CALGARY Jul 14, 2015 (Thomson StreetEvents) -- Edited Transcript of Bankers Petroleum Ltd earnings conference call or presentation Tuesday, July 14, 2015 at 12:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * David French Bankers Petroleum Ltd. - President and CEO * Suneel Gupta Bankers Petroleum Ltd. - EVP and COO ================================================================================ Conference Call Participants ================================================================================ * Darrell Bishop Haywood Securities Inc. - Analyst * David Dudlyke Dundee Capital Markets - Analyst * Jamie Somerville TD Securities - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- 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 Bankers Petroleum Ltd. second-quarter operational update conference call. (Operator Instructions) Thank you. Mr. David French, President and CEO of Bankers Petroleum, you may begin your conference. -------------------------------------------------------------------------------- David French, Bankers Petroleum Ltd. - President and CEO [2] -------------------------------------------------------------------------------- Thank you, Melissa. Good morning and thank you for joining the Bankers Petroleum second-quarter operational update. I think it is safe to say that the last couple months and indeed the last two weeks have been filled with a volatile and uncertain macro world. The influences out there are broad. The prospect of an Iranian nuclear deal, Greek challenges and offers to European creditors, turmoil in the Chinese markets, and continued anxiety over political waves of change in Alberta that have left the overall market nervousness at elevated levels. It forces all of us to look at our business and to make sure we are prepared for whatever the world offers us, especially on currency and product price. In our case, the currency question is pretty straightforward. Our sales are largely paid and reside offshore in US dollars and our costs are split roughly 50-50, one half being a mix of Canadian and US dollars and the other half a mix of euro and Lek, the currency of Albania. Albania, although a neighbor of Greece, has limited banking exposure to the fiscal situation in Greece. The banking relationships that Bankers hold remain strong and these funding institutions -- the IFC, the EBRD and Raiffeisen -- have broad portfolios. As to price, we headed into 2015 with a pretty moderate price outlook. We developed a capital plan on $50 Brents and knew this would be a year where positioning matters. First, be conservative with our balance sheet. Second, drive continued per-unity efficiencies in OpEx and capital, what I call lengthening our stride. And last, shine a light on the strength of our business in 2016 and beyond by articulating the tremendous potential at mid-level Brent pricing. I think this quarter's performance is a great signal of what lies ahead for Bankers. As to the balance sheet, we will disclose financials in detail next month. But we made the choice to focus our 2015 budget on two rigs rather than six. We said previously we are looking at roughly $70 Brent to reinstate a third rig and we have verified readiness of our contractor base. However, we will continue to hold into the third quarter, as recent developments have softened Brent in the near-term. On lengthening our stride, Suneel will update you in a couple of minutes on efforts across the business to push down costs. Facilities modifications are coming along nicely to eliminate waste, and we are looking at every aspect of our operations to further strengthen margins and lower investment requirements. You will see us test the multilateral again this year to contact more rock with less capital. But the strength of the business is the real news. From the quality of our drilling inventory including the new results in the Bubullima and what we can see for play expansion off 3D seismic, we see ongoing lightening of our crude mix and robust economics on individual wells well down into the $40 on Brent. EUR performance continues to impress. And we are building a business where we will need to drill fewer wells to offset declines. The quarter numbers tell the story themselves. We achieved a second-quarter production average of 20,045 barrels, a 1.4% growth over the previous quarter. And it is hard not to highlight the Bubullima. The four wells in the northern part of the field are producing an average 219 barrels a day at 85% water cut, producing 15-degree to 17-degree API crude. We are working to drill up to three additional Bubullima wells before the end of the year and are building out facilities to manage a much broader out-year development in the area. About 12% of our production or roughly 2,400 barrels a day in June is attributable to EUR flooding and the quality of the response tells us to do more, much more. We will build our facilities to accommodate additional 11 to 16 patterns this year and will work to have a comparable program for next year even in current Brent pricing. Lengthening our stride means sweating every detail of our performance. We continue to prioritize service level improvements to expand our margin. These projects include the construction of two major gathering systems to reduce infield trucking, the electrification of well pads and installation of vapor recovery units to bring down energy costs, and we are seeing a reduction in diluent usage as we produce higher API crude. We are building a business that works in this new price world and holds tremendous upside potential. I will now pass the call over to Suneel Gupta, our COO, to discuss the operational details of the quarter. -------------------------------------------------------------------------------- Suneel Gupta, Bankers Petroleum Ltd. - EVP and COO [3] -------------------------------------------------------------------------------- Thank you, David. Good morning, everyone. The second quarter of 2015 was a good quarter for Bankers as we regained production growth after a challenging first quarter. We were largely able to overcome the impact of reduced drilling rig count, down to two rigs from six, the seasonal flooding in February, and water disposal constraints. We still have some wells temporarily shut in to accommodate the low oil price environment but have brought back online the majority of the production. As Dave mentioned, our average production level was back over 20,000 barrels of oil per day for Q2, and we were able to maintain controlled spending to balance our capital spending with cash flow. Sales were slightly lower in Q2 at 19,599. However, the 37,000 barrels of net oil inventory build was held up for an early export cargo in July, which equates to about 400 barrels of oil per day, matching the production rates. We drilled 12 wells in the quarter including water disposal well and are on track to drill 60 wells in the year, as per our capital program. We have worked with our subcontractors to ensure standby of equipment is available for us to reactivate rigs on short notice as the oil price warrants. It would take us less than 30 days to reactivate a rig. The highlight of the quarter is the Bubullima production in the Patos-Marinza field, as Dave mentioned. These wells have high gas/oil ratios and water cuts but are delivering good oil rates with further optimization potential available. The horizontal well in Kucova has remained stable between 40 to 50 barrels of oil per day for over seven months. We are planning to expand the program later in the year with an additional horizontal well and implementation of an EOR test in Kucova in the second half of the year. We continue to be focused on our EOR program in Patos-Marinza with seven injector conversions in the quarter bringing the total to 31 patterns, which includes five waterflood patterns and 26 polymer flood patterns installed at the end of Q2. The patterns are providing about 2,400 barrels of oil per day incremental production over the primary decline curve, representing about 12% of our total production. We have added a performance slide to the corporate presentation on our website for an average pattern in the southern Driza and central Driza regions. Some of the southern patterns have been online for one to two years with the central patterns approaching one year. The response looks good with six to 12 months, typically, and we are building historical trends to improve our simulations and forecasting confidence. We will also be moving into new areas and converting more viscous oil patterns in the second half of the year to expand waterflood application. Several other optimization and cost-cutting initiatives are underway. We have reduced diluent blend further, from 6.5% down to as low as 5.5% and with additional light oil development and treating improvements are hoping to drop this level some more over the next few quarters. Initiatives to reduce diesel and propane consumption are having an impact. Several well pads are being converted to electricity for more efficient energy usage and gas gathered to offset fuel needs. Emulsion gathering infrastructure projects are well underway with savings projected for the second half of 2015. The cost-cutting initiatives are targeting $2 to $3 per barrel savings in 2015 and 2016. Specifically, the northern gathering system, which will be complete in Q3, is projected to reduce emulsion trucking costs by about $0.45 per barrel of produced oil. And the west gathering system will reduce trucking a further $0.25 to $0.35 per barrel, bringing the infield transportation costs down to below $1.50 per barrel from levels of $2.50 per barrel last year. The gathering system will also reduce the impact of flooding next year with improved access to fluid movement from wells to facilities through pipelines. We continue to focus on improving our operating cost structure to improve our margins at these low oil prices and have had significant impact on projects underway. Thank you, everyone. We are now open to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Darrell Bishop from Haywood Securities. -------------------------------------------------------------------------------- Darrell Bishop, Haywood Securities Inc. - Analyst [2] -------------------------------------------------------------------------------- Just a couple of questions here. First, on the Bubullima, and you have talked about good results here in Q2, three wells in the second half. Have you guys mapped out how many potential future locations might exist there? -------------------------------------------------------------------------------- Suneel Gupta, Bankers Petroleum Ltd. - EVP and COO [3] -------------------------------------------------------------------------------- Good morning, Darrell. Yes; with the 3D seismic we are able to map. The areas that we are developing currently are within the main field, below the Marinza formations. So those are the ones that we have infrastructure in place currently. Where would expand is up into the northern part of the field, and that area is still -- we do have some 3D seismic coverage of that area. So we need to drill off of that and really understand how large it can be. But there is a significant expansion capability around Bubullima. -------------------------------------------------------------------------------- Darrell Bishop, Haywood Securities Inc. - Analyst [4] -------------------------------------------------------------------------------- Second question is related to when you guys would potentially add back rigs. I know, David, you have mentioned $70 Brent as being that magic number before. Given all the cost-cutting initiatives that you guys have talked about and lower diluent due to the Bubullima, has that number come down closer to the $65 Brent level, or are you still sticking with the $70? -------------------------------------------------------------------------------- David French, Bankers Petroleum Ltd. - President and CEO [5] -------------------------------------------------------------------------------- You and I have talked about this before. I think in the range we are looking for is the high $60s number. I think $70 is easy for us. I think if we can drop that entry point a couple of bucks, that would be a good number. But I don't think we are right at mid-$60s just yet. But I agree with you; when you look at the run rate into 2016, so where we will be on a cost structure then, that's different. So, right I just don't want to get out in front of it until all of the cost savings have matured. -------------------------------------------------------------------------------- Darrell Bishop, Haywood Securities Inc. - Analyst [6] -------------------------------------------------------------------------------- Okay, great. And a final question here is just related to your corporate decline rates. Given the reduced activity here in 2015 and now what's a growing contribution from your polymer flood, where do you guys see corporate declines now, at this stage and running into 2016, assuming that you stick with the two rigs here in the second half? -------------------------------------------------------------------------------- Suneel Gupta, Bankers Petroleum Ltd. - EVP and COO [7] -------------------------------------------------------------------------------- I think our corporate decline right now is still around that 30%. But we did have a very big, high density drilling year last year. So as we move further into the year, that decline rate should be coming down from that 30% to 25% or down towards -- it will be less than 30% as we move forward. -------------------------------------------------------------------------------- Darrell Bishop, Haywood Securities Inc. - Analyst [8] -------------------------------------------------------------------------------- Great. Okay, thanks. That's all from me, guys. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- (Operator Instructions) David Dudlyke from Dundee Capital Markets. -------------------------------------------------------------------------------- David Dudlyke, Dundee Capital Markets - Analyst [10] -------------------------------------------------------------------------------- Back to the Bubullima, if I may. I was intrigued by the commentary that stated that these four wells, the history ranged from four months, which must these are two wells that were drilled in Q1, to over two years. And minimal decline rates -- can you put a figure to that? It seems extraordinary. The two wells in Q1 were described as doing 200 barrels per day each at 75% water cut. We now have an average of 220 at 85% water cut across four wells, two of which are over two years old. So can you just help me understand the sort of decline rates that we are seeing from these wells? -------------------------------------------------------------------------------- Suneel Gupta, Bankers Petroleum Ltd. - EVP and COO [11] -------------------------------------------------------------------------------- In terms of the Bubullima one of the things that we have been balancing around Bubullima development is the infrastructure because the production from it includes water, gas, and some of the gas associated is sour gas. So, because of that, over that two-year period it hasn't been stabilized production. So it has been on as the facilities allow and then it has been shut down for periods of time. So to establish a very good decline rate over a two-year period, we don't have that kind of a trend yet. So I think it's, from now going forward, as we keep those wells running we will be able to establish that trend. But what we are seeing is that it isn't declining that heavily or that quickly. We do also have optimization potential by increasing the fluid rate. So there is some water there, yes. But if we can handle a higher volume lift then we can also offset that decline. So we are still establishing what that looks like. It's early days for Bubullima but the rates look very good. -------------------------------------------------------------------------------- David Dudlyke, Dundee Capital Markets - Analyst [12] -------------------------------------------------------------------------------- So is that to say that essentially those older wells, they don't have a continuous, as you say, track record? (Multiple speakers) -------------------------------------------------------------------------------- Suneel Gupta, Bankers Petroleum Ltd. - EVP and COO [13] -------------------------------------------------------------------------------- That's right. We still need to get a stable trend on that to really assess the decline analysis on it. -------------------------------------------------------------------------------- David Dudlyke, Dundee Capital Markets - Analyst [14] -------------------------------------------------------------------------------- Okay. And in terms of forward drilling in the Bubullima -- I just did some quick math. These are high-volume wells, given their high water cut and their high oil production relative to your typical horizontal wells. So how much more production can you handle up in that very northern part of your field? And is there further infrastructure expansion required to basically meet your needs or your desires in the Bubullima? -------------------------------------------------------------------------------- Suneel Gupta, Bankers Petroleum Ltd. - EVP and COO [15] -------------------------------------------------------------------------------- Yes, exactly. For the Bubullima we are expanding the infrastructure enough this year to be able to, as we mentioned, drill an additional three wells and, I think, bring on four. There's one Bubullima shut in currently. But as we move forward into it and we establish more of a historical trend and can assess that development project a little further, and because of the sour nature of the gas and the additional water production and gas production, we will need to build some facilities up in the north. So that is underway right now. We are designing that and ordering up the long lead equipment. So we are expanding our infrastructures that we can expand in the Bubullima more than the three wells as we go forward. But for right now where limited by the infrastructure. -------------------------------------------------------------------------------- David Dudlyke, Dundee Capital Markets - Analyst [16] -------------------------------------------------------------------------------- Okay. And then if I may just move to EUR, I am intrigued. We now -- polymer now dominates waterflood 26 to 5. It calls my mind back earlier this year, and one of your slides showed that the Marinza waterflood, M0, was actually contributing, I think, from three patterns of similar incremental production per pattern to the polymer floods that you had in the Driza at the time. So why is polymer dominating waterflood? Is it simply a strategy to mobilize and build the reserves in the Driza and demonstrate that you can move the higher-end viscosity oil? Or is it a lack of opportunities, given the historic recovery to date in the Marinza? -------------------------------------------------------------------------------- Suneel Gupta, Bankers Petroleum Ltd. - EVP and COO [17] -------------------------------------------------------------------------------- With polymer flooding in any kind of simulation, even in the Marinza zones, when we are moving in with or injecting water, it's very hard for us to build up the proper pressure profile in the formation to get the maximum recovery. So in all cases when we simulated using polymer, you can get higher recoveries. So that's primarily why, and then also the viscosity of the oil. So if we were to have done those same patterns with polymer in the Marinza, they would have done better than underwater. Obviously, water is a little bit cheaper to do. But we are looking for maximum recovery and trying to get the most efficient economics for maximum recovery. (Multiple speakers). -------------------------------------------------------------------------------- David Dudlyke, Dundee Capital Markets - Analyst [18] -------------------------------------------------------------------------------- On ago-forward basis polymer is the route, even in the Marinza? -------------------------------------------------------------------------------- Suneel Gupta, Bankers Petroleum Ltd. - EVP and COO [19] -------------------------------------------------------------------------------- Yes, it's going to dominate. Polymer flood be the main expansion in Patos-Marinza, even in the Marinza, in some areas of the Marinza. Where we can do waterflood, we will expand it just for cost reasons. But we can also do it as a phase. We could do waterflood as a starting phase and then we can tail in with some polymer. It's all about maximizing recovery from those patterns. -------------------------------------------------------------------------------- David Dudlyke, Dundee Capital Markets - Analyst [20] -------------------------------------------------------------------------------- Okay. And last but not least, slide 19 -- you show -- and it is early days. You showed the response of the central and the south treated polymer patterns. Similar total number of patterns, it would appear, but slightly different response. Is it just the vagaries of statistics, given the very, very small number of patterns. The central seems to be out performing even your 3P, whereas the other one seems to be moving back from 2P down to 1P or at least trending that way. Is it just simply those statistics of very, very small numbers of patterns? -------------------------------------------------------------------------------- Suneel Gupta, Bankers Petroleum Ltd. - EVP and COO [21] -------------------------------------------------------------------------------- Yes. It's kind of early days on the pattern. But the central patterns are actually -- they performed better on primary. So the recovery factors in the central were better. So there is potential here that they could outperformed the southern patterns. It is early for us to say that the average pattern will be above the 3P line there. But the early indications are looking very good. As we get another six months or so under our belt we will be able to give you a little more information on that. But right now they are performing very well. -------------------------------------------------------------------------------- David Dudlyke, Dundee Capital Markets - Analyst [22] -------------------------------------------------------------------------------- Okay. Thank you all very much. Thank you. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Jamie Somerville from TD Securities. -------------------------------------------------------------------------------- Jamie Somerville, TD Securities - Analyst [24] -------------------------------------------------------------------------------- Most of my questions have been asked already and answered. But just clarification on the Bubullima -- at least four wells that you are seeing are currently producing 220. How many of those are horizontal? -------------------------------------------------------------------------------- Suneel Gupta, Bankers Petroleum Ltd. - EVP and COO [25] -------------------------------------------------------------------------------- There's three of them are horizontals. One of them is a vertical well. -------------------------------------------------------------------------------- Jamie Somerville, TD Securities - Analyst [26] -------------------------------------------------------------------------------- And then are there any subtle changes? You are not changing the budget officially, I don't think, in terms of capital spending for the year. But you alluded to the fact that the west gathering system, for example, was previously deferred. Are there any smaller changes to the works that you are actually undertaking this year? Or is that all still as originally planned in the budget? -------------------------------------------------------------------------------- Suneel Gupta, Bankers Petroleum Ltd. - EVP and COO [27] -------------------------------------------------------------------------------- Yes. I think our budget is still the same. We are drilling for 60 wells. In terms of the conversions, the injector conversions for our polymer and waterflood, we had budgeted about 20 conversions. That's probably -- that will be the program that sees the change first. If we can do more than the 20 and we can manage the production instability as well, we will try to do more than the 20 as well as the cost-cutting initiatives. So the west gathering system -- most of that project was already, in terms of the pipe and materials, was already sunk. So when we deferred it we weren't really deferring a lot of capital. So bringing it back onstream was also not a lot of additional cost. So essentially our program is unchanged where we are just tweaking it a little bit in a few places. -------------------------------------------------------------------------------- Jamie Somerville, TD Securities - Analyst [28] -------------------------------------------------------------------------------- Thank you very much. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- There are no further questions at this time. Gentlemen, I turn the call back over to you. -------------------------------------------------------------------------------- David French, Bankers Petroleum Ltd. - President and CEO [30] -------------------------------------------------------------------------------- Thank you, Melissa. We can't pick the world we live in, only how we respond. Bankers will continue to manage the reality of lower commodity prices, determined to shoehorn in more to be at lower cost of entry. Opportunities for us are everywhere. We will continue to push what we know about the Bubullima. We will explore the possibility of multilateral wells and other ways to reduce costs to contract rock. We will push our EOR program into greater viscosities and thicker sands. We will continue to work to shallow our decline and turn our available capital to growth. I believe it will be a rewarding second half of the year. Thanks for everybody's time, and have a great summer. -------------------------------------------------------------------------------- Operator [31] -------------------------------------------------------------------------------- Ladies and gentlemen, this concludes today's conference call. You may now disconnect.
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