Penn West Petroleum's (PWE) CEO Dave Roberts on Q1 2016 Results - Earnings Call Transcript

| About: Penn West (PWE)

Penn West Petroleum Ltd. (NYSE:PWE)

Q1 2016 Earnings Conference Call

May 16, 2016 11:00 am ET

Executives

Paul Surmanowicz - Senior Corporate Finance Analyst

Dave Roberts - President and CEO

David Dyck - SVP and CFO

Gregg Gegunde - SVP, Exploitation, Production, and Delivery

Analysts

Greg Pardy - RBC Capital Markets

Brian Kristjansen - Dundee Capital Markets

Operator

Good morning. My name is Melissa. And I will be your conference operator today. At this time, I would like to welcome everyone to the Penn West First Quarter Financial and Operational Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [Operator Instructions] Thank you. Mr. Paul Surmanowicz of Corporate Planning and Capital Markets, you may begin your conference.

Paul Surmanowicz

Good morning and thank you for joining us on this conference call discussing our first quarter operational and financial results.

With me this morning is, President and Chief Executive Officer, Dave Roberts; Senior Vice President and Chief Financial Officer, David Dyck; Senior Vice President, Exploitation, Production, and Delivery, Gregg Gegunde; and Vice President, Finance, David Hendry. On this call, we will provide a discussion referencing a webcast presentation, which is also available on our Web site at pennwest.com before moving on to Q&A.

Before we begin, I would like to point out that we will refer to forward-looking information in connection with Penn West and the subject matter of today's call. By its nature, this information contains forecast, assumptions and expectations about future outcomes, so we remind you it is subject to the risks and uncertainties affecting every business including ours. This slide and the appending contain a summary of the significant factors and risks that could affect Penn West or could affect future outcomes for Penn West, which are discussed in more fully in our public disclosure filings available on both the SEDAR and EDGAR systems.

I would now like to turn the call over to Dave Roberts.

Dave Roberts

Thanks Paul. Good morning and thank you to everyone for joining us on the call today.

I think we should first pause and extend our collective thoughts to those affected by the wildfires in the northern part of the province. We hope everyone's friends and family are safe during this very difficult time.

2016 has persisted in a challenging commodity price environment for both the industry and the market. However, in the face of this difficult time, I'm pleased to report that we delivered a strong quarter operationally, thanks to the relentless efforts of our teams. The great work accomplished in 2015, allowed us to start 2016 on very solid operational footing.

We continued to experience strong production performance from both of our two core plays the Cardium and the Viking. As a result, our volumes considerably exceeded expectations with average production of 77,010 barrels of oil equivalent per day, well above our 2016 full year guidance.

Additionally, a lower amount of production volumes were shut-in than previously anticipated which also contributed to our strong results. All this is a direct result from our continued production reliability and exceptional operational execution that we have been building on over the proceeding three years.

We continued to endow our teams with the task to further discipline to strengthen our cost structure and this quarter was no exception. We demonstrated excellent cost control and executed successful cost reduction initiatives all of which have positively benefited the company as evidenced by our results.

Our operating costs were significantly lower than guidance at $13.02 per barrel of oil equivalent and this was achieved from our ingenuities and persistent hard work to achieve stronger operational performance. In addition, G&A costs were $1.97 per BOE, again, well below our guidance due to the realignment of our staffing levels to best reflect our expected activity level throughout 2016.

We believe, we can reduce our absolute G&A costs by an additional $15 million to $20 million in comparison to 2015. And we will continue to find ways to drive our cost structure down and improve our business.

Consistent with our commitment to reducing our indebtedness, we were able to execute several dispositions, which contributed to improving our financial flexibility. We announced in the first quarter approximately $230 million in dispositions. I believe, we can achieve more and we will continue to strive for additional asset dispositions to further reduce our debt. Our top priority for 2016 remains the improvement to health of our balance sheet, which I believe can be accomplished as we continue to seek improvements in our cost structure and our debt levels, so that we are well-positioned to move forward once commodity prices recover.

Although, our path remains challenged at this point in time, I believe this enterprise will persevere. We have the portfolio of assets. We have the talent in-house and we are working to have the financial strength to emerge from this depressed cycle even stronger than when we entered.

With that, I will turn the call over to David Dyck for further comments.

David Dyck

Thank you very much Dave, and good morning everyone.

Let me start-off by addressing our current senior debt compliance and I would like to make it very clear that we were in full compliance with all of our financial covenants as at March 31, 2016 including the senior debt to EBITDA covenant that was 4.4x relative to a 5x limit.

Additionally and subsequent to the quarter, we paid our normal course senior note maturities on May 5, 2016, of $30 million using our existing revolving credit facility with our banks. We currently have $686 million of unused credit capacity available on our $1.2 billion credit facility and $224 million of cash from A&D proceeds. Consequently, we have more than adequate liquidity to meet our upcoming May 29, 2016 senior note maturities of $185 million.

As we have previously disclosed, we are currently engaged in negotiations with our lenders to amend our financial covenants. Prior to the end of the second quarter of 2016, which if successful will mitigate the risk of defaults in 2016 and further into the future at prevailing commodity price levels. A successful agreement with our lenders will allow us to continue focusing on operating our business and addressing our debt levels. These negotiations are complex and take time as it is critical to get the proper deal done in place that meets both side’s needs. Accordingly, we have hired two very capable advisors supporting the negotiation process, investment banking firm Rothschild out of New York and Calgary based PricewaterhouseCoopers.

We are focused on reaching an agreement with our lenders in the current quarter, otherwise at current commodity price levels we believe we will not be in compliance with our existing financial covenants at the end of the second quarter.

In addition to engaging with our lenders and in order to reduce the risk of default, we are continuing to pursue additional asset dispositions and considering several other options which may include obtaining additional sources of capital from strategic investors.

As mentioned by Dave earlier, our top priority remains reducing our debt and approving the health of our balance sheet. Although, we have raised over $1 billion in cash proceeds from our disposition programs since the start of last year, we believe that there is still more that needs to and can be done. We have proven that our ability to transact remain strong throughout this price environment and we are confident that we can continue to execute on accretive deals.

We understand this is an uncertain time for our shareholders, however, while there are no guarantees we believe we have the ability to move past this in hopes to continue our strategy of reducing debt, improving our balance sheet, achieving operational excellence and ultimately increasing shareholder value.

As a result of asset dispositions, the monetization of foreign exchange contracts and strong funds flow from operations, our net debt decreased by approximately $200 million compared to the fourth quarter of 2015 and by approximately $0.5 billion within the last six months. In addition, our net debt does not currently reflect previously announced proceeds from the sale of Slave Point and other non-core assets totaling approximately $180 million in proceeds. We recognize that we must further reduce our debt through additional asset sales and stay focused on ways to improve our cost structure.

During the first quarter funds flow from operations totaled $47 million compared to total -- compared to capital expenditures of $18 million demonstrating our commitment to live within our means. The increase to funds flow from operations was primarily due to our successful operating and G&A cost savings which more than offset a reduction in net revenue from the weaker commodity price environment in the quarter. We expect to continue our strong cost reduction efforts throughout the remainder of this year.

As a result of successful cost savings initiatives and production results in the first quarter we are pleased to announce that we are updating our 2016 full year guidance metrics. Our exploration and development capital budget for the year remains unchanged at $50 million with an additional $20 million to be spent on decommissioning expenditures. Our annual production is expected to remain unchanged between 60,000 and 64,000 barrels of oil equivalent per day after the effect of property dispositions closed during the first quarter and including approximately 3900 barrels of production associated with the Slave Point disposition.

We are reducing our operating cost guidance to between $17 per Boe and $18 per Boe down from $18 per Boe and $18.75 per Boe. We expect our G&A for the year to remain between $2.50 per Boe and $2.90 per Boe.

I'll now turn the call over to Gregg Gegunde to discuss our operations.

Gregg Gegunde

Thank you, David.

Last quarter, we demonstrated that despite the commodity price environment we were able to continue our strong momentum from the fourth quarter of last year to execute on our program that meet or exceed our key operational targets. During the quarter, Viking and Cardium activity was limited to completing and bringing production on from previously drilled wells. We brought online 21 wells into Viking and five wells into Cardium.

At our Viking play in Dodsland, we continue the application of the 12 ton 12 stage completion techniques on the half mile laterals. This drilling and completions methods has allowed us to realize additional cost reductions within the area. Moreover, eight of the 21 wells that were brought on production this quarter were drilled and completed utilizing a one mile well bore design. The stabilized wells have shown production performance to-date that is well in excess of their respective type curves.

We expect that the new application of the one mile lateral design on our high-graded reservoir acreage will result in a reduction of our go forward finding and development costs by an impressive 30%. [Indiscernible] implementing this design were supported by our land position as we move forward with the expansion of our Viking play.

In our Cardium play, we brought one well on production in the Crimson area and four wells in the Pembina J-Lease area and prop over the past year we have improved our drilled complete equipping and tying processes, consequently achieving significant improvements in cycle times. In addition, our spud to first production cycle time has been reduced by an impressive 90 days to 14 days through improved simultaneous operations. We have experienced per well savings of approximately $1 million from the approved operational changes that we have implemented.

For 2016, we're running a two well rig program, this quarter we drilled seven gross wells and brought 10 gross wells on production. Our activity for the remainder of this year is focused on proper approximately 90% of our working interest expenditures continue to be paid by our joint venture partner.

Our capital program this year really allows us to focus on our strong asset base and continue to fine tune our processes for optimal performance and results. Our J-Lease program including the wells brought on production in the second half of last year continue to exceed our expectations with strong performance and low decline rates. In addition in our Crimson area, we also continue to exceed expectations with production well above type curve.

Waterflood implementation and design work is proceeding in the Crimson area as well. Last year, we announced that our J-Lease program was impacted by infrastructure constraints as we experienced several gas gathering line failures which restricted our operation -- our production volumes. During the first quarter, we replaced seven kilometers of the Station 8 pipeline to improve the reliability of the gas gathering system. The project was completed under budget and significantly ahead of schedule.

The pipeline has generated positive results by increasing oil production by approximately 1000 barrels of oil equivalent per day post repair, with several fourth quarter 2015 wells still being optimized. In Willesden Green, we achieved stronger results in the second half of 2015 and first quarter of 2016 by targeting higher pressure zones with near by waterflood support. The performance from these wells continues to exceed our expectations.

This slide is a great representation of the successful cost saving initiatives that we have undertaken. We have reduced our absolute operating costs at our existing properties by over 20% since 2013. This is primarily a result of our focus on operational excellent practices resulting in improved run times, successful cost reduction, strategies, staff realignment and lower than anticipated macro cost environment. In addition, we are confident that we have the ability to further reduce our absolute operating costs by approximately 20% on a year-over-year same field basis excluding the impact of dispositions.

I'll now turn it over Paul to conclude our discussion.

Paul Surmanowicz

Thank you, Gregg. That concludes our formal remarks. So, at this point I would like to turn the call over to the operator for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Your first question comes from the line of Greg Pardy from RBC Capital Markets. Your line is open.

Greg Pardy

Thanks and good morning. Just a couple of questions, one is, I'm just curious as to how much heavy oil you've now got shut-in as is it sort of 1 to 5,000 barrels a day? And then, the second question is, unit OpEx is going to have just a huge bearing on driving your numbers to the balance of the year and then into 2016 and a lot of the commentary you've made has been around reducing absolute cost, which would suggest those unit numbers will remain in relatively good shape even though your volumes are coming down. Could you give us any color on both of those?

Gregg Gegunde

Greg, this is Gregg Gegunde. Your first question in terms of how much heavy oil we have shut-in, we haven't been just selectively choosing what type of production we have, it’s not necessarily heavy oil. I can't really answer that question effectively in terms of what percentage is heavy oil, but the oil we have shut-in is, it's a combination of some heavy oil; there is other areas where operating cost is a little bit higher and some gas production as well, so it's a combination of all three elements.

In terms of our operating…

Greg Pardy

And how much would that be then in just in total on Boe basis?

Gregg Gegunde

The Boe basis we’re somewhere in the region of about 2000 Boes roughly.

Greg Pardy

Okay. Thanks.

Gregg Gegunde

The second part of your question was, if I heard you correctly is, how we are -- continue to drive our operating cost as a function of declining production rates?

Greg Pardy

Exactly.

Gregg Gegunde

So we -- as I mentioned in the discussion we see partially 20% reduction in our operating costs. Some of the things that we've done here over the past three years is, we refocused our efforts in terms of better planning understanding our operations to a higher extent. We see our operating cost continuing to coming down as we move forward with this. The offset in terms of production losses, we'll carry essentially, but we see our overall cost coming down significantly.

Dave Roberts

Yes, Greg. And I'll just add a little color to that. I think because you are asking the question about what's the marginal number going to be. And I think -- you probably already done the math, but I think the upper end of our prior range it's kind of suggestive of what our in quarter costs could ultimately get to. So, still really good performance less than $19 per barrel.

Greg Pardy

Okay. So, thanks for that Dave. So, you are suggesting it's potentially 19 by the fourth quarter of this year?

Dave Roberts

Yes. I think that's upper end.

Greg Pardy

Okay. Thanks a lot.

Operator

Your next question comes from the line of Brian Kristjansen from Dundee Capital Markets. Your line is open.

Brian Kristjansen

Thanks guys. Following up on Greg's question with respect to shut-ins, you mentioned Dave at the beginning of the call that part of the reason Q1 was better was because some of the previously shut-in volumes came on. Could you quantify what that amount just specifically in Q1 was? And is the 2000, what is currently shut-in?

Gregg Gegunde

This is Gregg, here again. In Q1, the total amount that we shut-in as I mentioned to the previous caller is approximately 2000 barrels production of Boes that we have shut-in, largely that volume was in Q1. So that's number approximately 2000 barrels.

Brian Kristjansen

Okay. There weren't previously shut-in barrels that came back in Q1?

Gregg Gegunde

No. There wasn't.

Brian Kristjansen

Okay. Thanks.

Operator

[Operator Instructions] There are no further questions at this time. I will turn the call back over to the presenters.

Paul Surmanowicz

Thank you, everybody for joining us on the call today. We look forward to updating you on our progress and when we provide our 2016 second quarter results in the coming months.

Operator

This concludes today's conference call. You may now disconnect.

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