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Penn West Petroleum Ltd. (NYSE:PWE)

Q3 2013 Earnings Conference Call

November 06, 2013 11:00 AM ET

Executives

Clayton Paradis – Manager-Investor Relations

David E. Roberts – President and Chief Executive Officer

Mark P. Fitzgerald – Senior Vice President-Development

Todd H. Takeyasu – Executive Vice President and Chief Financial Officer

Analysts

Cristina Lopez – Macquarie Capital Markets Canada Ltd.

Pat Bryden – Scotia Capital, Inc.

Travis Wood – TD Securities

Dirk Lever – AltaCorp Capital, Inc.

Gordon Tait – BMO Capital Markets

Brian Kristjansen – Dundee Capital Markets

Operator

Good morning. My name is Candace and I will be your conference operator today. At this time, I would like to welcome everyone to the Penn West 2013 Third Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. Mr. Clayton Paradis, you may begin your conference.

Clayton Paradis

Thank you, Candace, and good morning. Welcome to Penn West’s 2013 Third Quarter Financial and Operating Results Conference Call. My name is Clayton Paradis, Manager-Investor Relations and with me this morning in Calgary is our President and Chief Executive Officer, Dave Roberts; Chief Financial Officer, Todd Takeyasu; Senior Vice President, Development Mark Fitzgerald; Senior Vice President, Production, Gregg Gegunde; and General Counsel and Senior Vice President, Corporate Services, Keith Luft.

In addition to the third quarter results, Penn West also announced the divestment of non-core asset for proceeds of approximately $485 million. Our capital budget for 2014 and the results of our strategic review process and long-term strategy that puts the company on track to become Canada's leading conventional oil and liquids producer focused on profitability.

A detailed discussion of this long-term plan will be the focus of our formal remarks this morning and I would remind listeners that we will be referencing a presentation in conjunction with this call. This presentation is available via the webcast and also on our Pennwest.com website if you already had the chance to review it.

Before getting started this morning, I am required to review our customary conference call advisories. Penn West Exploration shares are traded both on the New York Stock Exchange under the symbol PWE, and the Toronto Stock Exchange under the symbol PWT. All references during this conference call are in Canadian dollars unless otherwise indicated and all conversions of natural gas to barrels of oil equivalent are done on a 6:1 conversion ratio. All financials are reported under International Financial Reporting Standards or IFRS.

Certain information regarding Penn West and the transactions and results discussed during this conference call, including management’s assessment of future plans, operations and targets constitute forward-looking information under applicable securities laws.

Our actual results could differ materially from many conclusions, forecast or projections and forward-looking information. Certain material factors and assumptions were applied in drawing any conclusions in making any forecast or projections reflected in such forward-looking information.

Additional information about the material factors that could cause our actual results to differ materially from any conclusions forecast or projections in the forward-looking information and material factors and assumptions that were filed in drawing that conclusions or making any forecast or projection is reflected in the forward-looking information.

This is continued in our Q3 results of long-term plan corporate presentation, which is been webcast today and available on our website. And it is contained in our Q3 press release and MD&A and other reports on file with Canadian and U.S. Securities regulatory authorities, which may be accessed through the SEDAR website at sedar.com and the SEC website at sec.gov or on Penn West’s website.

During this conference call certain references of non-GAAP terms maybe made. Participants are directed to Penn West’s MD&A and financial statements available on our website, as well as filings available on the websites noted earlier, to review disclosures concerning non-GAAP items.

With that I would like to now turn the call over to Mr. Dave Roberts, President and Chief Executive Officer.

David E. Roberts

Thanks, Clayton and good morning all. And I can assure you I am going to speak a little bit more slowly than Clayton just did in going through that paragraph or two. I am really excited about the opportunity to share with you a comprehensive plan for the future of Penn West, a plan that delivers sustainable value for all of our stakeholders.

There’s a well-known homily in our business that the best way to look for oil is where it’s already been found. The Western Canadian Sedimentary Basin is an historic world class hydrocarbon basin and Penn West has the best light oil positions in it.

In the proceeding phases of the company’s life cycle, we concentrated on resource capture and later on determining if new drilling and completions technology could economically revitalize the significant oil positions assembled in Penn West. And now to be successful, Penn West needs to shift to an economic returns and execution focused business model.

Fortunately for me, my background and what I truly enjoyed about the industry fits into this stage of the company quite well. My colleagues and I at Penn West are excited about the opportunity set here and the company is ready to execute.

Before we move into that discussion however, I would first like to refer you Slide 2 in the deck and our forward-looking statement. It’s important given the extensive depths of information we’re going to provide on the business today. Thank you for that and now I’d like to make a few brief remarks about the third quarter and we’ll be speaking to Slide 3 in the deck.

While I think our release speaks to most of the facts and issues in the quarter, I would characterize the last four months as a period of continued active transition for Penn West. In my first full quarter with the company, I was able to get a detailed from the ground up view of our business from its weaknesses to its strength.

Working together with Board both in full and with the Special Committee, management set out to change the substance and culture of Penn West with the idea that each day we could and we’ll be better. And following the quarter now plus a month, we can’t say we have improved, but we also understand how much further we have to go.

From an inside perspective, the business performed generally as I would have expected in the quarter. We highlighted a capital shift for the second half of this year and this coupled with very high expectations for results both from a perspective of drilling and completion cost performance and our overall focus on delivering on program expectations led to one of the lowest investment quarters in our history at $69 million.

Coupling that with a normal heavy maintenance activities in Q3 following break-up and a new emphasis on evaluating with some rigor, barrels lost due to failure events for restoration, production fell by over a 4%in the quarter.

Our end of October rate was approximately 126,000 barrels of oil equivalent per day, as we concluded our turnaround cycle. As we now focus on our Q4 investment program estimated at less than $300 million, our exit rate will range between 128,000 and 130,000 barrels of oil equivalent per day, allowing us to fall within our full-year guidance albeit at the low end of our original range.

We now look for 2013 production to average between 135,000 and 137,000 barrels of oil equivalent per day on capital spending that it is expected to be below the prior guidance of $900 million. Importantly and I don’t think I’m just looking for a silver lining here, the underlying premise of our company that of being a liquids rich asset holder proved valuable for us. Even with lower overall production and not insignificant restructuring charges in the quarter, our funds flow increased nicely quarter-on-quarter by almost 5% on a like-like basis.

A key focus of our go forward business plan will be combining a liquids production growth capability with improving funds flow, the later being achieved with our commodity focus, but as importantly better costs and better capital effectiveness. To be clear, our business is cash flow. So while some will look at our Q3 as middle of the road, it has laid the ground work for the following slides about our future to be taken seriously within the following context. We made and continue to make measured decisions about our production priority. We had a stranglehold on capital decisions and our on the ground performance and spending capital dollars has improved stunningly.

Our cost structure is in control and moving downward and we’re having success in what has been termed a very soft market and tightening up our portfolio with asset divestitures. All these are real steps allowing us to focus ever more tightly on making this a premier competitor in the space.

Moving into a discussion about the long-term future of Penn West, I’m often asked just what can we expect of the company, or more specifically what exactly is management trying to do here? Of course the context of the question is, Penn West’s widely known position as a premier holder of acreage and resources in Western Canada and in fact when I took this job, the question the Board was essentially asking me was can we move from that abstract to a business that performs. So, our focus as management has been building a business that performs well in several areas, all focused on those elements that drive share price improvement from my vantage point and experience in the industry.

In the end, share price growth is about predictability in terms of operating results and growth in returns and our planned focuses on what I think are four key drivers of those outcomes; production per share growth, funds flow per share growth, funds flow as a percent of revenue or netback per barrel, and a solid capital structure or debt to fund flow metrics. All of the other inputs we’re driving, operating cost, G&A cost, capital efficiency and portfolio rationalization are tied to these outcomes.

What I hope to do over the next several minutes is describe what we expect and how we can achieve success in these areas.

On Slide 5 we have illustrated the interactive process with the Board and specifically the Special Committee of the Board that can be looked upon as the genesis of the new Penn West. The Board process as noted in our earlier release was started in June of 2013 and focused on a review of strategic alternatives to maximize shareholder value. The review completed by the Special Committee included among other things a detailed technical review and evaluation of Penn West’s asset base, a peer benchmarking analysis that was conducted across Penn West’s areas of operations, consideration of a wide suite of alternatives in the context of the external environment including large and small scale M&A and A&D concepts and a detailed economic assessment of Penn West core and strategic assets.

The Board and management have concluded the best value creation option for our stakeholders was a long-term business plan that have that foundation, a more focused portfolio as this is on profitable production growth with leading all broad metrics. Cost and spending control performance as fits the top low cost basin we plan and restoring our balance sheet to competitive levels. Now, I would argue that that’s all new to Penn West. We have moved from a front end focused resource capture model to building a returns focused exploitation and development company. So the company’s plan strongly endorsed by the Board begins with core focus.

We believe the all resource positions we have in our control in the Cardium and Slave Point are unrivalled in Western Canada and together with better high-return oil weighted assets like the Viking allows us to focus activity and capital to create sustainable platforms for success for years to come. From this platform we can generate profitable growth. From the slide we are suggesting we can grow oil production in barrels per day at a CAGR of over 12% and funds flow in millions of dollars at over 18%.

As you note that on this slide and then the remainder of the presentation, CAGRs as foot noted are measured from 2015 through 2018. We choose this period because of the way we modeled asset sales in the plant to occur essentially on day one of years 2014 and 2015. 2014 will be a significant transition year in our asset base, hence this planning artifice.

For comparability and reference Slide 40 shows the CAGRs for all the metrics included throughout the presentation for yeas 2014 through 2018 for comparability. I would note these figures are equally compelling in my view.

I precise the next element non-core assets rationalization and I am pleased to say that we are already having success of reaching agreement on a number of these assets and expect our Phase II programs to have similar success. We will describe our progress today in Phase I and those assets expected to be monetize in the second phase of our program later in the presentation. I would note these are quality assets that no longer fit our conventional focus.

These asset sales will allow us the ability to tackle another success element debt reduction as we use sales proceeds to pay down debt. Following this reset, we’ll look to maintain the business with competitive debt metrics go forward. Of course, perhaps the most crucial element noted is execution. All strategies look grand however it will be our ability to deliver higher netbacks based on cost control and more valuable long-term reserve and production additions based on capital control that determine our success.

We will talk about what we have done to begin a process of gaining your confidence on our ability to execute, but we are today very excited about our progress. Why I’m sure of attaining these explorations will lead to our shareholders support and share price improvement. Our plans contemplate as sustainable dividend go forward as a means of paying forward our shareholders for their support and commitment to Penn West.

Now I’ll spend a fair bit of time on this slide, but wanted you to appreciate as I do intense effort and amount of time our Board, management and teams placed on this news, plan and strategy, and our firm believe that this is the best path forward for Penn West. As focused as we are on change, Slide 6 emphasizes what is not changing in the company. Working safely and preserving our environmental heritage as Canadians remain values not just goals for us. Candidly, for sometime this has not been a fun place to work, but we expect that our new focus and by providing an opportunity to create success we have the chance to restore passion for our business, and the company in the future.

I could tell you our employees are also hungry for an environment that depends on high-performing individuals and teams, as we reach for our collective and individual potentials. And we want to work to improve our reputation in the oil patch, be a partner of choice. Good at what we do, but respectful of the strength and opportunities others bring to our business.

Finally, we want to remind people that we are owners of this company too, and our goals and compensation programs are increasingly being tied to all of our shareholder interests. As we move to Slide 7, we illustrate the change that is required, again emphasizing those elements that will lead to our success.

Focus on the balance sheet, with long-term targets for sustainability for the business, as well as significant effort towards restoring our capital structure with more competitive debt metrics. Focus the portfolio, right sizing the asset base by not only calling the tail of our business, but also recognizing our core conventional development skilled model, and de-emphasizing those assets that don’t fit that profile.

Portfolio focus also entails putting our money where our future life, hence the significant portion of our capital close to new primary and EOR production opportunities largely in our three key light-oil resource areas.

Improve costs and netbacks, we need to ensure that in areas we compete in and focus on. Our cost structures are competitive and continue to improve with a focus on driving netbacks higher throughout the planned cycle.

And finally, improve capital efficiency, in those areas we compete in, making sure our development cost compete or lead the path, and to make sure that we are constantly focus on an increasing recoveries through primary completion or enhanced recovery schemes to ensure we drive best in class development metrics. As we look to continue to replace reserves at rates that exceed our production profile.

Before we move into the planned detail and a greater focus on these four areas, on Slide 8, I wanted to emphasize again that while strategic studies are useful and plans are important, this is a business of action and results. And so, concurrent with the five months of study and planning and is led to our new view. We had maintained a constant stream of positive actions supporting our goals and demonstrating our conviction toward improving the company.

Over the summer, in addition to concluding our reviews, we streamlined our management structure and significantly reduced staffing levels. Our drilling and completion performance is improving rapidly. In fact, referencing our second half reallocation of capital to the Cardium and Viking programs announced earlier in the year an $87 million shift in investment dollars.

Our well cost and other improvements we have in hand will deliver those programs for just over $75 million a very positive first step. And finally, as announced this morning, we expect to close non-core asset sales totaling roughly $500 million by the end of the year, putting us at nearly one third of the way toward achieving the lower end sales goal of $1.5 billion. We have enjoyed a busy and productive five months.

On Slide 9, we begin to discuss our long-term plan for the company. We are a liquids based company, so there will be no surprise that our goal is to prioritize light-oil development showing meaningful total production and stellar oil production growth in the future, with an expected increase in liquids weighting to nearly 80% by 2018.

Clearly, the Cardium is the heart of the company, and we envision increased capital spending in the play throughout the plan reaching $800 million invested per year there within five years. Slave Point is an outstanding medium and long-term resource growth opportunity and it’s capitalized appropriately in the period and perhaps – and in perhaps the change with some observers are improved cost and delivery performance in the Viking allows us to feature investments there. Particularly in the early years, as a solid production growth performer and cash flow driver for our business.

We clearly understand as well the 2014 will be a year of some transition for the business, as we moved major assets out of our portfolio. The effects of asset sales may create some volatility versus the simple model we are illustrating, but the results of balance sheet improvement and portfolio focus will be significant. And as we focused on our high-performance delivery culture we improved constantly on our – will leads to deliver all of our metrics. 2014 is the year we get our culture better down and in great fully throughout the company. That will be critically important as we press forward towards the end of the decade.

Let’s look to Slide 10 as we begin show, why I am and why my team is excited about the opportunity we have in front of us. We expect to show that a focus Penn West for competitive and improving metrics relative to operating excellence can yield the following results.

Total production growing at over 7%, oil production growing at over 12%, overall netbacks growing at over 10% with funds flow per debt adjusted share growing at over 14% with our plan. And I would note that why we do highlight this later, our plan is built on essentially an Edmonton par view of less than $90 averaged throughout the five year window. I think many of you have always expected our portfolio to deliver results like this, we’re now poised to execute on these expectations.

On Slide 11, we begin diving into our individual focus for success areas, starting with focus on the balance sheet. As mentioned the plan contemplate $1.5 billion to $2 billion disposition program to be completed over the next five quarters. And as noted, we already have in place agreement to transact on $485 million of dispositions in 2013.

Our future focus is to manage the business to successively more challenging sustainability ratios, targeting a narrowband of around 110% and particularly less over time. The balance sheet were set and disciplined costs and investment programs designed to drive high netbacks light-oil production give us the ability to contemplate positive cash flow generation in the future, with the all of the opportunities that entails for our business and shareholders.

Slide 12, illustrates the balance sheet effect of assets sales on restoring competitive leverage ratios combined with our plan to remain discipline in later years, as our cash generation and development programs ramp-up. While Slide 13, indicates our expected level and varieties of debt throughout our long-term plan, as well as our likely prioritization of funds uses in maturing our various debt tranches.

Finally on this theme, Slide 14 illustrates our attractive note maturity profile with the takeaway being our funds flow portfolio is more than sufficient relative to the periodic and balanced nature of our maturities. Penn West benefits from the support of its lenders, many representatives of our note investors and current bank syndicate are on this call, and we look forward to continuing our long-term relationships with many of you.

Speaking to the success element of focus the portfolio, Slide 15, highlights our current portfolio management strategy as reflected in the plan. Indicated timing expected outcome, expected outcome of the processes and the uses of proceeds from this program.

While Slide 16, gives more fulsome information on what we expected to complete in the market this year, and the assets that comprised our Phase II planning. It is generally no secret that the company was going to go to the market to focus its portfolio, but this was also identified it’s the top risk to our success. Specifically, the overabundance of assets on the Canadian marketplace, creating a potential failure scenario for our processes.

Clearly, asset quality matters as well as the seriousness with which we are approaching completing transactions. Our Phase I results are I think very good and pretend well for us into the future, particularly as we move into attempting the transact assets that have historically been core to Penn West future story and offer a great deal of potential to targeted buyers that’s for the dog that didn’t bark we actually hearing, we recognized we had given ourselves what may seen a great of time to complete these activities. I would offer two things in response. First, this is just a model view and while I think we can forecast with great accuracy, our capital programs and base declines and have done so A&D timing in the market seems almost completely subjective hence the wide timing range.

My second point is an important one as it relates to timing as well. While I’m focused on transacting as we move the Company forward, I want our shareholders to also appreciate that for any asset to leave our portfolio, we will get appropriate value. We want a fair trade. Our Phase I results indicate that we’re not being unreasonable in terms of value. The Phase II assets may indeed take longer as their general scale and scope will require a different and likely more time intensive marketing effort to gain result.

Finally Slide 17, places our asset groupings and the sales assets on a map for illustrative purposes. 17 slide in the first may be a record for any oil company presentation.

Turning to Slide 18, the second aspect of focusing the portfolio relates to generating value with a drillbit. It’s interesting that the greatest blessing our company possesses, the largest acreage in conventional light oil resource position in Western Canada, by far of any company in our peer group has also been our Achilles' heel.

We’ve not been able to be focused in a singular passion on anyone or any related group of assets. In the oil and gas development world today and particularly in basins like the Western Canadian Sedimentary Basin, that ability to focus and that need to be in control of the most granular details, is essential for success.

Planning and executing at the most basic of levels will be key for us in the future. It is not surprising then that the core element of our strategy is a disciplined investment program focused on a very few key quality assets leading to sustainable value-added growth. Thus per capital program for development activities that approaches $5 billion in aggregate over the five-year period, roughly 90% of the spent will be directed to the Cardium, Slave Point and Viking with over 50% of total spending on the Cardium.

In addition, our plan to contemplate full EOR integration. We’re going to get back to our routes in the leading water flooder in Canada. So our plans will include between 10% and 20% per year, and an investment towards our EOR programs. A significant increase from the past three to five years of capital programs at Penn West. It’s a straightforward decision, water floods flow declined and deliver the most inexpensive F&D barrels to portfolios like ours. Our programs has modeled result in cumulative net new adds to our business of close to 70,000 barrels of oil per day equivalent in just five years.

Slide 19, emphasizes why we’re focused on the Cardium, Slave Point, and Viking assets. Let’s face it, the business can be bit of a treadmill at times, so areas with substantial resources yield running room. We have that in our business and importantly in our asset base today and our control for that. So here we show the number of drilling opportunities, we hold an inventory at current pricing assumptions and technical understanding, all noted with very compelling economic returns.

Our current inventory across these plays following the development contemplated in this plant is not exhausted. And we would expect that additional opportunities will open up to us from our portfolio as we appraise and further define our assets in the Cardium and particularly in Slave Point.

As everyone knows, we have great rocks and great positions to build firm well into the future. Of course, spending money and drilling wells never seems to be a problem for industry, but in slides 20 and 21, we are attempting to add context to what we expect to accomplish.

Slide 20 highlights our target with a basic competitive context of our industry to being a sustainable profit-making business, the ability to replace your reserves greater than production, and ensuring your development costs are competitive.

At Penn West, again, we start with a great organic asset base. We know where our barrels are, we just have to go, get them, that’s the high-class problem. We can and our current plan predict with confidence that we will be able to maintain the production replacement rate in excess of 100% from organic opportunities in our control today for the five years contemplated here. And given my earlier comments about inventory, it is not a stress to see that trend continuing well into the future. Again, we’re planning our activities to deliver this metric among others.

At the same point, for the focused portfolio we have been discussing, we expect we can deliver a development cost metrics for our operated assets over this period in the $16 to $20 per barrel range, which appears competitive when you consider that for 2012, our recent study suggested total reserve replacement cost in North America exceeded $20 and internationally reached almost $30 per barrel.

Side 21, supports our view that we have a high-quality economic development program. And as we have shown we can be competitive and clearly we’ll continue to improve on our execution. We then expect further high-grade our existing opportunities and our new ones from our extensive resource base. Our focused approach is going to allow us to work this asset base harder than ever to deliver outstanding results.

Now, before we move into a discussion of our core assets, I would like at this point on Slide 22 to offer our guidance for 2014, the first year of this comprehensive plan. Our Board this week has approved the capital budget of $900 million exclusive of environmental spend of roughly $75 million for 2014. With two-thirds of the investment directed at light oil opportunities resulting and the drilling of $210 net wells at Penn West.

We include in the inset graph, the total spending by location including drilling in the EOR investments and well breakdowns for your benefit. And one of the things we’re transitioning to as a company is a more even flow approach to our investment profile during the year. It was certainly true this year and in the past that Penn West might commit as much as half a years CapEx budget in the first quarter and approach that limits effectiveness, learning transfer, and the ability to adjust programs as situations worn throughout the year.

Generally in 2014, you should expect to see our capital flow at 25% to 30% of the total year spending in quarter’s one, three, and four with a small remainder dedicated to the breakup period. This shift to an even flow capital investment philosophy began in the present quarter and combined with our low spending Q3 creates a phase shift in our production profile for 2014.

Our production additions are more second half weighted and with normal declines our average production following and 2013 divestitures is expected to range between 105,000 and 110,000 barrels of oil equivalent per day. Even flow investment will result in less variability and production quarter-on-quarter beginning in 2015, and of course, we grow production from that year following our portfolio rationalization work.

It may be a tough year to model and so we are thinking through ways we can increase information flow during 2014 to the external world to ensure we assist analysts as appropriate. I would add here though, that while the year of transition in sales, our sustainability ratio doesn’t exceed a 115% a year, reflecting the funds flow power of the asset base we were retaining go forward.

The next several slides go into a great deal of detail for our three signature assets, the Cardium, the Viking, and the Slave Point area. They all follow the same format and I think you will be pleased with the level of specificity and detail we’re offering on these at the end of our business.

Starting with Slide 24, we outlined the progression of annual development capital in the Cardium resource coupled with the number of wells represented in the plan and we expected it cumulative added to production impact of this program.

And I would remind you that our potential in the Cardium extend well beyond this time for us. This would be a feature play in any portfolio. Well cost and cycle times are improving, solid recoveries in the primary base for well historic water flood success and verticals, and proven results from the use of horizontals and EOR leading to further recovery improvement. We had hundreds of well opportunities, 30% plus rates of return at moderate price assumptions. The Cardium is indeed a company maker.

Slide 25 shows our familiar acreage outline, that highlights both our 2013 and 2014 capital activities. We show a breakdown of our spending in both Pembina and Willesden Green areas highlight year-by-year production from the Cardium. And I should note that this includes just the Cardium reservoir body, not the larger Cardium district area then includes other reservoir horizons.

And finally, demonstrate the dramatic improvement in drilling and completion costs we have experienced in 2013 that will carryforward in our plans. Given the extension – the extensive number of wells we will drill over the period, and again, in a sustained well planned program, I would expect our cost curve to continue to bend lower as we move rigs and crews into the area and lead them there to continuously improve with years of inventory ahead. And even as we improve in our cost and delivery cycles we will still be pushing limits in areas like longer laterals in advancing our completion technics.

Slide 26 rounds out the Cardium display with some key economic and recovery data from the play, and highlights very well the concept of running room, as we illustrate the resources we consume in our five-year outlook versus our current book position and the remaining resource potential still under our control. I think you will agree, our Cardium position remains the most attractive conventional resource play in the country.

Turning to the Viking asset on Side 27, the Viking is a commonly misunderstood asset portfolio, perhaps the most common advice I get for this asset is to sell. For a variety of reasons ranging from Penn West competitiveness there to the overall scale of the opportunity it offers to our portfolio.

Simply, the Viking provides the solid, high-return, near-term growth platform for the company over the next two to five years, as well as being that rarest of breeds a free cash flow generating asset while on the throws of a large scale development program, it’s a great play. Well cost under $1 million very short cycle times with recoveries of over 50,000 barrels of light oil equivalent per well, leading to 70 plus percent rates of return. So as indicated here expect a fair amount of capital and well activity through 2015 with resulting attractive production assets.

Slide 28, in fact, shows Penn West building a 10,000 barrels of oil equivalent per day business over the next two years with the ability to sustain it over the forecast period. The other graph highlight that we have over the course of the summer close the drilling and completion gap on our competitors in the field.

Then finally, as a reflection of the quality reservoir position we occupy, we believe our well results are the best in the play, again, leading us to view the Viking as a source of superior production adds in terms of economic performance.

And that concluded it shows our drilling focus and future also highlights the down spacing activity to 16 wells perception and some areas to match our competitors, as well as new water flood activities we will be engaged in over the next two years.

Slide 29, close of the Viking summary with highlights and key characteristics of the play for us. I would point out the resource conversion or running room chart only focuses on the three areas of activities we will be engaging it over the planned period or a little less than half of our total contingent book. We chose to highlight the dark one in Avon Hills area here, as this is our focus area and it represents the richest reservoir and is the most oily of our acreage positions. Again, we still have room to run here as evidenced by the graphics and think we can go toe to toe with anyone in play for years to come.

In Slide 30 we turn to Slave Point, it’s an asset that represents a huge step forward for us if successful because of the resource potential in the area, because of individual well costs and carbonate reservoir risks, program has more slowly ramped up over the planned period. This reflects both capital discipline as a core value in the company, but also the careful planning we are undertaking as we plan for the bright future of this asset base.

Slide 31 highlights our progress on well cost in the play, but as the most expensive wells in our go-forward portfolio, we will continue to look to improve costs here. Of course, Slave Point also represents the highest IPs and EURs per well in our portfolio. So it continued drive completions improvement and cycle times will also be important.

The best production ramp reflects the go-forward potential, and I would note that most of EUR effects here are certainly back-end loaded in this view. There’s a lot more to come form this area.

Slide 32 illustrates the price. The perspective resource is a [indiscernible] while economics are attractive, and we have a high control land position in the play. Our 2014 activities are largely focused on low risk drilling to drive cost improvements, some work with longer laterals, water flood development and a 3D Shoot trying to expand our play their way here. I remain very excited about this play.

We turn last to our focus on total cost of operations beginning with Slide 33. I think we’ve been criticized often fairly for not being as focused on this aspect of operating excellence as possible. Clearly, an overarching focus on growth, and a production and all cost perception of the company was the driver of this. But we have re-installed the discipline around this metric by focusing on netbacks per barrel and cash flow generation as two of the most important of our core metrics.

We highlighted in the release that we have even shut in production, and it’s uneconomic in the quarter, but perhaps never before have seen stuff than last. The result is reflected in the slide that reflects a ground up view of how operating costs will change it, unless.

On the graph that Devlin will focus on is on the lower left. Our cost per barrel will be going down; aided by production growth to be sure, but largely driven by our control of the gross expense number. Again, portfolio work is trend the tail of our asset base held, they will be focused on our key drivers that leads to real improvement.

Now I’ll use the phrase project management approach to describe what we will be doing in each category of expense beginning with our five key drivers. And what I mean by this is that, we will systematically break down and understand our cost in these categories and create standards and processes that cause the enterprise to drive them lower.

For example, power management will accomplish one of the toughest review of elements such as people out management, true lifting costs in areas with multiple driver types, and real cost of restoring build production due to power issues, higher grade operating people at last. We’re going to turn them loose in these areas, and expect them to create solid savings in the business.

On Slide 34, I also want to illustrate the power of portfolio focus, and people around here – I really like this slide. The estimated 2014 corporate level operating cost figure we present even broken down as we have here on the graph on the left is often still very opaque. Where are the numbers coming from, can they really be changed?

As I tell my teams here, I care about the corporate number, but I worry about the field and least other numbers, and here we haves some positive news. For the three focus areas that our capital dollars are flowing to in this plan, we are providing a second level of detail on our total and by category costs. And what’s important here is the table in the upper right of the page. It’s very important to understand why we are going to get better and why portfolio focus matters.

We’re showing our operating cost positions relative to what we believe to be the best-in-class for those areas. Now we compare very favorably, and in fact lead in two of three and are close in the core areas of Cardium, but as, but as mentioned we’re going to continue to work to get even better.

Important thing is that cost leverage will be multiplied as our new development production increase in each of these areas over the planned period and is expected to represent nearly 50% of the corporate total by 2018.

On Slide 35, we provide a similar analysis for G&A. We made good strides in this area and we’ll be using a similar approach on measuring total cost versus direct value adds for the business to seek improvements. But we have reversed the trends of continuous growth and we will look to continue to surface ways to accelerate a decline here.

Again, in aggregate, and actually what we said here, developing barrels compared to costs and operating them at top peer metrics leaves the good results. And we created the illustration on Slide 36 to demonstrate this. And part of the graph of our peer group using Q2 2013 reported operating costs, and highlighted our progression as a result of our delivering the plan we’ve been discussing.

The key takeaways here are that we are maintaining cost control while liquids rating is going up, which leads to the view of dramatic improvement in netback per barrel in the period. And with the commodity and cost advantages our portfolio offers us. And importantly, these improvements are against a broadly flat commodity deck.

So in summary Slide 37, revisits a new Penn West stronger, competitive, profitable, solid production and importantly oil production growth from where our focused base. Funds flow rising dramatically without price support, driven by commodity mix, capital discipline and cost control. A reset stronger balance sheet with continuously improving leverage metrics, and all the while increasing investment in organic opportunities that we control today with a sizable inventory beyond the planned horizon.

I think everyone is well aware of the potential of this company. To date the Board and the Penn West team have acted decisively and with a sense of urgency improve this company, and we now have the full support of the Board to move forward on this challenging and exciting long-term strategy to become Canada’s leading conventional liquids producer.

We will continue to be decisive and will move swiftly to maximize value for our shareholders. We understand that simply we need to hit our numbers consistently especially our guidance with no excuses. We need to demonstrate a trend of improvement as an entire company, and we need to execute the long-term plan quarter-by-quarter.

Finally we’ve included a number of charts in the appendix to assist with your understanding of the plan and clarify it. We would certainly welcome your comments and question, and look forward to see in many of you in Calgary or on the road as we tell our story and begin with building this great company.

With that, I’ll turn the call back to Clayton.

Clayton Paradis

Thanks very much, David. I think with that, it closes our formal remarks, and we will move to Q&A.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question from Cristina Lopez, Macquarie. Your line is now open.

Cristina Lopez – Macquarie Capital Markets Canada Ltd.

Hi, thanks guys. Just a couple of questions, some of them are somewhat addressed, but with respect to the asset sales being targeted for 2014, in particular PROP and Cordova, can you speak to the production from those areas currently?

Mark P. Fitzgerald

Hi Cristina, it’s Mark. Current production match in those areas would be combined kind of in that 5,000 BOE to 6,000 range. The activities in 2014, certainly under obligations with our partners and under the JV agreements will continue as we move through the sale process. But – and that would be the general range. As you know Cordova is essentially all gas, and PROP is oil.

Cristina Lopez – Macquarie Capital Markets Canada Ltd.

Is there any intention to spend more money, again you said there will be some ongoing capital, and I know at PROP there was ideas of sort of spending a bit on cold production, is that going to be at all focused in 2014 prior to looking at an asset sale?

Mark P. Fitzgerald

That’s a good question, I think certainly we recognize through the technical work that the teams have done in our conversations with our partner, if there is an opportunity to do more primary work in that partnership, as we pursue sale of the assets, it’s our intent to continue the activities on a parallel path, I think that’s just good business.

Cristina Lopez – Macquarie Capital Markets Canada Ltd.

And I’ll ask a question on the dividend level. Obviously, you speak to a sustainable dividend, is that reference based on what your current dividend level is or will you be assessing the dividend on a go-forward basis?

Todd H. Takeyasu

Hi, Cristina, it’s Todd. What we’ve modeled here was the dividend at the current rate, we maintained the DRIP [inaudible] program, but as you can see at a high-80s at par light oil price, it goes along pretty good if we execute as we plan to.

Cristina Lopez – Macquarie Capital Markets Canada Ltd.

And I’ve one last question with respect to Q3 operating costs, it looked to be a little bit higher than the prior two quarters, is that a function one of electrical costs, and then two, just a lower production base?

David E. Roberts

Cristina, it’s Dave. I think simple answer is, you can turn around costs in there and also a lower production both from those turnaround activities and the fact that the decline was pretty steep of the two factors.

Cristina Lopez – Macquarie Capital Markets Canada Ltd.

And then that would then point to sort of 2014, from the presentation being sort in that $17 range, and then slowly declining after that, is that correct?

David E. Roberts

Yes.

Cristina Lopez – Macquarie Capital Markets Canada Ltd.

Excellent, I will let others ask questions. Thanks so much guys.

Operator

And you next question comes form Patrick Bryden with Scotia Bank. Your line is now open.

Pat Bryden – Scotia Capital, Inc.

Good morning, gentleman. I appreciate you guys have been through a process here and some hard decisions that weren’t easy and I do appreciate the disclosure. Just moving to a few quick questions, please, if we try to think about coming out of the A&D phase here phase 1 and 2, where does your production specifically bottom out at, and in terms of getting there how much of that is strictly A&D versus natural decline?

Mark P. Fitzgerald

Well, I’ll try this one Patrick. I think we try to do a pretty good job with the charts that we show. Pretty clearly 2015 is the base point as we see it, and then growing from there, hence the V shape section of the curve.

We basically have the capability or we think to predict that – or at least I would think that you should look at the company as essentially the 12.5 of asset sales, probably that range of numbers is going to be repeated, and at the end of 2014 program, and the remainder is going to be declines offset by the additions that will largely feature in the second half of 2014.

Pat Bryden – Scotia Capital, Inc.

Okay, I appreciate that. And I’m wondering if you can maybe or are you willing to give a sense for what you think your corporate decline rate is now, and what you think it would get to in 2018?

David E. Roberts

Yeah, I think the first number is what we’ve consistently said the decline [inaudible] typically runs 20% to 22% all in. That’s probably four to five points lower than that on just the base, but factoring in the new development. We’re not prepared yet to really address what we think the shallowing effect is going to be of the EUR program in the end of 2018, but it’s clearly going to come down from the 20% to 22%.

Pat Bryden – Scotia Capital, Inc.

Okay, I appreciate that. And then obviously you’re going to great pains to lay out a pretty elegant strategy here in terms of the growth that you would expect to drive looking ahead, but and I guess with all due respect to that process, if we look back at the history, the per share measures have been nowhere near that. So how should we draw some confidence that you folks can get there?

David E. Roberts

Well, it’s a fair challenge, and one that you know we candidly understand we’ve earned and part of the plan is to demonstrate our execution quarter-on-quarter. I think what I would point you to is – we clearly are moving in the right direction in terms of what our investment costs are doing, our drilling and completion costs are coming down, and I think dramatically.

And so I think that’s something that, it gives you some initial confidence. The fact is, that we’re playing in areas that are well known in this basin, and people are going to be able to look at our type curves and say, are they doing as well as everyone else and we’re going to be able to say that categorically.

So it’s going to take some time, but what we’re embarking on here, there’s nothing heroic in our plans. All this stuff is in our control, we don’t have to wait on anyone else, partners, land agreements, all these other kind of stuff, we just have to execute. We think we’ve closed the cost gap, we’ll kind of continue to get better, and as we demonstrate well results, we think that confidence in the investment market is going to grow quarter-on-quarter.

Pat Bryden – Scotia Capital, Inc.

I appreciate that. And then just maybe back to the JVs, I’m not sure if you can express this, but can you maybe characterize the nature of your ability to sell or exit both Cordova and Peace River, I mean is that just a straightforward process, are there any encumbrances to that?

David E. Roberts

Well, pretty clearly any time you have a JV as with any operating partnership you want to make sure that your partners are well informed and understand what their options are and what your actions are. And we believe that this is what I would term as a straightforward process other than our ability to continuously inform our partners. At the end of the day both of these JVs were created to make money and create value for the respective companies and we believe that that’s still going to be the outcome here.

Pat Bryden – Scotia Capital, Inc.

Okay. And then just lastly and then I’ll step out of the way, and I thank you for all your time. Is it possible to get a sense for where the spending levels are to date on both JVs?

David E. Roberts

Well, Mark, can you address that.

Mark P. Fitzgerald

It’s not in specifics right now Pat, but I can certainly give you some general context similar to comments I provided to Cristina. As you’re aware we had drilling activity underway in Cordova through 2013 and the focus in 2014 will be completion of those wells and bringing those on stream as we’re able. And then in our partnership we continue with the Seal Main and Harmon Valley South pilots, continue with the advancement of primary program that we’ve talked to and have expanded into 2014 and continue with refining and development of ultimately Seal Main and Harmon Valley self-thermal work on an ongoing basis.

So on a relative basis to the total capital that’s being invested in light oil because of the carries in the partnership it’s relatively minor and immaterial in the grand scheme of things. But as I said, we are continuing as an ongoing concern on both those JVs with the activity while we proceed with looking for buyers for our share.

Pat Bryden – Scotia Capital, Inc.

Okay. Thanks for the answers. Appreciate it.

Operator

Your next question comes from Travis Wood with TD Securities. Your line is been open

Travis Wood – TD Securities

Yes. Good morning guys, and thanks for the time. And I do appreciate the amount of work that you will have ahead of yourselves for 2014, given the announcements this morning. But I have a couple of questions. The first is, if we look at the 12,500 that you have for sale or within the PSA agreements, what is the fixed cost that would be associated with those barrels? You talk about the high OpEx per BOE number, but can you give any color on the fixed cost side?

Mark P. Fitzgerald

Travis, it’s Mark. The operating costs associated, if that is where you are going, is about $22 of BOE associated with that, so certainly reflects the non-core nature of those within our portfolio.

Travis Wood – TD Securities

And if you were to break out the variable versus the fixed you have, can you talk about that at all?

Mark P. Fitzgerald

Well, I would suggest given that the nature of those dispositions given that they is essentially the intense of what we are doing through the non-core dispositions is to wipe them out and move completely out of an area that we’ve moved the entire cost structure of the company.

Travis Wood – TD Securities

Okay. So going forward, similar type of process for the other non-core assets that you are looking to divest of?

Mark P. Fitzgerald

Yes, absolutely. I think it speaks to the strategy that we have around the dispositions which is, as Dave talked to, very much focused on development in our capital activity in core areas and as we move out of the other areas, I think it’s in the best interest of both ourselves and counterparties to truly move away.

Travis Wood – TD Securities

And another question. This is back to the decline side, but more so just for the short-term. So if you are reallocating capital spending a little less on the non-core assets, so to speak, what happens through the corporate decline rate in the short-term, with a bit less spending on some of the base assets?

Mark P. Fitzgerald

Well, the decline doesn’t really change, Travis. I think that the issue and what we’re trying to highlight is basically this year if you think about what we’ve done very low spending quarters in Q2 and Q3. We’re moving to this even flow approach Q4 forward and so it’s essentially pushed a normal production line that we have in this company out by a couple of quarters. And so the decline is as it looks over the next couple of quarters I think you could say it’s exacerbated, but the base numbers are not changing. It’s just where the additions are going to coming in. That is the reason I talked about. We’re going to have to do a better job of explaining some of this stuff until we get largely the second half of 2014.

Travis Wood – TD Securities

Okay. And the last question, and this might be – and maybe you can share with Mark. It might be a better question for you, Mark. When you think back to 2008, and not that this is exactly the same strategy that’s trying to unfold, but sounds very similar and we’ll see on the execution side. But what do you see that’s different in this strategy versus what Penn West was trying to execute on in 2008 with non-core asset divestitures, and trying to spend more on the Cardium to improve the efficiencies? What’s going to make this one different?

David E. Roberts

Well, I actually will take that one instead because I wasn’t here, but I’m clearly a student of the history of this company and it’s one of the reasons that I am, A, so animated about our success and excited about what we could do here. I think what I would say it’s all about follow through. We’re going to focus with discipline on the things that make operating company successful. We’re going to focus on the asset base that actually do the right things for us in terms of yielding production and economic result and we’re going to stick with it and drive through this. And that’s one of the reason that we put out this five-year plan because we recognize we have a reputation as being quite changeable and what we’ve done is we put a stake in sand here in terms of what we’re going to try to do with this company and how we’re going to drive it forward and that’s the key difference here.

Travis Wood – TD Securities

Okay, thanks very much. I think that’s it for me.

David E. Roberts

Thanks.

Operator

Your next question comes from Dirk Lever with AltaCorp Capital. Your line is now open.

Dirk Lever – AltaCorp Capital, Inc.

Thank you very much. And like Pat said before, thank you very much for laying this out. It is very comprehensive. I have a couple of questions. The first one is, as you are going into the water flood work, what have you got for expertise? You’ve seen a lot of turnover. So have you been building up internal expertise? Did you hang onto that? Because for the rubber to hit the road, you have got to have people with the abilities to do it, so if you could touch on that.

David E. Roberts

There is no question that we have restructured significantly here, but the only thing I would say there is waterflooding is in the DNA of this company and we have the resources in order to be successful on those areas that we’re attempting to move forward with waterflooding. So I’m not concerned about that and I candidly this is going to be an exciting place for people that may not be in this company today. They want to come work as we return to our routes in that particular area.

Dirk Lever – AltaCorp Capital, Inc.

Okay, thanks. And the other one is, I’m just going to use round numbers, because I’m just trying to square off to the 2014 guidance one of the 105 to 110. And I’m assuming that that bakes in the sales of the 15,000 to 20,000 barrels a day, because round numbers, 125 at the end of October. End of 2013, you’re like 130. So to get there to the 105 to 110 guidance, I’m assuming that you baked in that 15,000 to 20,000 sale?

David E. Roberts

No. I think what we would suggest to you is we have baked in the sale of the 12,500.

Dirk Lever – AltaCorp Capital, Inc.

Yes.

David E. Roberts

And the remainder of that is what we are trying to describe in terms of this capital shift that basically doesn’t show any significant production ads until the back half of 2014. And so you get a more pronounced depth of the curve into 2014, which will allow you to get to that average number.

Dirk Lever – AltaCorp Capital, Inc.

Okay, so there is a decline. So that 105 to 110 does not factor in any of the sales for the phase 2, then?

David E. Roberts

That is correct

Dirk Lever – AltaCorp Capital, Inc.

Thank you. That’s the clarification. Thanks

Operator

And your next question comes from Gordon Tait with BMO Capital Markets. Your line is now open.

Gordon Tait – BMO Capital Markets

Thanks, and good morning. Just looking through the presentation, it looks like the Cardium is the only core play where you are increasing your capital in 2015 over 2014. Although from your presentation, also looks like the Viking has the highest IRRs of those core plays. So I am just curious why you’re not putting more capital into the Viking versus the Cardium sooner than later?

David E. Roberts

Well, Gordon I think that’s a – let me impact that question a little bit because it probably requires a low bit of philosophy. First things first, we’re managing this business to create not only a production growth profile, But to generate funds well and so one of the key metrics for us is sustainability. And so what we’re trying to do is fit all of our very attractive program with a certain capital qualm [ph]. There is no question that we could spend more money if we wanted to do that. And so what we’ve done here is the Cardium is the most important play in the company. It provides the greatest long-term value add for us and for our shareholders. And so we need to create this investment ramp to get us to the ability to ultimately spend the amount of money we need to on a go-forward basis. So basically be the driver of the company.

But Viking is very attractive to us. It provides the short-term flywheel for us on very predictive basis for us to generate solid production growth and cash flow growth. But there is no reason for us, say, in a current structure with the things that we are trying to get done in the three big place to over invest.

Gordon Tait – BMO Capital Markets

Okay. Now in that Cardium, historically Penn West has always had quite variable results. So are you getting better at zeroing in on where to drill the wells, how to deal the wells, to get a little more consistency in the drilling results?

Mark P. Fitzgerald

Hi, Gordon, it’s Mark. I would make a couple of comments to that. I think consistent with the focused conversation that Dave has led regarding Cardium, Viking and Slave Point the same applies as you’ll see in the Cardium where we’ve given you detail on exactly where we are going to focus on the next five years. I think advancements that the industry has made in terms of completion techniques combined with the cost reductions that we’ve seen over the past six to nine months and that focus has given us a lot of confidence in terms of predictability and relatively low levels of variability and our results go forward in the Cardium.

David E. Roberts

Yes, I think just amplifying that because I made the comment to and my experience of the boarder is teams get better if they do the same things over and over and over again and the important thing that we have with this incredible debt of inventory that we have particularly in the Cardium, but the other two plays as well is in my expression we’ll be able to put several drilling rigs out there and park them and we’ll have the same crews, same rigs doing the same things over and over again. So the advancements we’ve already gotten will be cemented in and probably increased over time. That’s how you win in this business. And so, having opportunities like Cardium is what most of us live for the statement.

Gordon Tait – BMO Capital Markets

Okay. And then with respect to your sales, specifically, at Seal. I mean is it feasible that your partner CIC could be a potential buyer of that asset? First of all, do they have the people on the ground to operate? And secondly, are there any restrictions to SOEs and acquiring interest in what I think are designated oil sand leases?

David E. Roberts

Well, I think the first part of your question, Gordon, you probably have to raise with CIC. Clearly we would not intimate anything that they may or might not do and I think as far as for any restrictions I think all of us can do all our conclusions of what some of the statements the Government of Canada has made in the past about that.

Gordon Tait – BMO Capital Markets

Okay. And then lastly, now not be a downer, but what happens? What is your plan B if the assets that you’ve identified for sale don’t get sold at the prices you want? Are you going to sit on them, or do you have a fire sale? What are you looking at?

David E. Roberts

Well, I think I kind of indicated that and so I appreciate the opportunity to amplify this is – look we have a desire to transact, but clearly we have an obligation to our shareholders to make sure that we create the most value from these transactions. We have highlighted a number of assets for you largely on the basis. They do not any longer fit our conventional oil focus. We clearly have, as everyone knows, an incredibly deep portfolio. There will be other opportunities that we could potentially substitute in the event that these assets improved and possible the sale to sell, but I would tell you I think that’s a very unlike scenario. Most people know it’s a quality place and they create real opportunities for other operators coming to be successful.

Gordon Tait – BMO Capital Markets

Great, thanks.

Operator

And your last question comes from Brian Kristjansen with Dundee Capital Markets. Your line is now open.

Brian Kristjansen – Dundee Capital Markets

Good morning, guys. The 2014 guidance appeared to me, at least, to be surprisingly low. I get spreading CAD900 million over 2014 has some impact, but I’m wondering if you are planning to shut in any more incremental un-economic production in 2014? And if you can, can you quantify it? And then Dave, you mentioned that you are still sticking to the corporate decline of 20% to 22%. I wanted to see if you could quantify what your existing capital efficiencies are? Thanks.

David E. Roberts

Well, you’ve got the key point that always kind of puts me in a corner from the last question. The capital efficiency numbers, I would tell that since we put that guidance out for 2013, we’re going to be within those ranges. But one other thing that we are going to be focusing on a company is for the true measures of capital efficiency. Are you replacing your reserves and what is going to be your development cost and I think we’ve outlined what our expectations are going to be for that.

As far as the 2014 guidance again, I think you really have to consider Q2 and Q3 spend, the fact that we’re more even flow from this point forward, which is going to push a lot of our additions towards the back half of next year. And I’m not guiding specifically this, but pretty clearly what we saw is the run rate between Q2 and Q3 might be indicative of what we see in the first half of next year on the basis of our capital spending profile. So and again I don’t think that changes the decline rate. I don’t think it changes the quality of the programs that we’re after. It’s just a function of us rephrasing the business to make this into a more normal oil and gas company.

Brian Kristjansen – Dundee Capital Markets

Okay, thanks. And then just on the – on your slide where you’re showing a long-term production growth, you’re seeing a further dip in 2015. Is that ex-incremental sales, or does that include any of the incremental sales?

David E. Roberts

Well, that would include the impact of sales that we would have modeled at the end of 2014 day one 2015.

Brian Kristjansen – Dundee Capital Markets

Great. Thanks.

Operator

And we have no further questions at this time. I’ll turn the call back over to our presenters for closing remarks.

Clayton Paradis

Well, I’d just like to say thank you to all for joining us today. We appreciate your continued interest in Penn West. Should you have any further questions about Penn West or the presentation today, please feel free to contact our Investor Relations team and we would be happy to assist you. Thank you. This concludes our conference call. Good bye.

Operator

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may now disconnect.

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