Penn West Petroleum Ltd (PWE) Q2 2016 Earnings Conference Call August 4, 2016 11:00 AM ET
Paul Surmanowicz - IR
Dave Roberts - President and CEO
David Dyck - SVP and CFO
Gregg Gegunde - SVP, Exploitation, Production, and Delivery
Jason Frew - Credit Suisse
Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Penn West Second 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, Investor Relations, you may begin your conference.
Good morning, and thank you for joining us on the conference call discussing our second 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 appendix 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.
Thanks Paul. Good morning everybody and thank you for joining us on the call today. Penn West had notable second, delivering strong operational and financial results. Second quarter production of 63,568 barrels of oil equivalent per day exceeded consensus estimates due to a combination of continued strong performance from Cardium wells we drilled last winter and continued improvement and the reliability of our base production.
In the second quarter we remain focused on cost control and challenged our teams to find further efficiencies in their field operations. This led to a significant decrease in operating cost, well ahead of expectations. In addition, we deferred some discretionary expenses related to turnarounds and work over activities to the second half of the year. The cumulative results of these efforts led to an second quarter operating cost of $12.70 per barrel of oil equivalent.
The steps we took to reduce debt in the second quarter put our balance sheet on a much more solid footing. We closed approximately $1.3 billion of asset dispositions in the quarter, including the sales of our Saskatchewan Slave Point assets. In addition, subsequent to the quarter, we have signed agreements for an additional $75 million in non-core asset dispositions. We have now reduced our pro forma net debt to approximately $491 million from $2.1 billion at year end 2015. These sales have confirmed our compliance with all of our financial covenants and allowed us to remove the growing concern of previously included in our first quarter results.
We have already made progress on our previously announced phase two of the Company’s aspiration plan to sell our remaining non-core assets by the end of the year. With the additional $75 million in signed dispositions agreements since the end of the second quarter, the Company is on track to reach our target proceeds range of $100 million to $200 million and on track to complete the final phase of our transformation.
Where our balance sheet concerns in connection to our debt for the foreseeable future behind us, we are excited to get back to work and begin a sustainable development program. The Company is increasing our capital program for the year by approximately $40 million to once again start growing production in the Cardium and the Alberta Viking. Importantly, our increased capital programs will be fully funded from this year’s funds flow from operations. Our pre second half capital program is expected to add approximately 3,000 barrels of oil equivalent per day to our 2016 exit production and will set us up for continued growth into the next year and beyond.
With that, I will turn the call over to David Dyck for further comments.
Thank you, Dave, and good morning. In the second quarter, we effectively deleveraged our balance sheet and reduced our net term debt by over 70%. Net term debt has gone from $2.1 billion at the end of 2015 to a pro forma net debt of $491 million, a reduction of $1.6 billion in our debt, which we consider very meaningful. We have proven our ability to transact on asset sales in a very difficult price environment and are committed to maintaining our balance sheet strength going forward.
At the end of our 2016 second quarter, we were fully compliant with all of our financial covenants. At June 30th, our senior debt to EBITDA ratio was 3.9 times relative to the $5.0 times limit. Additionally, we have $374 million remaining in cash proceeds from prior dispositions on hand, which is expected to be used for future debt repayments. If these proceeds have been applied at June 30th, our pro forma senior debt to EBITDA ratio would have been 2.3 times. We expect to remain compliant with all of our financial covenants for the foreseeable future and we have removed the growing concern note from our financial phase.
During the second quarter, funds flow from operations totaled $55 million, an $8 million increase from the first quarter. It is important to note that the $55 million is net of $7 million one-time financing costs associated with our dispositions in the quarter. Normalizing for this, funds flow from operations would have been $62 million in the quarter. The higher funds flow from operations was primarily driven by a significant reduction in operating costs. This once again demonstrates our team’s excellent work at finding operating efficiencies and continuing to drive down our cost structure.
Net revenue was essentially flat with the improvement in commodity prices from the first quarter offset by lower production due to asset dispositions. The first half of 2016 marks an improvement in our operating cost structure from 2015. Our second quarter operating cost of $12.70 per barrel of oil equivalent came in well below our internal projections and well below consensus estimates. This was a result of operating efficiencies in our well programs, leading to a decrease in operating costs. We also deferred several discretionary expenses primarily related to turnaround and work over in the second half of the year. And as a result, we expect a modest increase in our operating cost in the third and fourth quarters.
On a full year basis, we expect our 2016 operating costs to average between $13.50 per Boe and $14.50 per Boe. Going forward in our core areas, we expect operating costs in the range of $10 to $12 per barrel of oil equivalent. In light of our new financial flexibility in accordance with debt reduction efforts to-date, we are increasing our capital budget for 2016 by $40 million. This increase in our capital program will be fully funded from full year 2016 funds flow from operations, demonstrating our ability to grow profitably and sustainably. We expect the incremental second half growth program will add approximately 3,000 barrels of oil equivalent per day of exit production in 2016. This capital will be allocated to the Viking and Cardium programs in Alberta.
Our second half development program in the Peace River is relatively unchanged from our original budget. The $40 million increase in spending will bring our 2016 exploration and development capital budget to $90 million with an additional $15 million to be spent on decommissioning expenditures. We are also updating our full year guidance. We expect our 2016 corporate production to average between 55,000 to 57,000 barrels of oil equivalent per day and production in our core areas with expected average between 22,000 and 24,000 barrels of oil equivalent per day. We expect our full year operating costs to average between $13.50 to $14.50 per barrel of oil equivalent and our G&A guidance is unchanged at $2.50 to $2.90 per BOE.
We’ve conducted a review of our preliminary 2017 plans and we anticipate spending up to $150 million in total capital expenditures next year, targeting developments in our core areas. The Cardium continues to be the foundation of our development program and will be supported by incremental growth in the Alberta Viking and meaningful cash generation at Peace River. We expect the 2017 program to grow ore production by 10% from the fourth quarter of 2016 to the fourth quarter of 2017. Our 2017 capital program will be fully funded by funds flow from operations.
We have built next year’s capital program to be flexible with spending weighted towards the back half of 2017. We are very aware of the recent weakness in crude oil prices over the last two weeks and we will adjust the capital program if needed when we get closer to the end of the year.
I’ll now turn the call over to Gregg Gegunde to discuss our operating results for the quarter.
During the second quarter, we performed a comprehensive review of our core assets, particularly the growth potential of the Cardium and the Alberta Viking. This analysis reaffirmed that our assets were able to deliver strong economic results in the current price environment, and supports further development of plays in these areas. Given the improved financial flexibility reported to us and our increased capital budget for the second half of 2016, we plan to restart development and drilling in Cardium and in the Alberta Viking.
In the Cardium we plan to drill and complete five wells in the second half of the year, two wells be drilled in the J-Lease field of Pembina and three wells in the Crimson Lake and Willesden Green. The J-Lease well will be completed using a cemented liner system for improved production performance and improved reservoir management through enhanced longer term water flowing control. Also in Crimson Lake we plan to convert an existing horizontal well through water injection blow in order to increase and maintain reservoir pressure to support production from offsetting wells.
Our Crimson wells drilled in the fourth quarter of 2015 continue to perform well ahead of type curve, making these wells some of our most productive Cardium wells drilled to-date. In the Alberta Viking, we plan to drill and complete 11 wells in the Esther area. These wells will be drilled using a one mile wellbore design previously used in the Dodsland area of the Viking that resulted in excellent productions and development costs. We expect the technical skills learned and our experience in Saskatchewan Viking will directly translate to success in our Alberta Viking program.
We continue to drill and bring on wells in our third core area of Peace River. In the second quarter we drilled and brought on production two gross wells. In the second half of the year, we expect to drill 19 gross wells with the full support of our joint venture partner. Peace River area continues to provide stable production metrics as a cash generation vehicle for the Company.
I’ll now turn the call back to Dave.
As you could see on this slide, we have successfully completed phase one of the Penn West transformation plan. We have worked tirelessly to fix our balance sheet and have done so by selling approximately $1.3 billion worth of assets since the beginning of 2016 at very attractive multiples. On these dispositions, we have reduced our net debt by over 70% to approximately $566 million at the end of the second quarter from $2.1 billion at the year-end 2015. And with the additional $75 million in signed disposition agreements subsequent to the second quarter, our pro forma net debt to-date is $91 million.
We now have competitive and sustainable go forward leverage metrics and are excited to focus on our long-term organic growth. As we have mentioned previously, phase two of our transformation plan will rationalize our remaining non-core assets and is certainly underway. As evidenced by our additional asset sales subsequent to the second quarter, we are confident in our ability to further reduce our debt and we anticipate transacting on our remaining non-core properties by the end of the year. We’re focusing on growing production sustainably, generating funds flow from operations in excess of our capital spending.
I’ll now turn the call back to Paul to conclude our discussion.
Thanks Dave. And that concludes our formal remarks. So at this point, I would like to turn the call over to the operator for questions.
Thank you [Operator Instructions]. The first question is from Jason Frew with Credit Suisse. Your line is open.
I just wanted to maybe check in with you, David, on - there's another big difference between funds flowed from operations and what you call funds flow, I guess FFO and funds flow from operations. So really I just want to get a sense here if you have a view that those numbers will converge over time or is this more of an accounting choice that we live with? I just want to get a better sense of what the drivers around those numbers are?
So in our MD&A we outlined the differences and we show the migration from funds flow to funds flow from operations. So I think all the details is there. Overall, we would expect these numbers to migrate together over time and but there are going to be certain anomalies which I’ve identified in my comments here this morning that will create some differences from time to time and those are just differences in the way we’re accounting for things. But I am hopeful that people will take a look at the detail we provide in our documents and understand what the two numbers are.
So I think it said the restructuring and the FX charges on the maturities that are the big pieces within there. So are you expecting then the restructuring to fall away over time and maybe comment on what's driving the FX on the maturities?
Yes, for sure. I mean restructuring by its nature is not an ongoing thing. We’ve gone through a significant change in Penn West here. And so we would expect any restructuring charges to dissipate if not go away completely. And as we get into normal operations, and the FX from maturities is just a function of fluctuations in core exchange rates. But as we reduce our debt that number should go down because our U.S. component of our long-term debt will decrease.
[Operator Instructions] It looks like we have no further questions at this time. I’ll turn the call back to the presenters.
Thank you. That concludes the presentation. We look forward to updating the market with our further refining in the coming months. Thank you.
This concludes today’s conference call. You may now disconnect.
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