PWE - Penn West Petroleum

[alertmeipp]

Even the dullest in the shed don't put out a forecast this far below the current price, without a very good reason. And even if the analyst was expressing sour grapes, the report still got through the screening process. Incompetent analyst AND incompetent screening is pretty unlikely.

 

SD

 

Did you read the report? Do you agree with their assumptions?

 

I read the report and I agree with the assumptions. I will sum it up for those who haven't read it.  There is a chance Penn West may violate their debt convents next year and possibly go bankrupt.  For those who deny that this is a real possibility are demonstrating confirmation bias.  They based their report on $65 WTI for 2015.  TD raised their risk rating to "speculative" from "high". 

 

Asset write downs are coming in Q4, perhaps TD got wind of what's coming.

 

The hard part is to forecast how the oil price will go next year and then the next few years after that.

 

Most if not all analysts didn't see this coming, it's comical to see them pretending to know what is going on and yet come up with another predictions.

 

Remember how many analysts think BAC will be nationalized... where are those ppl now? Probably pumping BAC will double next few years.

 

I have seen range from 40-100, if oil trades below 50 for next few, many cos are over. OTOH, if it trades over $100 in next fews, many will go up a few times.

 

It's all speculation, don't kid yourself pretending you have an edge.

 

 

[sys]

I read the report and I agree with the assumptions. I will sum it up for those who haven't read it.  There is a chance Penn West may violate their debt convents next year and possibly go bankrupt.  For those who deny that this is a real possibility are demonstrating confirmation bias.  They based their report on $65 WTI for 2015.  TD raised their risk rating to "speculative" from "high". 

 

Asset write downs are coming in Q4, perhaps TD got wind of what's coming.

 

and $75 out to 2018.  i think most of us would agree that if their predicted environment occurs, there are better uses for our money than canadian e&ps.

[sys]

kilroy, thanks very much for linking those reports.  they are very interesting and useful.

[alertmeipp]

All in to oil consumers if that is true.  8)

 

 

[Uccmal]

Even the dullest in the shed don't put out a forecast this far below the current price, without a very good reason. And even if the analyst was expressing sour grapes, the report still got through the screening process. Incompetent analyst AND incompetent screening is pretty unlikely.

 

SD

 

Did you read the report? Do you agree with their assumptions?

 

I read the report and I agree with the assumptions. I will sum it up for those who haven't read it.  There is a chance Penn West may violate their debt convents next year and possibly go bankrupt.  For those who deny that this is a real possibility are demonstrating confirmation bias.  They based their report on $65 WTI for 2015.  TD raised their risk rating to "speculative" from "high". 

 

Asset write downs are coming in Q4, perhaps TD got wind of what's coming.

 

I dont get your comment about confirmation bias. 

 

TD didn't account for the 355 million that covers the debt due this year, pure and simple.  The price guess is just that, a guess. 

 

Of course PWT can go bankrupt.  I am sure it wont be the first to go.  A few dozen others will go first.  At that point the pricing may have changed. 

[Guest 50centdollars]

http://fivethirtyeight.com/features/the-conventional-wisdom-on-oil-is-always-wrong/

[kevin4u2]

 

I dont get your comment about confirmation bias. 

 

 

Let me quote Henry David Thoreau, "It's not what you look at that matters, it's what you see."

 

 

TD didn't account for the 355 million that covers the debt due this year, pure and simple.  The price guess is just that, a guess. 

 

 

No offence, but TD does take the $355 million into account.  If you look at the TD report Exhibit 7, CF Statement, CF from Net Acquisitions, it is $570 million.  If you read the Q3 financial statement it says lists property dispositions on the CF statement at $215 million. 

 

Look at that virginia, $570 million (TD YE estimate) - $215 (Q3 Actual) and you get... wait for it I have to get my calculator... $355 million. 

 

 

[alertmeipp]

http://fivethirtyeight.com/features/the-conventional-wisdom-on-oil-is-always-wrong/

 

I think people were wrong because even though in long term, price will be dictated by supply and demand. In short to med term, there are just too many variables to consider. The good thing is you cannot recycle oil and replacing oil will take a long time.

 

 

If you want to be in oil for long term, find the low cost producers with excellent execution and balance sheet.

 

If you think oil will bounce back in a few months, buy the most leveraged with good assets and check back this time next year. As mentioned by many, it's much like options on oil price.

 

Or go short and go in oil consumers if you're bearish on oil.  Anyone actually did that earlier in the year?

 

[Uccmal]

 

I dont get your comment about confirmation bias. 

 

 

Let me quote Henry David Thoreau, "It's not what you look at that matters, it's what you see."

 

 

TD didn't account for the 355 million that covers the debt due this year, pure and simple.  The price guess is just that, a guess. 

 

 

No offence, but TD does take the $355 million into account.  If you look at the TD report Exhibit 7, CF Statement, CF from Net Acquisitions, it is $570 million.  If you read the Q3 financial statement it says lists property dispositions on the CF statement at $215 million. 

 

Look at that virginia, $570 million (TD YE estimate) - $215 (Q3 Actual) and you get... wait for it I have to get my calculator... $355 million. 

 

 

 

Save your sarcasm for somewhere else.

 

TD has not counted the debt properly.  Try reading the actual company reports. 

[cwericb]

“Save your sarcasm for somewhere else.”  Agreed, this isn’t Stockhouse.

 

On the subject of analysts, I couldn't help but notice that a number of them downgraded FFH just a couple of days before share price popped by over $100 last month. Nice call.

[SharperDingaan]

We need to recognize that the reports are marketing pieces; names are the same - but timeframes differ. $65 average selling price does not automatically mean $65 for every month of 2015, $55 for Q1 and $75 for Q4 produces the same $65 average.

 

3 months out a lower share price is a good possibility; not sure that $0.70/share is reasonable. But 50% off to $1.10-$1.25 does not seem at all unrealistic - if prices stay at $50-$60, there is a big write-down, & dividend & capex get cut again. The perfect storm is the expected Q4 write-off, not what has just occurred.

 

1 year out its pretty hard to see why the oil price would not be higher, & why PWE would not be at $4 or higher. Commodity pissing matches don't last forever, & a global accommodation will be reached; whether existing players like it or not. Nobody is going to want to go a rematch until the damage is healed up.

 

None of us has a crystal ball - hence prices of $0.70, or $4.00, are at best a WAG (Wide Assed Guess); don't shoot the messengers for attempting to put numbers around it. As the carnie barker says ... yous pays your moneys and takes your chances.

 

In Real Estate you make your real money when you buy, the actual sale is just a liquidity event. I would put it to you that we are seeing exactly the same thing here.

 

SD

 

[undervalued]

http://fivethirtyeight.com/features/the-conventional-wisdom-on-oil-is-always-wrong/

 

I think people were wrong because even though in long term, price will be dictated by supply and demand. In short to med term, there are just too many variables to consider. The good thing is you cannot recycle oil and replacing oil will take a long time.

 

 

If you want to be in oil for long term, find the low cost producers with excellent execution and balance sheet.

 

If you think oil will bounce back in a few months, buy the most leveraged with good assets and check back this time next year. As mentioned by many, it's much like options on oil price.

 

Or go short and go in oil consumers if you're bearish on oil.  Anyone actually did that earlier in the year?

 

Airlines will be doing great in this oil price. I am still holding my AAL which helps offset my holdings in SD and XCO.

[plato1976]

How long will PWE sustain in this oil price env ($50-) before it breaks some covenants?

Anyone seriously investigated?

 

 

http://fivethirtyeight.com/features/the-conventional-wisdom-on-oil-is-always-wrong/

 

I think people were wrong because even though in long term, price will be dictated by supply and demand. In short to med term, there are just too many variables to consider. The good thing is you cannot recycle oil and replacing oil will take a long time.

 

 

If you want to be in oil for long term, find the low cost producers with excellent execution and balance sheet.

 

If you think oil will bounce back in a few months, buy the most leveraged with good assets and check back this time next year. As mentioned by many, it's much like options on oil price.

 

Or go short and go in oil consumers if you're bearish on oil.  Anyone actually did that earlier in the year?

 

Airlines will be doing great in this oil price. I am still holding my AAL which helps offset my holdings in SD and XCO.

[SharperDingaan]

How long will PWE sustain in this oil price env ($50-) before it breaks some covenants?

Anyone seriously investigated?

 

This cannot be done right now as we don't know what assets will be shut in at the lower price level. Most would expect that at $55, net of sale proceeds and additional write-downs to $55, they will be stretched. The cure is additional reduction of capex, staff cuts, & a debt covenant eliminating the remaining dividend in favour of additional interest coverage. The why everyone in Calgary is so nervous.

 

If you believe that oil will be back at $65 within 3 months, & there will be no additional year-end write-downs, PWE looks pretty good.

 

Otherwise, not so much. This is where you learn patience, & the true value of cash.

 

PWE is just an oil coy, & the opportunity is NOT unique.

 

SD

 

[biaggio]

From their last quarterly report

 

The main covenant in the senior notes is the senior debt to EBITDA threshold of 3:1. Is this right?

 

LTD= $2192million less $355=$1.837b

 

my ebitda calculation is ~$1.1B at $65 per barrel (in Canadian $)

 

 

 

 

[SmallCap]

One of the most significant investing mistakes I ever made was investing in a company that was going through a rough patch. They lost 25% of their client base and finances were getting tight as you can imagine. My assessment was that they had recently sold a lot of equity in order to restructure their LT debt setup. They reduced their LT debt, didn't have anything due for 5 years and all the covenants were not in any danger. I assumed based on this that the management who I took to be smart guys would have the necessary leeway in order to downsize/find new clients and get the business back to profitability. Insiders were buying and some very smart Money managers were buying significant chunks. They even were still paying a dividend. Funny thing, they announced a dividend 3 weeks before they announced bankruptcy.

 

What I missed is not understanding just how significant their vendors were in providing them credit and how thin the ice was that they were on getting credit from the vendors in order to continue operations. The vendors cut off their credit and the company went belly up so fast. The interesting thing is that I don't think I could have seen this coming from looking at the financials because they don't tell what is needed to keep the business running. I studied that balance sheet and debt agreements so thoroughly and it turns out I was looking at the wrong thing.

 

Now let me relate this back to PWE.

 

I have been thinking about PWE in relation to oil prices (hard not to) and if oil prices go back up then everything is probably rosy. I have just been realizing how little I can tell about where oil is going to be in the future so I have been trying to get those thoughts, "if oil was at ____ then..."

 

If the price of oil is $10 or $10,000 per barrel there will still be oil companies profitably extracting it out of the ground. right now everyone is in a tizzy and companies are unprofitable because of the drastic change in the price of oil. But I am confident that once the price of oil stabilizes at what ever it will stabilize at, that there will be oil companies profitably removing it from the ground. I don't know where it will stabilize or when it will stabilize but I am sure it will stabilize.

 

back to my thinking on PWE, it's not about the price of oil but about does PWE have the necessary financial flexibility in order to give them enough time to restructure and re-size the business for the new price environment?

 

I see three threats to my investment.

1. bankruptcy

2. dilution through selling of more equity

3. management selling out at a low price (I really don't think much about this one because i can't anticipate it in any way)

 

My thinking is that while I don't know the time frame, if PWE is able to stick around long enough then it doesn't really matter what prices will be, PWE will be able to make a profit.

 

But what could cause Bankruptcy or the need for dilution ?

 

This is very naive thinking on my part and an oversimplification but if oil drops more or stays down then they can stop drilling and downsize the overhead of the business and just watch their BOE/D drop, and their revenue with it, shuting in production as it becomes unprofitable, pumping out of existing wells while they are profitable. I know that is an oversimplification. And that strategy just might work if they didn't have any debt but of course they do. So the question is how far can they go with that strategy while still maintaining the debt.

 

I know this has been rambling but I am trying to figure out what are the circumstances and probabilities of either bankruptcy or dilution.

[plato1976]

Today I look through the list of Canadian oil companies

PWE is definitely the most leveraged - it ranks at the high end but near the middle

But it's certainly one of the hardest hit picks

I don't have a reason - maybe b/c they have ZERO hedge in place? Not sure if this can justify...

 

 

One of the most significant investing mistakes I ever made was investing in a company that was going through a rough patch. They lost 25% of their client base and finances were getting tight as you can imagine. My assessment was that they had recently sold a lot of equity in order to restructure their LT debt setup. They reduced their LT debt, didn't have anything due for 5 years and all the covenants were not in any danger. I assumed based on this that the management who I took to be smart guys would have the necessary leeway in order to downsize/find new clients and get the business back to profitability. Insiders were buying and some very smart Money managers were buying significant chunks. They even were still paying a dividend. Funny thing, they announced a dividend 3 weeks before they announced bankruptcy.

 

What I missed is not understanding just how significant their vendors were in providing them credit and how thin the ice was that they were on getting credit from the vendors in order to continue operations. The vendors cut off their credit and the company went belly up so fast. The interesting thing is that I don't think I could have seen this coming from looking at the financials because they don't tell what is needed to keep the business running. I studied that balance sheet and debt agreements so thoroughly and it turns out I was looking at the wrong thing.

 

Now let me relate this back to PWE.

 

I have been thinking about PWE in relation to oil prices (hard not to) and if oil prices go back up then everything is probably rosy. I have just been realizing how little I can tell about where oil is going to be in the future so I have been trying to get those thoughts, "if oil was at ____ then..."

 

If the price of oil is $10 or $10,000 per barrel there will still be oil companies profitably extracting it out of the ground. right now everyone is in a tizzy and companies are unprofitable because of the drastic change in the price of oil. But I am confident that once the price of oil stabilizes at what ever it will stabilize at, that there will be oil companies profitably removing it from the ground. I don't know where it will stabilize or when it will stabilize but I am sure it will stabilize.

 

back to my thinking on PWE, it's not about the price of oil but about does PWE have the necessary financial flexibility in order to give them enough time to restructure and re-size the business for the new price environment?

 

I see three threats to my investment.

1. bankruptcy

2. dilution through selling of more equity

3. management selling out at a low price (I really don't think much about this one because i can't anticipate it in any way)

 

My thinking is that while I don't know the time frame, if PWE is able to stick around long enough then it doesn't really matter what prices will be, PWE will be able to make a profit.

 

But what could cause Bankruptcy or the need for dilution ?

 

This is very naive thinking on my part and an oversimplification but if oil drops more or stays down then they can stop drilling and downsize the overhead of the business and just watch their BOE/D drop, and their revenue with it, shuting in production as it becomes unprofitable, pumping out of existing wells while they are profitable. I know that is an oversimplification. And that strategy just might work if they didn't have any debt but of course they do. So the question is how far can they go with that strategy while still maintaining the debt.

 

I know this has been rambling but I am trying to figure out what are the circumstances and probabilities of either bankruptcy or dilution.

[kilroy04]

Debt to equity as of Q3 sat about in the middle (30% ish) according to that compilation.  That number could change if there are major write downs. (I would guess that is likely)

 

No hedging.  Canadian oil sands also didn't hedge - one of the bigger hits to market cap as well.

[SharperDingaan]

We know their reserves were calculated @ 65/bbl, & that it is not realistic.

It is highly likely that reserves will be recalculated at $45-55/bbl, & the resultant write-downs will materially affect the SCFP.

It is hard to see how they will NOT breach covenants. So assume they do ... & the cost is further capex reduction & zero dividend.

It is a desirable player, so .... assume SCFP restructuring over BK, & dilution to avoid a take-out.

 

There is nothing wrong with waiting to see how their year-end numbers look. Only an idiot tries to pick up dimes ahead of a bull-dozer.

 

SD

[alertmeipp]

Of coz,  just make sure  bull dozer is coming

[kilroy04]

David Roberts: Jan 22 Whistler Conf Q and A (no formal presentation)

 

Covenants are an issue for both the bonds and undrawn lines.  They are working on it.  Sooner the resolution the better (CFO wasn't there because he was working on it).  He thinks it makes more sense for the company to be a going concern noting they have 500m barrels of oil in the ground that has value.

 

$50 WTI doesn't work for anybody.  Thinks we'll see $55 for this year (i.e. a later bounce) and $70 then $80 in subsequent 2 years

Doesn't see this as 1986 but did not explain why

Eluded that he thinks this market is a deliberate test and doesn't think it was directed at US shale - stated it was only his opinion

They will be rational about capital with a revisit after the spring thaw  (this came up in a discussion re eliminating dividend - it's clear that's not where he would choose to go)

 

Company culture change: 1) It's about making money - not barrels of oil 2) Work in progress of shifting to bottom up decision/management as opposed to top down. They are now best in class in drilling for their 3 major fields

 

Comes across as rational, a true expert, comfortable, and very credible.  It was about the business and not him.

[kilroy04]

For those who don't know, Dave Roberts is the CEO of PennWest

 

He also noted that because of the environment, they are able to hire talent.

 

I don't know what the resolution to their covenants will be but it's hard to think there won't be some agreement other than BK

[Uccmal]

David Roberts: Jan 22 Whistler Conf Q and A (no formal presentation)

 

Covenants are an issue for both the bonds and undrawn lines.  They are working on it.  Sooner the resolution the better (CFO wasn't there because he was working on it).  He thinks it makes more sense for the company to be a going concern noting they have 500m barrels of oil in the ground that has value.

 

$50 WTI doesn't work for anybody.  Thinks we'll see $55 for this year (i.e. a later bounce) and $70 then $80 in subsequent 2 years

Doesn't see this as 1986 but did not explain why

Eluded that he thinks this market is a deliberate test and doesn't think it was directed at US shale - stated it was only his opinion

They will be rational about capital with a revisit after the spring thaw  (this came up in a discussion re eliminating dividend - it's clear that's not where he would choose to go)

 

Company culture change: 1) It's about making money - not barrels of oil 2) Work in progress of shifting to bottom up decision/management as opposed to top down. They are now best in class in drilling for their 3 major fields

 

Comes across as rational, a true expert, comfortable, and very credible.  It was about the business and not him.

 

I listened to it last week after he presented.  I too was impressed with his straightforward manner. 

 

I figure they will just ask their debt holders to adjust the covenants.  I am not sure the line of credit providers will be so forgiving, though.  I was looking at the situation with Connacher O&G today.  Their market cap is 18 million with 500 m shares.  They just issued 1 billion shares to their debt holders to kill some of their debt.  I dont think PWT will need to be that dramatic.  They are being fairly proactive about it, so we will see soon enough. 

 

 

[kilroy04]

Good news is they report their credit syndicate as essentially undrawn as of early January.  Getting diluted out with warrants or share issuance is possible.....  And previous management issued a ton of shares so this probably hangs over PWE. With no particular insight - things don't seem that dire yet.

[bbarberayr]

Write up in the Globe and Mail from the Contra the Heard:

 

http://www.theglobeandmail.com/globe-investor/inside-the-market/when-budgeting-assumptions-go-awry-face-them-dead-on/article22757906/