David Roberts - President and CEO
Jeremy Kaliel - CIBC
Penn West Petroleum Ltd. (PWE) CIBC Whistler Institutional Investor Conference Call January 23, 2014 1:00 PM ET
Jeremy Kaliel - CIBC
Okay, well we’ll get started with our next presentation today, next up is Penn West. And we are very happy from Penn West to have Mr. David Roberts, President and CEO with us today. Dave is going to give a short presentation and we will settle down the fire for a chat. My name is Jeremy Kaliel and I am the CIBC analyst for dividend paying intermediates and it would be my pleasure to moderate this event. I will hand it over to David.
Thanks, Jeremy. Appreciate that. I appreciate the organizers of the conference for inviting me and allowing me to attend and like to wish everybody a Happy New Year. I have actually been reminded that we are coming up on the Chinese year the horse as a few of my investors have compared me with a certain part of bad animal’s anomy over the last couple of days.
I am going to go a little bit off script because I am going to get to conversation with Jeremy, because I think that’s what’s most important to folks. We do have a copy of the presentation, it’s roughly 11 slides or so and our press release, Clayton Paradis who is my IR Managers is here in case you want a copy of that and obviously all of this is available on our website as well.
So what I would like to do is I think people know who we are as an enterprise and what we cover so what I would like to do speak to two slides specific in terms of reiterating what it is we are trying to do and the fact that we had been consistent telling the market exactly what we are going to do and continue to deliver on those promises.
When Rick George and I took on the leadership manual of this company we were left with a series of challenges. And I think we’ve talked about those in some detail, but basically we had a difficult if not unworkable financial structure. We had a company that was not well known for its operating and cost control prowess. We had a company that basically had set the benchmark at the low end in terms of its ability to invest capital wisely. And coming from where I do in lower , it was clear that this was the company that lacked focused which is probably the root cause of all of these other issues.
So we said about to do fix these areas in short order. And I would offer that over the seven months that I’ve been with the enterprise. We have made remarkable progress on most of those fronts. We still have work to do and we recognize that it is going to take some time to restore the faith in credit and the company.
So first of all, focused portfolio. This of course is in the glomeration strategy coming from the trust days. And so we were blessed with the largest acreage position and probably the largest gathering of light oil assets in Western Canada. The issue is to make sure you are focusing in on the right ones.
And so when we talk about focusing in on the top three assets in our portfolio and largely the top two, when I mentioned the Cardium and the Slave Point area, we’re talking about areas with resource potential of a billion barrels that are repeatable and candidly quite easy to manipulate in terms of oil and gas problems. So this is not a difficult unconventional basin. This is basically oil field what I want, just do it right, do it repeatedly and follow-up with water floods and you will be successful. And that's one of the reasons that I’m very excited about what we’re doing in terms of skinning down the portfolio.
We do need to become better operators. And one other things we talked about the enterprises so we could demonstrate that we’ve cut at least a $100 million out of the business. Now one of the evidences of that that we use and I don’t want to harp on it because I don’t like to talk about having done a lot of the stuff on the back so people we have had to let go. But so when I arrived at the enterprise roughly 2,300 employees, we’re under 1,400 now. We continue to reduce that count through asset sales and continue to focus on making sure we have the right people on the right seats as we move forward. That will allow us to continue to focus in on operating cost which was both structural in terms of some of the assets that we have to move out of the portfolio, but also as I said this is a company that did not have systematic operating cost control programs that I am used to around things like chemicals, just basic procurement processes, power, so on and so forth. So the start that we’ve made is going to continue to bear fruit as we move forward on a go forward basis.
We do need to get better at making sure we have reliable production. It’s been some consternation in terms of some of the efforts that we were able to deliver in the fourth quarter. But I will tell you again focus is going to matter here, because when you look at our Cardium business which is essentially going to be a third of the new company to start as we move forward, no issues during the Christmas period or during the bad weather period, that’s the place we’ve had the least turnover. And so we know we can actually operate these areas very well.
And in terms of capital efficiency I would argue that Penn West is on more in three months which is essentially the drilling window we’ve been in than anyone would have thought previously possible. We are already the cost leaders in [Milwaukee]. We are, I would argue the cost leaders in the Cardium and also pace leaders in terms of being able to drill wells as fast as anybody and we will be there very shortly in terms of the Slave Point area. And we have done this just by focusing on basic oil field engineering, simplifying our well designs, focusing on keeping the [better to borrow] the whole and not anything spectacular. And so when we get into moving rigs in, leaving them getting repeatable efficiencies and also actually using supply chain management, I think you will continue to see our costs move down as we go forward.
And then, the whole issue around assets sales, whether they are producing or not is to focus on the debt overhand. And I think we have done a great job as an enterprise of moving that forward. And one other things I think I would just point out, is we are getting a lot of chatter around moving too slowly, not doing quickly enough. By closing 2013 at a 2.7 terms debt ratio that would compare to us having not done asset sales and not done all the other things that we have done to improve our cash flow performance to an expected 3.2 terms. So there is movement in this company, we are making progress as an enterprise and we are focused in on the right things.
So the only other slide, I will talk to and then I will -- because most of you all have seen this, I think just briefly touching here -- I am a cash flow guys. And so lot people get hung-up on barrels, barrels don’t matter unless you are making money. And one of the things that we are going to be able to do here by focusing in on the correct assets in this company and driving efficiencies around our top three businesses is driving these cash flow curves. And we are going to do that by moving to more liquids base, continuing to take costs out of the business and only focusing on those things that matter.
And we are actually demonstrated this through actions; for instance, 190 of the 210 wells I’ll drill this year in three fields. We are not wasting a lot of effort in a lot of other places around our portfolio.
So, what I would talk about here is really the asset sales that we've accomplished. It’s interesting; we got a lot of push back from some of our investors that we need to challenge the market in terms of the reaction we’ve got yesterday.
I am a kid from West Texas and what I’ll tell you, we say out there is when you stand out in a thunderstorm and curse the lightening, there is two things that going to happen, one is a certainty, you’re going to get wet, and the other is likely, you’re going to find out what 10 or 15 gigajoules feels like on the negative end.
So, I am not going to say the market is wrong, I would speculate they overreacted, just talking about the last asset sales transaction we did or we expect to close in March. People tend to focus on the wrong metrics. They looked at this in terms of the cash flow per flowing barrel. We were able to [wipe map] Southern Alberta, which for us is a place we don’t want to be. We were able to move 1,800 wells out of the portfolio. I’ve reduced the well count of this company by 20% since I’ve been here. That’s a significant metric for a company like ours as we go forward. But here is one of the things, you are never going to get from me is I do not spike the ball. I want people to understand when they do business with us; they are going to get a fair deal from us. I think the counterparty thinks that this is a great deal for them; it’s a great deal for me, similar to the first three transactions we did last year. We need to continue to be in that mode, because there are certain things I need to get done in this enterprise. But when I say that this deal is accretive to us, it is, because I do not make economically irrational decisions.
And so we’re going to -- what I’ll tell you is we are going to stay the course, we got a lot of work to do in this enterprise, we have a plan, we know what it is we need to do for the next five to six years and we’re going to stick to it and see where we turnout. But I think that there is a great story for this company coming very soon and people who pay attention are starting to catch on to that and I think will do very well.
So with that I will get off my high horse and now Jeremy.
Jeremy Kaliel - CIBC
Thanks Dave, have a seat for the fire. So, I will start the Q&A here but as always, certainly do appreciate questions from the floor; just raise your hand if you want to jump in. So Dave, talking specifically to your operational update on Tuesday, it answered a lot of questions about how your distribution program and your efforts to improve capital efficiencies have been going. In the update one thing that you discussed was your decision “to not to restore more than 3,200 BOEs per day of interrupted production based on economic recovery analysis.” Could you elaborate on the nature of these volumes and do you have more on your portfolio that you might consider shutting in?
Yeah, I think pretty simply, I am the [Texas] guy from way back and maybe I can’t keep a job but I’ve had the opportunity to work for three or four, five pretty good oil companies and I have never worked for an enterprise that restored uneconomic production, never. And you walk into Penn West and no offense for the past because it is what it is, but production was king. And what we’ve done with our field people is we’ve armed them with the information about here is what you’re actually making money wise, this is what this asset is costing us. And when things go down, we want you to do the right thing. And so, if it doesn’t make sense to restore that production, we will not. And so for instance, there is a pipeline failures in these numbers where we’ve not restored things into our gas areas; there is downhole submersible pumps. Most of this stuff is outside the bounds of our core three areas because obviously they all make money and we work diligently to restore that production. But it is something we're just trying to put a discipline into the business around. This is a business about making money, not barrels. And once we get that, that’s a significant cultural shift for this company. And I think it's going to continue to bear dividends as we go forward. And that's the reason I don’t get too hung up on the short-term production issues.
Jeremy Kaliel - CIBC
Alright. Questions from the floor?
Yeah. that's a great question. One of the things that I kind of forecast before this announcement came out is I think people should look at the totality of the numbers presented on the page. Because everyone wants to see the barrel, dollar per barrel metric. People should think about where these assets are, what they really represent. And for this particular deal, I'll give you a picture. The buying company wanted a specific asset and we said we're willing to transact around that but we need a bigger area on the map, because it's more beneficial for me to move out of areas than to necessarily get hung up on getting the top dollar for the lease x.
And so, what I would ask people to look at is out of respect for the buyer, we did not talk about the NOI multiple other than to say that it's accretive to us. We think that that should translate to anybody who follows this company saying that multiples at least 5.5 times. And so when you look at those kind of metrics, you start to say, is this a big NOI hit to us as an enterprise? No.
And so, what do we accomplish, 1,800 wells out of the area, not having to focus on, which for us is an area Southern Alberta that doesn’t make sense for company like Penn West. Now the buyers of this asset and the buyers of the other assets that we have had, they love this stuff and more power to them. And they’ll probably actually do well but I am not going to invest in them. And so that NOI multiple is actually kind of also a slippery slow, because it’s not going to be consistent.
Give you a little anecdote because one of the things I look at because in addition to the 20% of wells reduced, you can look at the major four asset sales, the three we closed and the one that’s upcoming in terms of how I look at things in terms of overhead basis. Almost 10,000 land files and well files are going out of the company. And you start thinking about what it takes to actually store that stuff, count it, keep up with it, you can start to see why these things are beneficial to us. Unlike everyone else, I would love to do asset sales, not assets that don’t produce cash flow. But I am also a realist. My base issue is debt and I am going to get after it diligently and with the focus that I’ve already shown.
Jeremy Kaliel - CIBC
Okay. As part of your announcement on Tuesday as well, you noted that capital spending for 2013 came in 9% below you had originally anticipated, so $816 million versus $900 originally budgeted. Could you talk about where this $84 million of savings came from?
Yeah. A lot of people think that I just don’t let people spend money and that is true, I mean I am pretty tough. When I came in, in the second half of the year, we immediately focused down on the areas that I wanted to spend money and basically cut everything else out. But I think the factual matter is, is that the majority of the savings we’re getting on a well-by-well basis we’re already seeing 20% to 30% reductions across the portfolio in our drilling completion cost performance. And look, I am not magic and none of the stuff is magic, it’s just about doing things in a basic of your way that make a lot of sense.
And so again, you are seeing this. We’ve drilled wells in the Cardium in eight days. And so, it’s all about simplifying design, getting to the bottom of the hole, staying on the hole you bid, sort of moving things around like. And we continue to look for ways to improve our performance. So, Viking is a great example. We were probably $250,000, $300,000 out of the money, because we were drilling too long. We just copied what some of the other people were doing in terms of the well design and what they were doing with fluids, and on completion, we do use a higher dollar completion, but we continue to experiment, we are taking more and more nitrogen out of our completion fluid to continue to drive our cost down, so now we can be cost comparative.
The best way to get better is to copy the best, and that’s what we’ve done in all these plays and we are going to continue to make progress. And I’d reiterate that we haven’t even got started in terms of what I am used to from where I have been, in terms of supply chain management and then also things like when you put in the Cardium for example. When we put six -- eight rigs out there and just part them, these crews get better and better and better.
And so we are going to continue to see, I think cost and well performance improving over time which is really, what we are all about.
Jeremy Kaliel - CIBC
Okay. How much more can convectional production to producing barrels you think you could potentially sell? And in contrast, could you just sort of highlight the status of your potential dispositions of non-producing assets like the Duvernay or your Peace River heavy oil assets, how should we be thinking about those?
Candidly, the company started the Duvernay process too early last year because the play just wasn’t there. And I have a little bit of familiar with the Eagle Ford from my background. And we knew this play was going to come to us. And I think one of the things that we’ve seen and report that you published indicates that southern part of the play is starting to come into the frame.
And so we've had continuous interest, the interest is picking up. One of the things that I think you will see from us as we move forward this year as we were going to drill a vertical well to do some lease maintenance, we’re actually going to drill a producer, so we can may be help this process along.
I am not going to be panicked into moving too quickly with this. It’s still an asset in my view that doesn’t make sense for us, because I want a simpler business. And this is -- in my view our position is a great one. And you can see on the map right outside at the door if there is a company that jumps off the page is mine in terms of acreage position that we have in green, but we’ll be patient with as we go forward. [Top as well,] I think we have a lot of interest on that, we have a process running. That asset suits a lot of folks. And the key difference between the conventional side and I’m not telling you anything you don’t know is that universe is a lot smaller and so we said we’re going to be pacing, we’re going to be pacing.
Here is the challenge we've got, is we can probably move more conventional assets out the door quicker and get our debt situation handled quicker. The question for us is how much risk are we willing to take at the backend of these more strategic asset sales, or potentially a shorter term solution that may drive our production metrics down.
And that's kind of what I am now talking about that's the thread of the needle that I’m trying to do here because it may make perfect sense because I run the business on cash flow and that make sense for me, but I know there is a lot of people out there that still care about barrels more than they should. And so we’re going to make sure that we do the right math.
I think the key thing for people in this space to be aware of though is love to sell the strategic, it’s what I call them, but I’m not going to sit around and [launch] pen-drive. I have got dual processors running so I have optionality. So I am not sitting here at the end of 2014 saying well I got -- on the hand. So I need to get this behind me so I can get on running this company.
Jeremy Kaliel - CIBC
Great. Any questions from the floor? Okay. I know you mentioned, well, I saw at one of your slides, but could you just reiterate what your targeted debt to cash flow ratio is and perhaps your targeted total payout ratio where do you want to get to at the end of this?
We said and it’s nothing magic 1.5 turns and that we just didn’t pick that out of the blue because I’ve just seen I have any debt because I don’t get an advantage from it, but that’s the competitive metric of my pure side and so that’s kind of what we are looking at. We’re strong believers in the dividend, the current dividend structure looks like 25%, 30% payout to me and that should be a very comfortable number for us. I like paying my shareholders. It’s capital discipline and also says I think about you every day. And I recognize I got to pay people to stay with me, while I am going through what looks like a challenging time to some people.
Jeremy Kaliel - CIBC
And you also highlighted in your update, well cost coming down you said 20% to 30% reduction in DC to your cost. Could you talk about capital efficiencies perhaps per flowing barrel which was original way you said it lays out or where you are now, this is where you started?
So, he is smiling because everyone who knows me I don’t do capital efficiency [grew] flowing barrel, so it’s a terrible metric, because it’s really hard to pick that. I think folks can do the math of this year’s numbers and they are going to look better than they have in the past.
What I’ve really focused people in on and what we did in the update in November is what really matters is operated development cost and we're targeting across this base that we can do this in $15 to $20 per barrel range, which sets you up for these things to be sustainable and make money. And also to make sure that we keep our replacement ratios over 100%.
And so that's how we run the business, this is an NPV business, this is an F&D business and that's how we’re running it. And this will be the last year that we talk about flowing barrel metric and sorry.
Jeremy Kaliel - CIBC
Okay. What should investors have on their radar screens in terms of potential catalyst for Penn West in 2014? I know you talked about something.
Yeah. Pretty clearly people are waiting for what's the big deal in terms of an asset sale. Is it one of these non-producing assets, is it a producing asset and how does it make me think about the ultimate debt structure of the company. And we're getting that feedback loud and clear. And so, I think that's going to be the main catalyst. We believe that momentum towards 2 turns on the debt ratio is one of the things that we think is going to unlock or unshuffle the company. And I think that's consistent across what we think internally and what most of our external holders are telling us.
I think candidly what people need to see from this company is some of the second half metrics operationally. Can you start spreading10 to 15 plus Cardium wells a month? Once we get to that kind of pace, I think this company starts to turn meaningfully. And then other things too probably half the wells will drill in the Cardium in the second half of the year, better than 30 wells would be 1600 meter wells for the longer, the industry standard is 12. And so this leave out for us in terms of actually pushing the limits of what we've done I think will be very meaningful for people on a go forward basis.
And then in the slave this whole issue of can we actually turn the corner with mountable drilling and drop those well costs into the $3 million range as opposed to the $4 million range? Those are things to me that are long-term value catalyst for the company as we go forward.
Jeremy Kaliel - CIBC
Okay. So the big picture, I mean what will Penn West look like in 12 months and in two years maybe?
Well, consist to what we said, I mean ultimately I think the shape of the curves that we’re putting out there in terms of what I am trying to do in enterprise get this company to a place where we can show significant, not spectacular growth, I’ve talked about 7% importantly 10% plus liquids growth which I think we can do with our portfolio, cash flow growth overtime within a debt structure that makes sense and then remaining very disciplined within this cash flow box that I’ve put around the company.
So I think 12 months from now people are going to be able to see a company that basically is equal to its peers if not better in all three of the place we’re in, in terms of our ability to deliver performance on a repeatable basis. They’re going to see a company that’s consistently within the capital metrics that I’ve set out in terms of well delivery. And they’re going to see a company that no longer is just barely got a [pin] out of the water relative to its debt structure.
So it’s going to be a more repeatable, more sustainable, more predictable business and it’s just will be a cash machine and I think people are going to be happy with that.
Jeremy Kaliel - CIBC
I think, yes John.
Yeah, it’s a more expensive process, but I will tell you kind of where, how this started, and I’ll try to be quick as I’m running out of time here. When I first got to Western Canada, I was convinced you couldn’t grow one of these, a business like this more than 3%. And so that was kind of my going in view of this from any kind of relative phase.
But when I started to see, once I looked at the Cardium and the Cardium is the heart of the company. It looks exactly like the unconventional plays in the South, except it’s easier. And all those plays are predicated on the same thing, how many wells can I drill to get ahead of this declined curve and I start platforming year-on-year programs?
And it’s no great magic, but you know basically once you start to think about here is you need to be able to drill 250 wells a year plus or minus in the Cardium. Hence my $800 million in out years in terms where we wanted to get to. And then the exercise was, what can I do effectively today, because when I walked in the company, Cardium is the center of the company, right, $50 million a year investment in Cardium, and so that’s not a work.
And so we dialed it up, so I’d get a sense of how quickly the machine can ramp up to actually do this. So it’s a $100 million this past year, we’ll do $260 million and I think we will be able to get to our $800 million closer from that. Then it became our exercise of what’s next? And so Slave becomes the most important next asset. What do I need to get done in the next two years so I can actually start aggressively pursuing that for the [first] year? And so whatever they wanted, they got.
And so it’s basically a modest well program, a 3D seismic program, some water-flood installations so we could prove that concept up and then whatever is left went to the Viking. So your capital allocation is pretty straight forward and no one else gets anything unless they could prove to me that somehow they are better than these other assets and has a long-term vehicle for us.
So within that framework then it was okay teams what can you actually deliver and can you make this work for me as we go forward? And so it’s both an inclusive and a very exclusive process in terms of how we do things.
Jeremy Kaliel - CIBC
Okay, time for one quick one.
Well, I think you have to earn the right to invest. And with earn the right and confidence again of our investor to do that. Longer term I do see this is a vehicle particularly in the two major plays where we would have a capacity to take other things on, but I want to hear this, is we’re not there yet. I’ll never declare victory on operations metrics, we got a ways to go to be the best of the best, so we can actually move into that space, but longer term I think Penn West can be that vehicle, but that's not something that candidly is right on my radar screen right now.
Jeremy Kaliel - CIBC
Okay. That's about all the time we have. Thank you very much.
Great. Thanks and enjoy.
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