Dave Roberts - President and CEO
Penn West Exploration Ltd. (PWE) Peters & Co. Limited 2013 Energy Conference September 10, 2013 3:30 PM ET
Unidentified Company Speaker
Well, clearly they came to hear Dave talk; several was waiving now, but appreciate you all bearing with us late in the afternoon. As much as I love 101s, the real benefit of these conferences is the ability to come in and hear my peers talk about their businesses. And because it tells us how far a competitive hill we have to climb at Penn West, and so that's going to be really the basis of my comments today.
I think most of you all know our story. We're an Alberta and Saskatchewan company, we do have assets in Manitoba and BC, but we're primarily dominant in Alberta and Saskatchewan with some very attractive in the midst of our portfolio. If anything, I would say our focus is too broad. And one of the things we're looking at is how can we narrow down to make sure that we extract the most value of the very resource rich portfolio.
So as I came into the company what I've tried to do is refocus the company into what I think it should be and we're of course focused like very is is to maximizing our shareholders value for the company. And the way to do that I think to decide where we're going to play and then try to the best in the basin. This has been inwardly focused company and one of the things that we're trying to do is determine who the best competitors are in the fields we operate in and target Best-In-Basin data.
We need to be much better in terms of our base production capability. Our maintenance and reliability has not been where it needs to be and it's one of the things we're focusing in on. We need to do better in terms of our work with the drill bit and in terms of improving our capital efficiency, and one of the greatest weakness in the company is our balance sheet is not in very good shape and we're working diligently to fix that.
We had to go back to basics. And I apologize over a lot of this step is kind of a (inaudible) that this is the course we've taken the company in the two months that I've been here. Penn West was a company focused on the front end of the this curve, more interested in acquiring more resources, pushing forward, exploration was more than just part of our name, it was kind of our focus area. And clearly because of the rich organic base we already have in our assets our portfolio, this is a company that needs to be more focused on exploitation and delivery of barrels that we already have.
And so, in our most recent restructuring we really have limited or eliminated the front end part of our business and we have emphasized and are going to focus in on the production side of the business and making sure that we manage our businesses to produce cash for our shareholders.
So we've reclassed the business into largely three districts. We built one around our holdings in the Cardium play, which I'll talk about a little bit later. The second we've built around our near beginning or mid-life development assets, and you could see that's what we call Big Hill after Big River Project that was done last century. And the remainder of our business some 40,000 to 50,000 barrels a day, the (inaudible) Penn West we have captured in a single business that we call Switchgrass.
The reason we did this is quite single. Our company ran every asset exactly the same way wherever it was in its producing life. And that last bit of the business as most of all you know needs to be run very differently. And we have basically put that group of assets into a business where we're going to make it be a cash payer to the corporation and not be necessarily a drain on our focus as we look at growth from the other two businesses.
This is just a simple cartoon of again how we've emphasized the fact that we are a produced-centered business, and again I recognize that many people think this maybe a sophomore, but we have really emphasized the fact that this is a production company, everything revolves around what we do as a production enterprise, and that is the delivery engine for the business and everything goes around it.
So the outfall of this basically in the two months that I've been at Penn West is we've seen staff reduction since the beginning of the year of a little over 500 employees, a rough 30% of our total count. That includes the reduction of executive management by 50%. We believe we've taken over $100 million out of the cost basis of the business in a very short amount of time. We’ll now let the business run its course in terms of having reduced some of the plotter we were focused on increasing our operating efficiencies on a go forward basis, as we look to become net cash generating engine on a go forward basis.
Of course strategy, we have basically stepping stone our budgets from 2013 at $900 million, many of you will remember that we talked about how to make a contingent budget, so I ever understood what that meant. And so we took it away almost so soon as we got the Calgary. We will produce between a 135,000 and 145,000 barrels a day. Unfortunately sequentially the second half will be lower than the first because of the way our capital programs are structured. We do have very strong incremental and individual project economics across the asset base and we’ll continue to focus on that.
One another things that we did do is we suspended one of our more active programs drilling in Waskada in Manitoba. And we’ve started to rotating for the programs that are going to be more important to us on a go forward basis. The Cardium is the core of the company and so we’ve rotated a substantial amount of capital into that. That business will feature very heavily in next year’s budget program and we’ll see increased activity in the Viking in the second half of the year as well as going into next year.
Well, this is just a picture of what I’ve talked about. So, this was our original allocation and you can see we cut back Waskada or Spearfish as a zone in the industry to roughly half. Push Cardium to $70 million to $80 million, I expect that figure will be at least in double next year on our go forward budgets. And you could see the Viking program is also good, it featured heavily in the second half of the year.
So, for Q2 we did have a solid and spectacular quarter in terms of our volumes about a 140,000 barrels a day. We’re able to reiterate our guidance as we think we’ll be able to make that. Very strong cash versus CapEx this quarter, it was helpful to some of our leverage metrics and you could see we obviously enjoyed the very strong commodity price environment with some solid netbacks from our predominantly lighter portfolio.
One of the things that we’re also working on in addition to operating cost is that we quite frankly had not been up to standard in terms of our capital performance at the 2012 end and you could see here we’ve got some comparisons on our major plays for what our plan was the half one actual performance both for cost and cycle time. We have a long ways to go in this particular area. One of things I’ll point out is, this is an example of lack of competitive focus. Viking program we have some outstanding competitors around us they frankly make us look pretty bad.
And really in the first 60 days we studied them, one of the great things about Calgary is we find that the competitors will actually tell you what they’re doing. And they’re happy to share with you anything that they’re doing and we have taken some of the lessons from some of this competitors. And we’ve taken our thought from an average wells really in the last 30 days were the liking from $1.35 million to $1.1 million, that’s the type of stuff that we could do just by doing basic blocking and tackling in this company.
Now, I'm not sure that we could get to the 950 to some of our stronger competitors get to simply because we have some differences on how we’re going to pursue things. But I expect the same kind of cost reductions in the Cardium play as we move forward on a go forward basis which will make our capital budgets go further in the long run.
I think we’re very well hedged obviously for this year, I'm much more concern about next year, pretty clearly we’re about 50% hedged on AECO on a go forward basis on the gas variable and knows that and so I feel pretty good about the hedges we have for 2014. We’re well hedged in the first half of next year in terms of WTI basis and we do have capacity on pipelines getting to the Gulf of Mexico in the second half which is an effective hedge for us for crude in next year as well. So, about 50% hedged on both to the major commodities which will give us time as we work through some of the transitions that we have to do as a company.
Again, this is a company that set up for a largely around three main assets that we also show Waskada here because it continues to be a meaningful part of our portfolio. But this is a company that dealt around the Cardium. And we have put the stake in the ground that if we can do the Cardium well then Penn West start to do well. And that’s one of the things that we’re going to focus in on both at proving our drilling cost, drilling longer wells, drilling better wells and also importantly being serious about pressure maintenance on this reservoir from the beginning rather than following up over time.
Carbonates, particularly in the Slave area that’s we have a very strong position there early days. A lot of running room in that place as well. We’ve got to do better in terms of our well cost. And the Viking we talked about is not a company maker for Penn West because of our size but it’s a great bridge asset for the next three or five years to get us to the future that we have in vision.
So, when we talk about things that we have to do as an enterprise that is basically a 140,000 barrels a day. We have to pursue things that’s running on to give us the ability to get into one place to do things on a repetitive fashion to drive our cost down and to take advantage of the scale that we have. And so we look at the three bars to the right you can see this is the reason we’re going to play in these places 2000 to 3000 locations in the Cardium and a 1000 each in our carbonates and Viking portfolios on a go forward basis. This is where Penn West is going to make it’s climbing over the next three, five years.
So, just briefly, you all know about Cardium because I think we’ve (inaudible) about it for many years with a 600,000 acres since given on the slide 500 million we’d release the new Contingent Resources 600 million barrels there. I think the key for us is we’re going to rotate into that in the second half of this year, we just put up two rigs this week. This is the place where we think we can operate four to six rigs probably as long as the rest of my career here. And we’re going to work more effectively with our partners here to make sure that we get the maximum amount of both our operated and non operated asset base.
Lots about Viking Saskatchewan, again it’s a place where we’re pretty forbade with the area of about 170 million barrels of contingent resources, 5000 barrels a day, it’s not going to be a significant growth engine but this is a quite predictable play where we could bring very good returns and very strong wells for certainly for the medium term.
And then lastly Slave Point is a place where we currently carry a little over 100 million barrels of contingent resources, we could double that with some of the potential that we see out here, key here is to get the cost down to make this an effective program for us but we’ll also be spending, most of our money in the second half here on water floods because we got some water flood work to do here in the future.
So, in closing what I would say is we’ve got a long way to go to restore our credibility as an operating end for us. We want to become a cash return vehicle so we’ve got some work to do with out balance sheet. We got to be more effective with the dollars that our shareholders have given us but we do have the exit base and I think we’re getting close to where we are the organization that’s the asset base reserve.
So, with that I will close. And there is an advisor in call.
I guess first half for the EMP guys of the panel, you’ve all talked about balance sheets, you’ve all talked about the size of the resource here for the plays. Jeff, you specifically reference sort of the capital constrains, you guys have in terms of some of the development relative to resource with reserves book. How do you guys think about leveraging third-party capital either before the joint ventures asset sales for a concentration of the asset base.
Unidentified Company Speaker
So, they both looked at me so I’ll go first. We’re not interested in doing joint ventures or taking any form of third-party money. We believe the best way to maximize value for our shareholders is to do it ourselves. And so we believe 100% working interest clearly focused properties, on your infrastructure a 100% gives us the maximum control of our properties and allows us to take the benefit for our shareholders of any upside that exist in the assets. That’s put virtually if in a position where we carry a little more depth than other companies do for example we’re probably $250 million to $300 million and do infrastructure financing versus using third party capital where we could easily finance that infrastructure but the flipside of it is when gas prices are low, we’re not making the earliest much money.
So, we made a conscious decision to keep everything a 100% and because we believe our drilling development properties not high risk exploration, we can afford to do that and we take on the debt and return for having earnings and control of cap.
Unidentified Company Speaker
Okay. And with respect to asset sales, I think we look at divesting at some assets to focus our efforts in the Montney and would anything else at the moment so anything like playing in the presentation is I think we have put an optionality in our asset base and we have to do things like that. We do like for doing things a 100% wherever possible, we do have a relationship with (inaudible) that’s in the Montney where they doing the gas that be in size. Good operating cost in the area and that sort of through that plans around 350 to 4 box as well operating and tamper that it’s close to $6 in that area.
So, that’s something we’re comfortable with. However, wherever possible we do like their facilities. In terms of what assets that we would look at obviously in our view this is a bit of a buyers market, we’re not really focusing on selling anything at the moment, we think we can fund our growth through our balance sheet which is now we’re about 1.6 times at the end of Q2 probably about 1.9 times at the end of the year. So, between cash flow, free cash flow from our well assets should be anywhere from $80 million to $100 million, we think we can grow there our Montney assets and as I pointed out we will be able to do that by the expansion of our gas plant which is eminent and the construction of the new gas plants in first part of 2015.
Unidentified Company Speaker
Yeah, I guess the only thing I’d add because we’ve obviously not having – probably spending those people’s learning over the last several years is – the big problem with JVs is alignment because it’s easy to think about alignment in the short term issues. These projects tend to drag out and maintain that alignment over time it becomes more and more difficult. And so and you know we’ve seen pluses and minuses on that. I think its, it’s, I agree with the other people on the [town] if you could do things yourself and control your own destiny you are in a lot better shape.
It’s a question for Dave I guess, you highlighted 3000 locations in the Cardium, which is obviously over quite a large area. Are there any areas that you are particularly focusing in on just because we’ve seen the results being variable throughout the Cardium and I guess, when you think about that, what do you think the ultimate potential of your Cardium inventory is?
Well I’m pretty confident that the numbers that we put out is because I don’t think 500 million barrels is an excess estimate of what we could ultimately take from that pretty clearly Lodgepole is among the best. Crimson Lake is an area that we’re very excited about if we get out costs under control two areas that we’re going to focus in the second half of the year and (inaudible). I think the key for my company as long as we’ve been in the Cardium I don’t really think that we’ve got after them. So, to really get an in-depth understanding and to see how good we can actually be there. And so, it’s pretty exciting to me that we’re going to focusing on that because the places we’re I don’t think there is any better.
I guess question for the other three, how do you position yourself to be relevant to the Supermajors and everyone else, who are active in LNG development over the next few years I maybe start with Gary?
Unidentified Company Speaker
Yes that’s obviously going to be an important part of the Canadian story with LNGs expanding over the next few years and we’ve to continue to focus on technology and service quality. We can’t allow I think the biggest question we get now is if you get, if you got the big NOCs in Canada you are going to have a larger presence from Halluburton, Schlumberger and Baker in Canada. And historically they haven’t been able to grow their Canadian market share because of the [lack] of people.
But I think we just can’t give them an opportunity to come in and take market share from us we’ve to continue to execute operationally. I think we’ve got good experience in the Horn River. We’ve the scale to be able to bid on work up there and take on projects that require 450,000 horsepower so I think maintain your solid, maintaining service quality, staying on the leading edge of technologies its all part of our overall strategy and we think the work from the Supermajors will come if we can continue on that path.
From our perspective I think we positioned ourselves well with respect to the resource that we captured in Northeast British Columbia with the 91 Tcf equivalent that I referred to and we’re proximal to a lot of infrastructure. So, evidenced by design we swapped out of an asset up (inaudible) coals that we sold earlier in late 2012 for $108 million and we bought the 200 sections close to our a land base infrastructure for the $78 million.
So, I think we’re not in a position to clearly comment on when these LNG projects kept going. I mean, we’re hopeful they do. Obviously there is a lot of work to do with the numerous governments involved in these projects and we hope that it does occur. But we’re in the mean time we’re going to run our business (inaudible) and its interesting down the road but that’s entirely its an effort from our perspective we’re just focusing on what we’re doing.
Maybe just a follow-up there what any is there is an FID from any of the big players over the next couple of years will that effect your pace of development?
From our perspective, it would not its only because we only have so much cash to deal with and work within the context of our capital structure. So, we’re going about as fast as we can at the moment.
Unidentified Company Speaker
(inaudible) scale so I think there is three things going on scale, delusion and capital and like [Dale] we don’t wanted to lead ourselves out while we are trying to build scale and so we’re not focused on what the (inaudible) decisions and when they are going to be made more importantly to us is drive our cost down and drive up our ultimate recoveries from the well and as long as we were – as long as we are making money and having earnings then we’re aligned to whatever else is going on around this. So, you think earnings are the most important thing that’s what we’re focused on which is our cost. So, as long as we’re making money, we’ll continue to expand our businesses and then played out with whatever happens, happens.
A question principally for Dave but also for the rest of the panel you talk about improving capital efficiency. Can you sort of walk us through some components that you are looking at today the difficulty most meaningful to help that metric? And I guess to the other panels members, where are you focusing in terms of your development activity today in terms of where the driving down F&D costs and improving capital efficiencies overall (inaudible)?
Just quickly I think the two areas that we notice the most difficultly in our company was first there really is an effective supply chain component perhaps not there and so we think Kevin the size that we’ve since basically our operating budget and capital budgets when combined about $2 billion we should be able to extract some real savings from using that kind of leverage. And so, we’re focusing on that. And then bluntly we just not been very good at the blocking and tackling side of E&P.
And so, the changes we made are have been, are very straight forward it involves two things focusing on what other people are doing in the place that we already are in and then again its critically important and I’m always interested in what people are doing across the fence and we fought and won a lot of these battles south already. We don’t have to reinvent a lot of stuff up here and so a lot of our focus is going to be making sure that we do what we’ve seen work in other places up here in the same basin.
Unidentified Company Speaker
Yeah From our perspective and how we’re going to drive our costs and how we feel we can drive our costs specifically in Northeast British Columbia is through pad drilling. We have seen significant savings as I pointed out in the presentation from an net the first well in that $4.9 million range the third well in the $4 million range. The other thing that we’re doing in that area, we’ve a water strategy; we have home water storage disposal wells as well. We try to reuse the water whatever and we frac it, which is a major costs associated with fracing as you know.
The other thing that is important Gary mentioned it in his presented but using different technologies we have gone from (inaudible) system to a frac port system or packer system and that’s reduced our overall costs in the well as well as improving efficiency. So, as a result, we’ve been able to improve the EURs from the original 2.8 Bcf per well up to 4.6 Bcf today. And IPs are going up from anywhere from 2.5 million a day, now they are in the 5 million to 7 million a day range as a result so, good combination.
Unidentified Company Speaker
Yeah, I'll just echo again what Dale said. So this year we built five different pads going, the maximum being seven wells and smallest being three wells. So pad drilling is in the same services, in the same places and better technology. So we've I think drilled our last 10 wells -- last 17 wells using that MBT system that Gary is talking about. Initially, we've had great results and much higher production rates but we're cautiously optimistic that the production will hold up.
The issue is not the IP rates, the issue is where are we in six months or nine months and we've tried all sorts of different technology with Gary's company. Some we had great initial rates and then the production falls off. Others we've seen lower rates but then the well hangs in much longer. So, we're doing everything that everybody else is doing form water to new technology. We have a team that just works on new technology. So we'll just see how it all plays out but same services, same place, same play, same area, same map sheet is the name of the game.
Unidentified Company Speaker
For us, we're focused on product cost at 30% of our revenue. And the biggest deficiency there is logistics sand transportation or sand and some of our key products. A lot of it we can control that. The people side of it it's tough to manage that. We need a certain amount of people and to pay them a certain amount. So I think the key for us is really product management and logistics in getting our sand where we needed to be at the right place, at the right time. We've seen, those were one of our issues in the US was poor logistics management and we've been able to save about $10 million a quarter or about 4% of revenue in the US just based on improving logistics on the sand side. So I think that's something we have to focus on.
Sorry, this question is for Jeff. Just given your focus on oil properties where do you see the split between oil and gas in the future and that's where some of the growth is going to come from?
Unidentified Company Speaker
So currently we're doing -- we have about roughly 85%, 15% light oil, and we see our gas production going up. We're just not going to run to those late oil properties because prices are high. The balance as you well know is we have lots of light oil that we can drill. And so if we do that F&D is going to go up, our corporate operating costs are going to go up, and the cost of the finding of the reserves are going to go up and our net backs will go up.
So we weigh that off against our current strategy as to be a big market player and so, if we take three of those cash flows invest more money in our gas. So we have empty plants. We fill the plants that drives our operating costs down. Our F&D costs go down its much easier to find and drill that because we're more comfortable with it and then we get growth. So, our net back aren’t as high with gas, but they're of awfully high. We compared to some of those light oil producers fairly well and we've earnings. So as long as we can create those earnings and still have gas we'll be producing more gas and less oil.
Thanks very much guys. We do have a reception….
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