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Agenda. Oil and gas industry in Canada Overview Characteristics Main risks Penn West Exp Company profile Risk management Encana Corporation Company profile Risk management Canadian Oil Sands Company profile Risk management. Canada is a Global Energy Player.
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Agenda • Oil and gas industry in Canada • Overview • Characteristics • Main risks • Penn West Exp • Company profile • Risk management • Encana Corporation • Company profile • Risk management • Canadian Oil Sands • Company profile • Risk management
Canada is a Global Energy Player • Canada is the third owner of crude oil reserves in the world after Saudi Arabia and Venezuela • Canada is the third producer of natural gas in the world • Canada is the sixth largest oil producer in the world • Canada is second in the world in hydro-electricity generation.
Industry overview Canadian Oil & Gas Statistics (2012) • 1.31 million barrels per day of conventional oil production • 1.7 million barrels per day of oil sands production • 13.7 billion cubic feet per day of natural gas production • $62 billion in capital spending • $18 billion in taxes and royalties paid to governments • Oil and gas industry currently supports 550,000 jobs across Canada • Oil and gas industry current comprises about 20% of the Toronto Stock Exchange
Petroleum regions in Canada • 1 Western Canada Sedimentary Basin • 2 Eastern Canada Sedimentary Basins • 3 Southern Ontario Oil and Natural Gas Fields • Regions 1 and of western and eastern Canadaaccount for nearly all of the nation’s current crude oil and natural gas production.
Canadian Association of Petroleum Producers (CAPP) • The voice of Canada's upstream oil, oil sands and natural gas industry • It represents large and small producer member companies • Members explore for, develop and produce natural gas, natural gas liquid, crude oil and oil sands throughout Canada. • Produce about 90% of Canada’s natural oil and gas • Associate members provide a wide range of services that support the upstream crude oil and natural gas industry.
Main production • Natural gas • Natural gas liquids • Crude oil • Oil sands • Elemental sulphur
Natural gas • Price determined in an open market • Supply of natural gas versus the demand for the fuel • Price Sensitivity • Residential • Commercial • Industrial • Winter Season • Higher crude oil prices • Economic growth
Natural gas liquids • Components of natural gas that are separated from the gas state in the form of liquids. This separation occurs in a field facility or in a gas processing plant. • Classified based on their vapor pressure
Crude oil • Actively traded commodities • Oil prices change daily • Global Trend • Demand rising steadily over the past 20 years • 60 million barrels per day to 84 million barrels per day. • Emerging Economies
Oil sands • Oil sand in Alberta is the largest, most developed and utilizes the most technologically advanced production processes • A naturally occurring mixture of sand, clay or other minerals, water and bitumen, which is a heavy and extremely viscous oil that must be treated before it can be used by refineries to produce usable fuels such as gasoline and diesel.
Canadian Oil Sands • Energy Efficiency • Using less energy input. • Reducing energy waste / losses. • Capturing waste heat • Cogeneration power / steam. • • Improved Recovery Processes • Lower temperature extraction. • Additives to reduce use of both • water and energy (steam). • Use of electricity rather than • steam. • Underground combustion rather • than steam. • • Carbon Capture/Sequestration • Most effective at upgraders.
Regulation Government: • Efficiency and market regulations (National Energy Board and Office of Energy Efficiency of Natural Resources Canada) • Environmental Regulations (Environment Canada) • Property Regulations (Provincial Government and Federal Government) Self-regulation: • Canadian Association of Petroleum Producers (CAPP)
Recent transactions & trends • The Canadian transactions market has been very active • The year's most significant trend is the increased interest from Asian investors and the high-profile deliberations by the Canadian government about the implications of foreign investment in Canada’s oil and gas Industry.
Traditional risk exposure • Commodity price volatility • Business risk (production and sales uncertainty) • Macroeconomic influence • Credit risk (Counterparty failures) • Operational Risk (Pricing) • Environmental/legal risk(contract enforcement) (environmental protection and disaster prevention)
Others • Pipeline approval • Access to capital investment • Global realignment of oil production • Availability of unconventional hydrocarbon sources • Underlying commodity supply and demand fundamentals • Foreign investment and M&A
Risk management • Sensitivity analysis • On cash flows sensitive to: • Oil and gas prices • Interest rates • FX changes • Further developed with • Probability calculations for movements in prices, interest rates and FX
Commodity derivatives • The use of commodity derivatives can mitigate or remove oil or gas price uncertainty • Options, futures, swaps, forward contracts…
Contingent liability derivatives • On a diversified conventional reserve base with significant production history, predicting the future production performance over certain time horizon using type and decline curves is generally quite accurate • Companies with this sort of conventional reserve base can enter into contingent liability derivatives like swaps on a high percentage of their PDP(proved, developed, and producing) production with a high degree of confidence that the physical production to back any hedge liabilities will be there regardless of availability of future resources like capital and rigs to drill and complete future wells.
How to manage risk? What constitutes a sensible risk management program depends on context: • The nature of underlying reserves, the size, scale, maturity, and sophistication of the company's operations, the petroleum economics of the underlying asset(s). • Correctly utilized, hedging tools represent a useful way of underpinning value, maintaining liquidity, and managing credit risk. Incorrectly used they can amplify risk significantly.
Outlook for the Canadian Energy Industry • Continued investment in the oil sands and other oil assets • Increasing investment in unconventional gas • Continued M&A activity — Joint ventures, acquisitions, asset transactions — Continued participation by international companies • Technological advancement expected to continue • Development of global infrastructure, including LNG • Social and environmental issues will continue to be critical to Canadian operations
Overview of the company • Founded in 1979 in Calgary, Alberta • One of the largest conventional oil and natural gas producers in Canada • One of the S&P/TSX 60, the 60 largest companies on the Toronto Stock Exchange • More than 2,000 employees • Total output: 56% oil and 44% natural gas • In 2011 the company converted from an income trust (Penn West Energy Trust) back into an independent corporation (Penn West Exploration).
Financial scenario • Market capitalization: 4.22 Billion CAD • Enterprise value: 7.14 Billion CAD • Shares outstanding: 489.77 Million CAD Data from Reuters, Dec 2013
Development Penn West's Board of Directors has approved a capital budget of $900 million for 2014, with two thirds of the investment directed toward light oil opportunities resulting in the drilling of 210 net wells. The development program also includes integrated enhanced oil recovery (“EOR”) investments across our core areas. In 2014, Penn West will be transitioning to a more “even-flow” approach to our investment profile during the year. It was certainly true in 2013 and in the past that Penn West might commit as much as half of its annual capital budget in the first quarter – an approach that limits effectiveness, learning transfer and the ability to adjust programs as situations warrant. Generally, in 2014 and in subsequent years, we expect our development capital flow will approximate 25% to 30% of total year spending in quarters one, three and four with the small remainder dedicated to the spring break-up period in the second quarter.
Reserves The reserves estimates have been calculated in compliance with National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities ("NI 51-101"). Under NI 51-101, proved reserves estimates are defined as having a high degree of certainty with a targeted 90 percent probability in aggregate that actual reserves recovered over time will equal or exceed proved reserve estimates. For proved plus probable reserves under NI 51-101, the targeted probability is an equal (50 percent) likelihood that the actual reserves to be recovered will be equal to or greater than the proved plus probable reserves estimate. The reserves estimates set forth below are estimates only and there is no guarantee that the estimated reserves will be recovered. Actual reserves may be greater than or less than the estimates provided herein.
Historical price 13/12/13 Price = 9.10 TSX NYSE 13/12/13 Price = 8.61
Management profile David E. Roberts President and Chief Executive Officer Mr. Roberts brings more than 30 years of operational experience in the upstream oil and gas business most recently as former Executive Vice President and Chief Operating Officer of Marathon Oil Corporation Todd H. Takeyasu Executive Vice President and Chief Financial Officer Todd is a Chartered Accountant with more than 25 years of oil and natural gas industry and public accounting experience. He has been with Penn West since 1994 in various positions Mark P. Fitzgerald Senior Vice President, Development Mark is a Professional Engineer who joined Penn West in 2008. Prior to his current role of Senior Vice President, Development, Mark was Senior Vice President of Production and Senior Vice President of Operations for Penn West.
Risk management at Penn West Penn West is exposed to a group of risks correlated to the activity it promotes in the sector of oil and natural gas production. Commodity price risk, foreign currency risk, credit risk, interest rate risk, liquidity risk, environmental and climate change. The company has got the aim to mitigate these risks throughout business strategies and management controls using determined financial instruments. As at December 31, 2012 and 2011, the only asset or liability measured at fair value on a recurring basis was the risk management asset and liability, which was valued based on “Level 2 inputs” being quoted prices in markets that are not active or based on prices that are observable for the asset or liability.
Hedging at Penn West “Penn West considers price hedging of oil and natural gas production to be a useful tool of risk management. Penn West continues to employ derivative instruments on a portion of its production volumes spanning several quarters into the future. The company also secured hedges to fix the costs of electric power at its oilfield operations, improving its ability to project operating costs, netbacks and cash flows. Penn West is careful and judicious in its hedging activities in order to preserve exposure to commodity price upside and avoid unreasonable opportunity costs”
Commodity price risk • The most important risk to hedge • This kind of risk is managend by using swaps, collars and other financial instruments • Limited to max of 50% of forecast sales volumes for current year plus 1 year forward and up to max of 25% for additional year thereafter.
Credit risk • There is risk if the counterparts does not pay back its obligation • There is Right to recover unpaid receivables by receiving the partner’s share of production where Penn West is the operator • For oil and gas sales, financial derivatives: limit credit risk by transacting only with institutions within credit facility, with high credit ratings, obtaining financial security.
Liquidity risk Liquidity risk is the risk that the Company will be unable to meet its financial liabilities as they come due. Management utilizes short and long-term financial and capital forecasting programs to ensure credit facilities are sufficient relative to forecast debt levels, dividend and capital program levels are appropriate, and that financial covenants will be met. Management also regularly reviews capital markets to identify opportunities to optimize the debt capital structure on a cost effective basis. In the short term, liquidity is managed through daily cash management activities, short-term financing strategies and the use of collars and other financial instruments to increase the predictability of cash flow from operating activities.
Foreign exchange rate risk Prices received for crude oil are referenced to US dollars, thus Penn West’s realized oil prices are impacted by Canadian dollar to US dollar exchange rates. A portion of the Company’s debt capital is denominated in US dollars, thus the principal and interest payments in Canadian dollars are also impacted by exchange rates. When considered appropriate, the Company may use financial instruments to fix or collar future exchange rates to fix the Canadian dollar equivalent of crude oil revenues or to fix US denominated long-term debt principal repayments.
Interest rate risk A portion of the Company’s debt capital is held in floating-rate bank facilities which results in exposure to fluctuations in short-term interest rates which remain at lower levels than longer-term rates. From time to time, Penn West may increase the certainty of its future interest rates by entering fixed interest rate debt instruments or by using financial instruments to swap floating interest rates for fixed rates or to collar interest rates. As at December 31, 2012, four percent of the Company’s long-term debt instruments were exposed to changes in short-term interest rates (2011 – 19 percent). As at December 31, 2012, a total of $1.9 billion (2011 – $2.0 billion) of fixed interest rate debt instruments was outstanding with an average remaining term of 5.5 years (2011 – 6.5 years) and an average interest rate of 5.8 percent (2011 – 5.9 percent), including the effects of interest rate swaps.
Safety, environmental and regulatory risks Penn West is committed to minimizing the environmental impacts of our operations and to involving our stakeholders throughout the exploration, development, production and abandonment phases. Our environmental programs encompass stakeholder communication, impact minimization, resource conservation, and site abandonment and reclamation. Safety is an integral part of Penn West's activities. Safety programs protect not only the Company and its employees, but also friends, families, fellow workers, the public and the environment, from the far-reaching effects of serious accidents. Penn West's senior management is committed to continually improving safety standards, programs, training, awareness – and, most importantly, the safety of its employees and contractor's employees
Overview • Sector: oil, natural gas, natural gas liquids and condensate • In striving to be the lowest-cost natural gas producer • The company plans to continue focusing capital investment in oil and liquids rich natural gas plays, minimizing investment in dry natural gas plays and attracting third party capital investments • In 2013 expectation of liquids production between 50,000 and 60,000 barrels per day • Strong liquidity position: in 2012 $3.2 billion in cash and cash equivalent • Stabledividends • Joint venture with subsidiariesof Mitsubishi Corporation, PetroChina Company Limited and Toyota Tsusho Corporation
Management Doug Suttles President & Chief Executive Officer Before joining Encana, Doug held a number of senior leadership posts at BP, including Chief Operating Officer, BP Exploration & Production, and President, BP Alaska. Doug graduated from the University of Texas at Austin in 1983 with a B.S., Mechanical Engineering. Sherri Brillon Executive Vice-President & Chief Financial Officer She served as Director of the Canadian Chamber of Commerce. Ms. Brillon holds an Economics degree from University of Calgary in 1981. Bob Grant Executive Vice-President, Corporate Development, EH&S & Reserves With over 30 years of experience in the oil and natural gas industry, Bob joined one of Encana’s predecessor companies in 1985. Bob graduated from Dalhousie University with a Bachelor of Science degree in engineering in 1975 and from Nova Scotia Technical College with a Bachelor in mechanical engineering in 1978.
