstream plans for 2006 and beyond. Our current focus for Midstream Services is to complete the integration of the newly acquired NGL business with our Redwater based operations. And to begin to capitalize on the tremendous opportunity that we see with our expanded asset base. Today I will discuss the business environment that we're seeing in the NGL business for 2006 and beyond and explain how we're taking advantage of the synergies for our combined assets.

Most of our Redwater operations and some of the new businesses are based on a fee-for-service or fixed margin contracts. So those parts of the business will tend to generate stable cash flow over time. This more predictable side of our business represents roughly 60% of the total cash flow we expect from midstream. Even with this predictable cash flow there'll be opportunities for growth in this business and I will touch on some of them later. The remaining 40% or so of total Midstream Services cash flow is based on buying the NGL content of a raw gas stream extracting and processing the NGLs and then selling them into the North American market. In this business, we make our margin broadly speaking on the difference between the price of natural gas and the crude oil liquid prices. This difference is known as the frac spread. Contrary to what you might think, we like frac spread. It's a powerful cash flow generator when properly managed. We handle our frac spread opportunities in three ways.

First, we capture the frac spread opportunity to our assets. Our integrated operations enable us to transport and store raw and finished product as well as process NGLs in geographically diverse regions of North Americas. This gives us flexibility as to when, where and what we process, store and market. The NGL business is typically highly seasonal with strong first and fourth quarter cash flow that drops off sharply in the second and third quarters. This year the typical value shaped cash flow curve is looking more like the side of a mountain, with cash flow building towards a very strong fourth quarter for reasons I will explain in a moment.

Second, we have an active risk management strategy. We have already succeeded in layering in a series of hedges to lock in the value of the very strong frac spread that we are currently experiencing. We have now locked in favorable frac spreads for 2006 at level of 33% with percentages ranging from 21 to 27% over the next four years. We intend to increase these levels during times of favorable spreads to lock in -- sorry we intend to increase these levels during times of favorable spread like those we're currently experiencing. We could go as high as to lock in our Board mandated limit of 80% of the frac spread opportunity in 2006 and 2007, with lower limits in the years beyond. Our strategy is to protect the base level of EBITDA from the Midstream business while retaining the upside that we believe to be one of the most attractive features of this business.

Our third frac spread tool is simply taking advantage of the natural hedge that we have created by carrying an upstream natural gas production business with a Midstream NGL business. Because natural gas is the key inward cost of the frac spread part of the NGL business, a low gas price relative to oil benefits the NGL business while a high gas price will benefit our upstream operations. It is also important to bear in mind that this frac spread opportunity I am describing applies to less than one-half of our total Midstream business EBITDA.

When we finalized the acquisition with EnCana frac spreads were very weak as a result of hurricane induced high gas prices. So we negotiated a frac spread support agreement to give us two years of financial protection against unfavorable frac spreads while still allowing us to complete participation in frac spread upside. And indeed, we drew on that frac spread support agreement to the tune of about $5 million during the first two weeks of operations in December. But, as so often happens in the NGL business the world has completely changed in only a few weeks. As you can imagine with natural gas prices falling off as a result of the warm winter weather this year, and with crude prices staying strong the current frac spread in the forward spread today are extremely favorable.

The frac spread between WTI and the Alberta natural gas price is now in the range of 11 compared to an historical average of 8.2. So we're anticipating that we will have the opportunity to pay back the frac spread support we received todate from EnCana as early as the first quarter. However, a favorable frac spread does not automatically translate into outstanding cash flow and EBITDA. This point speaks to the mountain shaped cash flow curve I mentioned a moment ago; as well as oil and gas relative prices the other key determinant is the ratio between the crude oil price and NGL product prices. The warm winter has created the highly unusual scenario in which propane and butane are trading at a much larger discount to crude oil than we typically see. Propane, for example, has historically traded around 72% of WTI. Today that number is about 60%. We are anticipating Q1 EBITDA in line with our long-term expectations under the current market conditions; if product prices had been more typical Q1 would have been very strong.

In today's scenario our NGL storage assets really show their value. We're currently building low-cost propane inventory that we anticipate selling in the fourth quarter of this year and the first quarter of 2007. So what does all this mean from a results perspective? We have a policy against giving specific EBITDA or cash flow guidance but we have said in the past that historical annual EBITDA for the Redwater business was on the order of $60 million. And for the former EnCana business with synergies and new facilities it was on the order of $90 million. For 2006, at today's commodity prices, we would likely see EBITDA of around those levels. If the propane and the crude relationship were to return to normal levels and the frac spread were to remain strong we could exceed those historical levels. Of course, actual results will depend on such factors as the frac spreads, product prices and our operational and marketing performance.

I will wrap this up by reiterating how excited we are by the opportunities we see in Midstream Services going forward. Not only are we now the second-largest integrated NGL player in Canada, we have also truly exceptional integrated west to East NGL system and built on best-in-the-class assets and some of the best people in the industry. The flexibility and optionality that our expanded business offers are outstanding and there are still all kind of interesting growth opportunities available to us. Our people and our facilities are well positioned to capture new opportunities associated with the bitumen boom in Alberta.

I should give credit as well to our existing employees and to new employees who joined us from EnCana and from Kinetic, the NGL marketing company. While the disruption created by the acquisition is always unsettling, both current and new Provident employees can handle the transition professionally and positively. The integration of the teams is going very well and we are well on our way to capturing the synergies of bringing these two businesses together. I would also like to reaffirm to our customers that we will continue to deliver the value add services that we have in the past. And with that high-level overview I will pass it back to Tom for his concluding remarks.

Thanks Randy. Our long-term strategy at Provident has unfolded as we had planned and as a result Provident Energy is a very different company today in 2006 than it was back in 2001 when we converted to a trust. With about 20% of our EBITDA today coming from the U.S.-based long-life oil reserves and about 40% of our EBITDA coming from the Midstream business today. What hasn't changed however is our commitment to delivering long-term value and sustainability. All of our strategic initiatives are undertaken with that vision in mind. It is worth noting that Provident no longer has a natural gas peer group or a natural peer group I should say of companies to compare ourselves against as a result of our diversification. We are creating a unique value proposition through our balanced portfolio and interconnected diversification. The benefits of this diversification include assets of a scale, exceptional economic life, a more balanced risk profile, natural synergies among our businesses, access to multiple capital sources, exposure to organic growth projects and the opportunity to deploy our capital in a range of alternatives not available to pure play competitors.

Having built up three distinct businesses, each with size and scale in its own right we are very pleased where Provident sits today. We are strategically positioned to realize the value and potential of our diverse assets. And particularly in the current environment of commodity price volatility Provident's balanced portfolio offers attractive security for sustainability for investors. We would like to thank you for your time today, and operator at this time we would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Your first question comes from Jonathan Fleming from Sprott Securities.

I wonder if you could speak to the technical reserve provisions in the U.S. that appeared in your disclosure this morning?

Why don't I turn that over to Dan O'Byrne and he can give you some color on that.

Certainly. The technical revisions that you see in the [NI 221101] format 1, that we released today are by and large economic, the economic impact of higher operating costs specifically in the California area where higher natural gas prices leading up to year end resulted in significant increase in the costs of power which was -- which is a big component of our operating costs down there. In addition, we did see reserve additions in the Orcutt field to the tune of north of 3 million barrels on a [2P] basis so the bulk of those revisions and of course you have the positive economic revisions of an increased price environment. So in summary those would be the three major components of our reserve changes in the U.S. outside of production of course.

Thank you. I wonder Randy if you can give any color on the potential acquisition opportunities on the Midstream side of the business?

Of course Jonathan I am not going to come out and tell you what we're looking at but there are -- we see both brownfield and greenfield opportunities. We possibly could see some consolidation in the Midstream Services part of the business. From a greenfield part there are certainly a number of opportunities that are unfolding as they relate to the oil sands and tar sands development that is going on. One of them is already that we have already focused on, of course, is condensate, condensate blending. We have expanded our facilities for that. We anticipate that there could be additional opportunities in that same type of product that we could deliver to the market.

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

Okay, well what I would do is encourage all participants if they have further questions, please do not hesitate to contact Laurie Stretch at our office here or the e-mail us and we would be happy to get back to you. Thank you operator.

You are welcome. Ladies and gentlemen, this concludes today's conference call. Please disconnect your lines and have a wonderful day.