殼牌 (SHEL) 2007 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Duvernay Oil Corp. 2007 annual results conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session. (OPERATOR INSTRUCTIONS). I'd like to remind everyone that this conference call is being recorded on Thursday, March 20, 2008 at 12:00 p.m. Eastern Time. I'll now turn the conference over to Mr. Scott Kirker, Manager of Corporate Affairs. Please go ahead, sir.

Thank you, operator, and welcome, everyone, to our discussion of Duvernay's 2007 year end and Q4 results. Before we get started I refer you to the advisory on forward-looking statements contained in the news release as well as the advisory contained in Duvernay's annual information form dated March 30, 2007, the latter of which is available on SEDAR. I'd like to draw your attention in particular to the material factors and assumptions in those advisories. Mike Rose, our President and CEO, will start off with an overview of our operations and results. Following those comments, Mike and Brian Robinson, our Vice President of Finance and Chief Financial Officer, will be available for questions. I'll now turn the call over to Mike Rose.

Good morning, everybody. Pleased to go through 2007 release. Lots of highlights. Our year-end closing balance proved plus probable reserves grew to 148.2 million barrels. We added 55 million barrels of P+P reserves at a cost of $8.89 a barrel. We had strong growth in all three reserve categories, proved was up 51%, P+P up 47%, and that's net of production, and, importantly, F&D costs were down approximately 33% in '07 versus '06.

We reached the 26,000 barrel production level in March with the start up of our Oldman plant. More on that a little later. Overall, '07 production was up 33% over '06. We had record cash flow in the fourth quarter of $1.17 per share. We've maintained our very good top decile cost structure, both on op costs and G&A costs. We're well into the Montney play in B.C., and our first two horizontals tested at rates in excess of 5 million per day and our deep exploration program in Alberta and B.C. has yielded a couple of discoveries.

Looking at financial results, both cash and earnings were up in '07 versus '06. In a relatively difficult gas price environment for Duvernay, which is a gas weighted producer, about 90% gas, 10% oil and liquid, so we did very well increasing cash and earnings. We had very strong netbacks due to that aforementioned top decile cost structure, and very favorable royalty structure. For the year '08, given strengthening gas price outlook, we have increased our cash flow outlook for 2008 by approximately $50 million to $378 million, up from $325 million, and we have done some hedging to capture that gas price increase.

On the production side, we had very good sequential production growth Q4 '07 versus Q3, up 10%, and that trend has continued in Q1 and is expected to continue in Q2 of 2008. As mentioned, overall, production daily average was 33% higher in '07 versus '06, and that's in step with the strong reserve increases as well, and we would like to keep them tied to each other. We've gotten above the 26,000 BOE a day level. We have between 1,500 and 2,000 BOEs a day yet to bring on stream prior to breakup. We feel reasonably confident we're going to get all of that on, the weather so far has been cooperating, particularly in the B.C. area, it hasn't gotten that warm, and it's not sunny which is good when you're approaching breakup.

Looking at 2007 reserves specifically, growth was very strong. I've already quoted the percentage increases, what 51% on the proven and 47% on the P+P, all accomplished via the drill bit, replaced 2007 production by 7.2 times, and our recycle ratio was 2. Proved reserves were added at a cost of $12.25 per BOE prior to future capital, and P+P prior to future capital was sub $10 at that $8.89 level.

We're moving slowly towards booking portions of the very large development drilling inventories that we have. Typically, in the Deep Basin those future locations are booked at approximately a BCF less than what drilled wells are recognized with, so that's important for the 324 locations that we carry in future development capital. When they're drilled, they will realize a BCF increase but the full capital is already carried in the future capital category. So that's an important uplift to where the '07 reserves sit. And on top of that, we have between 1,700 and 1,950 locations throughout our two large operated areas that currently have no reserves assigned to them, and they are development wells, and we'll get to all of them eventually.

On the capital side, we're being conservative in 2008. First half capital spending will essentially be a cash flow budget, and we'll stick with that $400 million budget for the year but we're looking at spending about $160 million in the first half and that provides us added flexibility in the second half should we decide to accelerate exploration, discovery follow-up, or the Montney development in Northeast B.C.

As far as the balance sheet, we've increased our cash flow outlook by approximately $50 million. We've done a $30 million flow through and we've entered into an agreement to sell $40 million worth of properties, so in aggregate, $120 million added to the balance sheet, and we think that's prudent to do in this current financial environment we're in.

Looking at the EP program for 2008, we operated nine drilling rigs in the first quarter and plan to stick with an eight to nine rig program through the balance of the year, and with the aforementioned capital spending in the first half we can still accomplish that. It is getting close to breakup so just one drilling rig in B.C. is still active and it's finishing our fourth Montney horizontal well, and we have approximately five service rigs still working, and we'll be able to keep pipelining for another two or three weeks yet. In Sunset Groundbirch B.C., our first operated complex, results have been very strong with success in the Montney play, new pool discoveries, both in the zoic and at West Groundbirch and also Deep Groundbirch. We released on the Montney play a couple of weeks ago. A little further information, our first two wells did in fact production test in excess of 5 million a day. They're both on stream as of this week. Two other wells we will get drilled, completed and tied in prior to breakup.

We have an inventory of over 500 Montney horizontal drilling locations on the 180 net sections of interest that we have in Sunset Groundbirch, and we plan to ramp the Montney horizontal program up somewhat. We expect another 10-plus Montney horizontals during the balance of 2008 which will provide a relatively significant production volume uplift in the second half of the year, particularly Q4, by the time you get everything drilled, completed and tied in. Multi-zone discoveries at West Groundbirch will be followed up, and then at Deep Groundbirch, our two of 10 Paleozoic tests, we have tested gas from several Mississippian horizons. We're going to bring one of the sweet zones on, very strong test, 5.5 million a day at about 1430 PSI or 9800 KPA. We expect to have that well on prior to breakup and there's plenty of follow-up potential for that zone and others. We will drill at least one more deep test in Sunset Groundbirch and spud that well after breakup. So it's a play underneath the Montney for those not familiar with what we're doing there.

In the Alberta Deep Basin we're carrying on with our same pace of activity. It is our largest area from a reserves and production standpoint, and our package is updated and available on the website, and you can see those numbers. Current production is approximately 19,000 BOEs a day out of the Deep Basin alone and we will get to the 20,000 BOE a day milestone for the Deep Basin alone prior to breakup. 15 new wells drilled so far in the first quarter and the very strong completion results continue with those wells in the first quarter.

The Oldman 10-24 plant began producing a little earlier in March. That gives us three 100% owned and operated plants in the Deep Basin with processing capacity of up to 160 million a day. We're almost at the 120 million a day mark right now, and our goal is to have 150 million a day of equity gas through this system by late 2008 and starting up Oldman will take our op costs on a corporate level down somewhat.

And, finally, underneath the Deep Basin play in the Devonian at Edson, we finally deepened and tested the Edson well and we're happy with the results. We've proven our geologic hypothesis correct, and there's lots of follow-up potential. And I think that's enough for the overview and Brian and I are more than willing to take questions.

Thank you. Ladies and gentlemen, we'll now conduct the question and answer session. (OPERATOR INSTRUCTIONS). Your first question comes from Jonathan Fleming from Coremark Securities. Please go ahead.

Hi, guys, just on your Montney reserves, I wonder how much total Montney reserves you have booked?

We've booked the 14 verticals that we drilled over the past two and a half years. We have reserves recognized for the two horizontals that we drilled and completed and subsequently put on production during the first quarter, and we have a small number of probable horizontal locations, so that will be our big reserve booking target in 2008 is the Montney, especially if we have in aggregate 15 plus horizontals drilled and completed already.

Okay, and with respect to the drilling that you worked on subsequent to the year-end, in the Montney, is that going as expected, no surprises? Could you give a little more color there?

Well the first two horizontals were drilled and completed for approximately $5.5 million, which is on budget and the second two of the drilling, well the first one, sorry, the third is now drilled and we're running production casing. It was done on budget so the completion will start on the weekend. The fourth well is just starting the horizontal leg but no negative surprises as far as the capital cost on those wells thus far.

Great. On your Edson prospect, you mentioned in your press release that you plan to continue drilling there. Can you give us some idea of how many wells you plan to follow-up on that prospect with in the year?

Well it will depend in part on how the results go. We think the first well is not an end member, either good or bad. It's a very strong well. We think we can also do better in there. Future locations will depend somewhat on getting regulatory approval, but having done the first one and coming up with an H2S content significantly less than what we've modeled, we hope that that makes future licensing a more simple process.

Good stuff. I guess finally on your royalties, royalties were lower than certainly I anticipated in the fourth quarter. How do you see that playing out in 2008?

I think that our 08 numbers will be comparable to those that we experienced historically. If you look at our effective royalty rate, it's right around the 15 to 16% over the last three years and I think that's a reasonable number. Of course we have a huge run in gas prices that will affect them a little bit.

Okay, great quarter, guys and thanks for answering those questions.

Thank you.

The next question comes from Stephen Calderwood from Raymond James. Please go ahead.

Just continuing on the royalty question, into '09, how do you view your investment in Alberta compared to BC, and do you see yourself shifting capital into BC when the royalties kick in in 2009?

We like both areas equally. We're having spectacular results in the deep basin. There are some GAAP incentives in the new proposed 2009 Alberta royalty scheme. There are discussions on going to enhance those during the course of this year with the Alberta government, not by us but we do our negotiating through Cap, so we're hoping to see some improvement there as well, so no decisions have been made on shifting capital because of royalties. It will be strictly because of our due to operating results.

Okay. And you mentioned you had agreements to sell properties worth about $40 million. Does that include an equity interest in Exshaw?

It has nothing do with Exshaw, it's a different Company all together.

Okay, perfect. Thanks.

Yes.

Ladies and gentlemen, (OPERATOR INSTRUCTIONS). Your next question comes from Richard Wyman from Canaccord Adams. Please go ahead.

Good morning, everyone. Just a couple of questions to maybe get a bit more detail from questions that you already answered. With regard to the Montney reserves, do you actually have a number? Like what volume out of the 150 or so million BOEs that you booked would be characterized as Montney reserves?

I think we're sitting around the 3 to 4 million barrel mark in aggregate. And we have 40 million barrels booked in Northeast BC right now, P+P.

So roughly 10% of your north East BC stuff?

Yes.

Turning to this Edson well, can you comment on what the wellhead flowing pressure was to get your restricted rate of up to 7 million?

No.

Okay, and then just for clarity, you mentioned was it 1950 locations in your inventory that have no reserves booked with them at all, is that right?

That's right.

And the split between BC and Alberta would be?

Well we've updated that slide so if you look at that inventory slide, Richard, well I know the numbers, it's 1380 in Alberta, so 324 of those are carried as future PUD locations in the deep basin so you've got just over a 1000. Bear in mind that on the 110 sections of land that we've added through farm and are in the process of earning, we haven't booked all of the development locations there yet. In the Montney, that's where the range arises between 1700 and 1950, we got between 250 and 500 to go, you might notice that we increased our Montney land from what we quoted was 120 sections, we had more land in there, we now quote 180 net, that's based on drilling results that we've had during the first quarter, we drilled six additional verticals in there also, which drives us to that larger inventory number, so the Montney inventory could grow from where it is but we've only drilled and completed two so we kind of have a long way to go and then for Village and other Triassic development locations, we carry 350.

Okay, and are there other assets potentially for sale besides the stuff on the Peace River High?

No, not at the current time. There's a chance that maybe some minor things here or there are going. We're not selling everything on the East Flank of the Peace River High right now. It just makes sense at this time to really focus in on the two big projects because A) they keep getting bigger and B) the exploration underneath each of those is working as well, and if we need any incremental money, we'll transfer from East flank into those two core operated areas.

Okay and just one last question on the expansion of the Montney acreage or the prospective for Montney. Has that moved out into the farm out acreage you have from Talisman? Is that where the major increment is coming from?

No comment on that at this time. It's from all over our BC operated complex.

All right, thanks.

The next question comes from Brian Christensen from Genuity Capital Markets.

Hi Mike, just trying to get even more detail here, just specifically on your horizontals for the Montney, what you have booked and whether the 4.5 BCF that you've quoted in your presentation or do you expect them to get to that level at the end of this year?

They're at that level now.

Okay. And then in regards to production you mentioned 29,000 in the release. Should we take the five year development outlook slide of being 29,584 as sort of your forecast guidance for '08?

Well our guidance in the package is 29 to 30 and so Brian used the mid point which is around 29.5 and I think we haven't updated this five year outlook since November, so it actually doesn't include any Montney EP activities. So at some point, we will but we haven't yet.

Like when we're done updating that, I think you'll see that overall, we're going to have a little better performance for two reasons. One is our base has moved up so we're using the GLJ base and secondly, this model is built on capital efficiencies and I think our '07 capital efficiency is more indicative of what we're really going to do forward and that's not built in here either.

Okay, thanks, guys.

Don't take too much precision from those numbers. It's just a model that you put dollars in it and it creates barrels so it's not exactly what we think is going to happen in 2010. It just gives you an idea. And our one year guidance is 29 to 30 as Mike said. Okay. Thanks. Yeah, thanks, Brian.

The next question comes from Brad Borggard from CIBC World Markets. Please go ahead.

Hi, guys. Sorry just a couple more questions here on some of what you've got booked. I'm just trying to drive at the number of locations on a net basis so when you say 324 gross in the deep basin should I continue it to assume 60% working interest net Duvernay, and then also a little more color on number of Village locations booked, and I guess I'm not sure we ever got in terms of number of Montney horizontals booked.

Our typical working interest because we've migrated to different areas in the deep base in is between 70 and 75% so that's the number I'd use there. We have, I think the number is 29 Village locations carried in the P+P category for Sunset, Groundbirch by GLJ. A further note to that, we will be able to get a lot of those future Village locations with the Montney horizontal as we go through the Village at a low angle, and then go horizontal in the Montney, we'll be able to access the 1.5 to 2 B's in the Village in a much more cost effective fashion, because as we come out of the hole, finish our five or six orthogonal stimulations in the Montney horizontal, you can cast the Village in the vertical part of the well over on the way out so we'll get it for $0.5 million as opposed to 2.2 which is what's carried in the reserve report, million per well and it's a very light booking as far as future locations in the Montney, so that's the big booking opportunity for us in 2008, and we're spacing the wells out to enhance that ability to book more reserves, and learning as we go, which areas are better than others.

And are you saying you could comingle the Village and the Montney then?

Yes.

Okay. Also I was just wondering have you guys had GLJ look at running the reserves on their deck and what the potential impact of the new royalty regime would be?

Yes, we have and the results were indicative of valuations similar to what we've published for what's included on the table in the press release. In other words there was no value erosion on any of those sensitivities that are prescribed.

Okay, great. Thanks, Brian and last question. Could you just give some color in terms of where current capacity to get volumes out of Northeast BC are relative to current capacity relative to current volumes on both the Village and the Montney?

We're trying to get another $10 million a day on prior to break up which will have us essentially full of between 55 and 60 million. We could squeeze a little more Montney gas because its sweet, but we have plans under way to add significant capacity increase for Q4, or not very much capital because the advantage we have is most of our pipeline systems are already built. We have the four plants and a lot of compression and dehydration already so for a very modest expenditure, we can add 30 to 40 million a day capacity prior to year-end which is what we're working on right now.

So it would be fair to say that you guys would be restricted to about 10 million a day of growth up until Q4?

No, it wouldn't be fair to say that. We'll be able to get more gas out as time goes on here, but we'll add about 40 by year-end from where we'll get to coming out of Q1.

Okay, great. Thanks, guys.

Mr. Kirker, there are no further questions at this time. Please continue.

Well, thanks everyone for listening. If there's no more questions we'll end the call now. Thanks.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. Please disconnect your lines.