Obsidian Energy Ltd. (OBE) CEO David French on Q2 2018 Results - Earnings Call Transcript

Obsidian Energy Ltd. (NYSE:OBE) Q2 2018 Results Earnings Conference Call August 2, 2018 8:30 AM ET

Executives

Brad Monaco - Manager, Corporate Planning & Investor Relations

David French - President and Chief Executive Officer

David Hendry - Chief Financial Officer

Aaron Smith - Vice President, Development & Operations

Analysts

Jeremy McCrea - Raymond James

Shailender Randhawa - RBC Capital Markets

Operator

Good morning. My name is Dan, and I will be your conference operator today. At this time, I would like to welcome everyone to Obsidian Energy's Second Quarter 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.

I would now like to turn the conference over to Brad Monaco, Manager of Corporate Planning and Investor Relations. You may begin your conference.

Brad Monaco

Good morning, everyone. Thanks for joining us. This morning, we will be discussing our 2018 second quarter financial and operational results. The format of this call will be audio only.

With me this morning and speaking on the call is Dave French, President and Chief Executive Officer; David Hendry, Chief Financial Officer; and Aaron Smith, our new Vice President of Development.

Before I turn the call over to Dave, I’d like to point out that we will refer to forward-looking information in connection with Obsidian Energy in the subject matter of today’s call. By its nature, this information contains forecasts, assumptions and expectations about future outcomes, so we remind you it is subject to the risks and uncertainties affecting every business, including us. Please refer to our public disclosure filings available on both SEDAR and EDGAR systems for a full discussion of significant factors and risks that could affect Obsidian Energy or could affect future outcomes for Obsidian Energy. Go ahead, Dave.

David French

Thanks, Brad. Good morning, and welcome to the Obsidian Energy second quarter financial and operational update conference call. We hope everyone is enjoying their summer. I have spent a good deal over the last several weeks engaging at conferences on the trajectory of our Canadian E&P business. This update so is timely. Many in this industry, especially those in basins that are catching the realization as commodity prices improve, the Cardium being one of them, have optimism about the coming quarters. We certainly share that view.

The Canadian energy space sees performance improving in the next year with sustained higher liquids pricing in particular. The industry question is shifting, from will these wells make money at these prices and how deep is our inventory. We at Obsidian Energy, like our answer to that changing narrative. We have already kicked off the start of our Cardium fast track program with, we expect substantial early 2019 production additions. We hold the largest acreage position in the Cardium with a deep inventory of both primary and secondary locations. All of this is underpinned by quality operating margins and shallow declines.

Obsidian Energy believes that solid net backs and low declines coupled with our 80% rate of return primary development, will be particularly well as our hedge book grows over in 2019. We added an independent analysis from Desjardins to our corporate deck on Page 5, that outlines its potential. Analysts forecast quality growth and cash flow per share for us as we play forward our business plan and highlight how our stock is currently priced against 2019 delivery. We share the view that this combination positions us very attractively to investors and the company emphasis now is squarely on our defining projects, Cardium fast track.

Fast track means essentially one thing over the coming quarters, dedicated manufacturing of Willesden Green wells. The asset quality, capital efficiency and quick cash cycles from that program calls for us to fund it. When we look at the second quarter of 2018 itself it was overall pretty quite on the new volume activity. Many of the remaining drilling capital are earmarked for the second half of this year. The lion's share of spend across the company in the quarter was clearing the deck operationally for our next round of growth.

Of the modest 26 million development capital spend in the second quarter, a large portion went to supporting the commissioning of our Peace River area [indiscernible] 50-50 gas plant and cutting our pads fully upward to the new gas gathering infrastructure. This effort is a onetime cost to the business in Peace River and driven by AER Directive-84 compliance. We also systematically completed the largest and most comprehensive turnaround in our fleet at the Crimson gas plant. I cannot emphasize enough that efforts of this magnitude really get headlines because they feel like one-offs to the business. However they are good signals of things to come.

The Crimson plant especially allows us to launch the Willesden Green program confidently with capacity and mechanical integrity to support years of development. The next turnaround in that facility is not scheduled for another five years. Calling execution of that magnitude would be important under a ordinary year, and this timing supports the demands of a rigorous old development with associated wet gases coming it's way, good to have it behind us.

You will not be surprised, the listeners on this call but the biggest challenge for our current financials is the overhang of our corporate cash flow with our hedging program. Although net backs at the asset level are compelling we see needed participation in 2018 pricing over a low $50 WTI. As I had previously mentioned the majority of our hedging commitments roll off in early 2019 with the business [screening] up from onetime costs in 2018 we will not be adding any more hedges at this time. We're paying close attention to market dynamics and will keep the investment community aware of our plans.

Our current flow from operations is 32 million which is slightly off from 1Q and our planned throughput spending brought up ex per BOE in and around mid-$14 range. Assuming energy has [Indiscernible] than our update and growing second half on volumes that reduce costs. We therefore maintain our current full-year guidance. There can be no mistaking that the next several months are operationally critical to Obsidian Energy. Cardium fast track is at the heart of our commitment to create an attractive investment vehicle for shareholders.

The concept is simple, you have repeatable cost advantage, liquids weighted wells in a 50 year old play with liquids takeaway. Bringing those wells on and produce them as leading cash margins. We intend to do just that. Our team is in place with some of the best Cardium technical staff in Canada including Aaron Smith, Vice President of Development who joined us last month from Sinopec Canada. Aaron is an engaged and experienced leader who will guide delivery of this major project. We made a robust search for this role and Aaron very quickly emerged as the top candidate. He has tremendous experience running large resource style development programs across the basin specifically right here in the Cardium. We welcome Aaron to our team and I look forward to all of you meeting him at our Investor Day in the fall. Aaron will join us later on this call.

There is genuine excitement here that the stage is set for Obsidian Energy's time and investors reward. We look forward to detailed discussions thus far outlying our 2019 development and monitoring of inventory of highly respective -- prospective wells in this large asset base. I believe you will like what you see and like what you hear.

Thanks, everyone. Let met turn the call over to Dave Hendry, who will further outline the quarter results.

David Hendry

Thanks Dave. Funds flow from operations came in at 32 million which was slightly below our expectations for the quarter. We did see gains from oil prices in the quarter but they were offset by realized risk management losses, volatile crude oil differentials and lower production. Our production for the quarter averaged approximately 28,700 BOE per day. We plan a major turnaround in the quarter at our Crimson Lake and Lodgepole facility which were executed on time and on budget. Production was slightly behind overall estimates due to lower rates from our first quarter Mannville and PCU 9 programs. Average liquids sales price in the second quarter was $65.21 per BOE and average national gas sales price was $1.62 per MCF both exclude hedging activities.

We continue to benefit from our venture marketing arrangement, as our realized cash marketing exceeded AECO pricing by more than 45%. Operating costs for Q2 were $14.47 per BOE, the 12% decrease from Q2 2017 was mainly attributable to our disposal of higher OpEx costs properties earlier this year plus continued cost reduction programs. However, it is higher than our expected annual average due to costs associated with the planned turnaround and maintenance work done. Higher power costs also contributed. We expect to see a noticeable decrease in the second half with less maintenance activity and the impact as development volumes drive the per BOE number lower.

Net debt was relatively unchanged for this quarter, we were at 408 million versus 407 million for Q1, of that 408 million, 326 million was drawn on revolving credit facility and 79 million came from our senior notes. We paid 32 million of senior note maturities in the quarter, utilizing the credit facility to do so. That comes with a commensurate increase in our available credit on the bank line to 440 million. We continue with our disposition mandate of non-core assets and closed a few existing third party royalty sales in minor land packages.

Proceeds totaled $9 million which was split towards debt. We also closed approximately 5 million in proceeds from our [indiscernible] subsequent to the quarter end, which was also put directly to debt. These royalty transactions are beneficial for the company because there's a negligible amount of production impact associated with the sale and makeover good metrics. We continue to progress our small divestiture program but expect that the bulk of it is over. I'll now pass the call to Aaron Smith to discuss our second quarter operational results.

Aaron Smith

Thanks Dave, and good morning everyone. I am very excited to be joining at this defining time in the company's history. The team is in full swing with our busy second half program, and I am pleased with what I see in terms of readiness and the potential, this next leg of development. This morning I will touch on the quiet drilling quarter but focus on what I am most excited about, which is the busiest development program for this company in years. As Dave said quite earlier the concept of what we are doing is simple. The repeatable manufacturing approach will be distinctive for shareholders and something I look forward to talking about at Investor Day. We will make headway on drill costs and capital efficiencies.

I'll start with the story in Canada before turning to Willesden Green. PCU 2 continues to perform after its slower start, as Dave discussed earlier this spring at the AGM, one of the two wells had completion issues and we were delayed almost five weeks bringing the wells up due to weather windows. However the well is also right on the curve now [showing] a 200 BOE per day per well which is a good news story. In PCU 9 total fluid rates are strong but with higher water cuts than forecast. We need to introduce some infrastructure work in July to offset limitations and fluid headwind. We look forward to getting some more work done in Pembina next year and beyond and see significant inventory running room across multiple fields in the area.

Everyone is pretty familiar with our well results to date in Willesden Green and they continue to deliver. Obviously the initial rates from our program have been better than expected and they continue to be at or above type curve. The second half program is in very close proximity to the successful first half wells, which gives me confidence that we are focused on de-risking our development ledge. We have already decided with the summer and fall drilling campaign, we currently have one rig active which just finished drilling our sole Deep Basin well into the Flair Formation of the [indiscernible]. This well was rig released in late July and we hope to stimulate it shortly. We are very optimistic on the well.

We have also had some non-operated dollars allocated here with our partners in the area which was referenced in the release this morning. Our second half drilling program will be executing our fast track primary Cardium strategy focused in the Crimson Lake area of Willesden Green. We have planned six pads with 15 horizontal producers, a mix of two and three-well pads that are positioned in close proximity, with the successful three-well pads drilled in late 2017 and early 2018. We will be running two rigs by mid-September. The first rig will drill three wells between the water flood units for one pad and move east to join the other rig as we finish out the program. We foresee going at this pace in 2019 aside from the typical breakup season.

We are planning to have five wells on by the end of the year, with the remainder coming on-stream in the January and February time frame. I'm excited to see the results of this program reflected in our financial statements. A lot of what we have been talking about this morning is future potential and I look forward to making it a reality. As Dave mentioned we will have a lot more to say on this future potential in the upcoming Investor Day which will be webcast. The focus for me will be really lifting the hood on the inventory potential of our land base. This is not a story that fizzles out after one growth program. Our land base truly has legs to grow.

Turning quickly to Peace River, we are obviously pleased with the results from our four well program in the first half. Production over the first 90 days has averaged 400 barrels per day per well on a gross basis. With these results, coupled with where crude prices are relative to gas, we have decided to reallocate capital from our schedules of [indiscernible] program to four additional wells in Peace River. The wells would be drilled for approximately the same capital costs that would fit in energy and are expected to come on production in the fourth quarter.

Our Peace River joint gas gathering system and gas plants is proceeding on-schedule and we expect now the system on-stream well in advance of the September 30, AER Directive-84 regulatory deadline. We started routing [solution] gas at end of July and will have the plants fully online by mid-September. There was an increase in spending of about $5 million due to construction cost overruns as we finalized the plans last quarter. We see that reflected in our guidance numbers.

All in all lots to be excited about. I look forward to our Investor Day event this fall and updating everyone on our drilling activities with third quarter results. That concludes our formal remarks, I'd like now to turn the call back over to Dan the operator to open up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Jeremy McCrea with Raymond James, please go ahead.

Jeremy McCrea

Hi guys this is more related to your primary development at Willesden Green, just a few questions here. I know you're probably not looking to really give total guidance here but I'm more curious what you would like to see? So for 2019 what portion of your CapEx budget do you think can be directed towards just primary drilling if you can provide any kind of number of wells and how much growth do you expect to see coming out of this area here at the start?

David French

Jeremy this is Dave French, I would say we're putting in 15 in the second half of this year, I would assume that pace of development kind of continues both first and second of next year timing wise. So similar shape to that, that's going to make up the lion's share of capital for 2019.

Jeremy McCrea

Okay. And then I know you guys have somewhat given growth rates right now, 2017 into 2018, how do you think as you shift your capital budget toward more primary development? Or maybe I'll ask it in a different way. What kind of growth would you like to see going forward for Obsidian over the next few years here?

David French

I think Jeremy we talked about a lot. I think we're trying to fit in the sort of double digit range in terms of growth. I think it's going to be the combination of the nice mix of primary development at [indiscernible], our shallow scope of declines hitting around 19% and so we think that that's a good platform to sit on top of in terms of development. So that would be the range we had shoot for and certainly it’s going to depend a lot on, we're certainly going to do our best to live within funds flow and development. So it will be wet funds will give us the choices but certainly shooting for a double digit trajectory is the right answer.

Jeremy McCrea

Okay, and then just last question. I know you guys talk about 250 locations in Willesden Green, is that based on four wells a section, like what do you make of some of your peers who are going down on the six, eight wells a section at this area?

David French

Yeah, that number is been for the four wells per section. For me I think each peer's development program is going to be veered on the type of rock that they see. For us I think the program that we've got designed reflects what we think is optimal on a [MPV] basis for each section. And so I think one has to be looking very closely at the rock and its quality before assessing the appropriate depth.

Jeremy McCrae

Okay, thanks guys.

Operator

[Operator Instructions] Your next question comes the line of Shailender Randhawa with RBC Capital Markets. Please go ahead.

Shailender Randhawa

Hi, good morning, just wanted to get additional color on the potential asset sales David and just where discussions stand with your partner in terms of Peace River and just thoughts on the Viking? And given that you already changed capital for the year any thoughts on use of proceeds over the balance of the year? Thank you.

David French

Hi Shailender, I think as you know -- I will probably take those in the reverse order. I think we obviously we had a program in the Viking early this year that although the Viking -- the [pro rata] on one went very well we ultimately didn’t take and after that we moved forward with. I still expect that we will continue to look at options around Viking. And so for us you'll notice there is probably a -- we made the decision in the fall to swap out [top] wells for Viking wells and I think we will continue to look at the ultimate choice around Viking. Around PROP those discussions continue. I think we are as a company continuing to look at how we think about heavy oil in that business and so for us that option continues. We certainly have constructive dialogs with the Chinese around there choice and how they think about that joint venture. But as far as we're concerned it's just an ongoing dialog.

In terms of proceed from the sale we obviously would -- I think Dave Hendry would second this as well we probably would focus on do we have an [Indiscernible] we always think about debt first and then if you the combination of whether we would look at potential buybacks from proceeds or whether we would put it to the drill it's going to spend a little bit on the market pricing for where the equity stock is at the time.

End of Q&A

Operator

And I’m showing no further questions in the telephone queue at this time. I would now like to turn the call back over to David French for closing remarks.

David French

Thanks guys for your questions. As you can tell from us there is a sense and anticipation of things to come. The pieces are in place for Obsidian Energy to breakout as an investment vehicle. Our job right now is simple; drive manufacturing of the Cardium fast track program, do it safely and with organizational discipline. We will come back to you this fall with early results, a preview of 2019 and maybe see what's in-store for 2020 and beyond. I look forward to that conversation and really appreciate everyone's time on the call and have a great rest of your summer. Thanks everyone.

Operator

Thank you to everyone for attending today. This will conclude today’s call, and you may now disconnect.

Comments

[bargainhunter88]

I am just glad that no reverse-split was brought up. Will keep holding.

[testfd]

What a long wait......stock price is pathetiic...markets at all time highs wti at 67 and obe at like a buck........but its not obes fault its the cad oil sector in general its out of favor..it too will have its time......i really cant see much more punishment.....the sector has been beaten dry

[8547481]

Pistol Pete have you been asleep for the last 5 years. Dave Roberts cleaned up a lot of the mess from the old management team. French is back to screwing thing up!

[divconsulting]

Folks,
I think Dave Roberts cleaned up the BS. But he didn’t lay foundation for additional drilling. It was also mess at that time. They didn’t had plan for capital spending and drilling plans or knowledge on depletion rate.

I think French organized it. French made the biggest mistake by putting hedges but which other companies haven’t done it. French was bit slow in expediting drilling but remember till last oct, prices were hovering around mid 40s. Who would expedite drilling at that price?

He is not greatest of all but not worst either.

[8547481]

Which other companies did not put hedges on? First Why put hedges on such a large percentage of liquids? BTW Continental did not put hedges on back then (I'm not sure what they are doing today)

Ok so how long are you supporters going to give French? When will the rubber meet the road?

[Long Player]

Continental sold their hedges prematurely a few years back and cost the company hundreds of millions of dollars in lost protection. No one ever gets hedges "right". All hedges do is make the cash flow predictable. If oil prices fall, then management is a hero. Here they are a goat for now.

[pistolpetetechguy]

Guys. David French is a top executive who was dealt a terrible hand. While the compensation is rather high, that is what it takes to acquire top talent. He is doing his best and fixed many wrongs. I say he needs a couple years to get the company moving on a positive direction again and get the stock to turn around. At least they haven’t announced a buyback and sinking good money after bad!!! That would have just less cash for executing the turnaround. Instead of criticizing management we should send them our constructive thoughts and thank them for a job well don even though there is much more to do.

[Ruben123]

you must be a short enjoying nice profit.

[rsykes73]

This has to be sarcasm, right? All the ducks were in a row when he came on board - debt was taken care of, covenants were in line, oil price was rising. He may be a top executive but in this circumstance he has executed a big shit and forgotten to wipe.

[adecinvestor]

Nothing is more constructive than firing French

[Gettin-Old]

Sad thing to have watched this company be destroyed over the years by dishonorable management. By the sound of it the management made sure they were shielded from any loss.

[matrixca_27]

It is time to replace David French. Time to walk the talk.

[8547481]

Admit to only reading the first page but my comments are primarily focused on past mistakes by management. Punctuated in the fact that shareholders deserve much more than management has delivered with their compensation packages have been RICH!
Its time to ehance shareholder value for all the expense you all take from this enterprise and its assets!