PWE - Penn West Petroleum

[investor-man]

This is just like the old days on the BAC thread....

 

Yesterday, I thought about adding that we still needed some posts about:

1) I'm waiting for the next 30% decline before the bottom

2) It's a black box, how can you value it?

 

Well... deja vu.

 

I'm new to the board. Did you guys go into BAC before or after Buffett got involved? There's nobody like that to follow into this -- not that I don't respect people on the board but following Buffett is kind of a no brainer

[ItsAValueTrap]

I agree with Kevin... the sane way of valuing these assets is by doing your homework and trying to figure out their Net Present Value.

 

Just curious, have you ever used said sane way of valuing assets and identified a long opportunity? I've never really seen you mention a resource company as a long and you appear to be quite knowledgeable and have read your mining textbooks and know a lot about lots of companies.

 

The correct answer may be there are none because you don't go looking for a wife in a whorehouse (to continue my misguided analogy) and that's kind of been my view given I've only ever bought 2 (3 if you count BP)

 

But let's say someone was very bullish on oil or copper or whatever and hired you to buy five stocks to express their view. Which would you buy? Thanks.

 

Mining companies publish the NPV of their deposits.  For oil and gas companies, they publish the 'standardized measure' of their reserves.  That's basically a NPV calculation.

 

I haven't found it that useful because you don't know if the figure is honest.  Most of the time it isn't.

 

For Altius Minerals (there's a writeup on my blog) I did a very quick and dirty NPV calculation of what the Kami royalty was worth.  Eventually I realized that Kami was not economic due to falling iron ore prices.  Luckily for me, I had great timing when I sold.  I will never know if my calculations were sane unless the Kami mine gets built... so it's hard to say if my calculations were any good or not.

 

2- Honesty and talent are the two most important things.  In the long run, I think that they will overpower your entry/exit price.

 

On the long side, you figure out who has both.  Then buy their shares if the company is buying back shares because it thinks that they are undervalued.  Look at their past history to make sure that they do not buyback shares when they are high and stop buying when the share price is low.

 

On the short side, the industry is dominated by crooks and scumbags.  Of those people, you figure out the ones who are really incompetent at running a E&P or are actively stealing the from the company.  Look for massive headwinds that will eventually crush the company.  Valuation doesn't matter as much, but only short the overvalued companies.

 

If the company has a history of value destruction, then P/B is an ok proxy for valuation.  The critical assumption is that management is inflating book value.  (Book value can be understated if the company doesn't do shale and uses successful efforts.)  Looking at free cash flow is more important than P/B.

 

It's easier to figure out shorts than it is to go long.

 

3- The big picture is that underlying assumptions have a huge effect on the NPV of a company's reserves.  My NPV calculations are generally back-of-the-envelope.

[ERICOPOLY]

This is just like the old days on the BAC thread....

 

Yesterday, I thought about adding that we still needed some posts about:

1) I'm waiting for the next 30% decline before the bottom

2) It's a black box, how can you value it?

 

Well... deja vu.

 

I'm new to the board. Did you guys go into BAC before or after Buffett got involved? There's nobody like that to follow into this -- not that I don't respect people on the board but following Buffett is kind of a no brainer

 

That too...

 

Truth is, Buffett can't tell us how long oil will go down.  Nobody knows.

 

The upside to that is this is an asymmetrical payoff on an outcome that nobody can predict.  The cure to low prices is low prices though.  We just need the "how long" to be right, but nobody knows.  So you aren't competing against anyone with better information.

[ItsAValueTrap]

But let's say someone was very bullish on oil or copper or whatever and hired you to buy five stocks to express their view. Which would you buy? Thanks.

 

Buy the commodity futures and throw on tiny short positions of some of the inverse ETFs.  I'm serious!!

 

I find it very difficult to find good commodity longs.  The management teams are really, really bad.  Much worse than other industries.  Too many people behind resource stocks are trying to scam investors.

 

2- Sometimes you have to have the discipline to own nothing.  Buffett knows a lot about investment banks.  He worked at Solomon Brothers for a few months.

 

There have been long stretches of time where Buffett did not buy or sell anything relating to investment banks.

 

3- There aren't too many long opportunities in commodity stocks right now.  Things that I own or interest me right now:

KMI warrants

Kobex Capital

Ryan Gold.  Bad management (though better than their peers).  But... I'm attracted to cigar butts.  I don't own this at the moment.

KIROY / Kumba Iron ore (I never owned it)

 

That's it.  My list is very small and I would not load the boat on any of those stocks. 

 

Kobex and Ryan Gold aren't even commodity stocks.  I only like them because they are sitting on fat stacks of cash and trade at a discount.  KMI has low sensitivity to commodity prices.  It is sensitive to the demand for new infrastructure.

[thepupil]

But let's say someone was very bullish on oil or copper or whatever and hired you to buy five stocks to express their view. Which would you buy? Thanks.

 

Buy the commodity futures and throw on tiny short positions of some of the inverse ETFs.  I'm serious!!

 

I find it very difficult to find good commodity longs.  The management teams are really, really bad.  Much worse than other industries.  Too many people behind resource stocks are trying to scam investors.

 

2- Sometimes you have to have the discipline to own nothing.  Buffett knows a lot about investment banks.  He worked at Solomon Brothers for a few months.

 

There have been long stretches of time where Buffett did not buy or sell anything relating to investment banks.

 

3- There aren't too many long opportunities in commodity stocks right now.  Things that I own or interest me right now:

KMI warrants

Kobex Capital

Ryan Gold.  Bad management (though better than their peers).  But... I'm attracted to cigar butts.  I don't own this at the moment.

KIROY / Kumba Iron ore (I never owned it)

 

That's it.  My list is very small and I would not load the boat on any of those stocks. 

 

Kobex and Ryan Gold aren't even commodity stocks.  I only like them because they are sitting on fat stacks of cash and trade at a discount.  KMI has low sensitivity to commodity prices.  It is sensitive to the demand for new infrastructure.

 

thanks, so in sum, very few are wife material.

[Uccmal]

This is just like the old days on the BAC thread....

 

Yesterday, I thought about adding that we still needed some posts about:

1) I'm waiting for the next 30% decline before the bottom

2) It's a black box, how can you value it?

 

Well... deja vu.

 

I'm new to the board. Did you guys go into BAC before or after Buffett got involved? There's nobody like that to follow into this -- not that I don't respect people on the board but following Buffett is kind of a no brainer

 

That too...

 

Truth is, Buffett can't tell us how long oil will go down.  Nobody knows.

 

The upside to that is this is an asymmetrical payoff on an outcome that nobody can predict.  The cure to low prices is low prices though.  We just need the "how long" to be right, but nobody knows.  So you aren't competing against anyone with better information.

 

See the start date of this thread.  There was another before it for a few months.  I was in BAC a year before Buffett.  It was after Buffett, During TAX LOSS season that BAC reached $5.00 when I bit my tongue and really added. 

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/bac-wt-bank-of-america-warrants/

 

PennWest is a big company.  It is not going out of business.  They just sold 5-6% of production for 350 Million.  That gives me a 6 B plus value for the total existing production.  That Does not include reserves on the land they have drilling rights for, if any exist at all. If the non pumping land is worthless then the sale value of the company may be around 4 B after debt.  4 B = $8.00 per share minimum if it were sold.  Stock price is less than $4.00.  If someone offered $8.00 per share tomorrow for the whole company I would likely 3x/4x my money overnight. 

 

I dont disagree completely with Kevin42u's analysis.  The company was on an unsustainable path prior to the present managers.  It would have been in deep trouble, if the oil plunge had happened last year.  Right now the optics are clouded by the low oil price, the restatement, such as it was, and the turnaround efforts.  The debt level is high but the debt service is pretty cheap. 

 

My bet is that present management is better than most other companies out there.  Either Rick George, and Roberts are really stupid for investing 10'M between them in this company in the last 18 months, or they are really convinced they can out scam the scammers.  Or maybe they are better operators and legit. 

 

So my bet is now asymmetric, the way I like them. 

 

 

[Uccmal]

This is just like the old days on the BAC thread....

 

Yesterday, I thought about adding that we still needed some posts about:

1) I'm waiting for the next 30% decline before the bottom

2) It's a black box, how can you value it?

 

Well... deja vu. However, I felt better about BAC. And points 1&2 above are perhaps valid this time (in the case of BAC it was years after the crisis and books had been scrubbed)

 

I too like Banking much better than commodities but It will be decades before we see another opportunity like that in banks. 

[ItsAValueTrap]

If you put in a lot of work, you could probably build a reasonable discounted cash flow model / figure out the NPV of the assets.

 

1- For some reason the filings on SEDAR talk about shut-in wells.  This is a bad sign if the company is shutting in wells that were only recently drilled.  This would suggest that the wells have low margins and have terrible economics.

 

The low margins really hurt when commodity prices decline.

 

2- Production dropped by roughly a quarter year-over-year, though that's partly due to asset dispositions.  With more work, you can figure out current decline rates.  If you research other wells in the area and look at production records (sometimes these are publicly accessible), you can make a guess about likely decline rates.  Because shale is new, it's hard to predict terminal decline rates.

 

3- Read through any technical/engineering reports.

 

4- If they have joint venture partners and assets with previous owners, it's well worth the effort to look into what other people think about the assets.

 

5- Their annual information form has NPV figures on page A3-4.

 

Proved reserves including non-producing and undeveloped reserves have a NPV of $5,895 at a 10% discount rate at forecasted commodity prices.  Of course that number may be inflated.  This is as of YE2013 and doesn't include asset sales, new wells brought online, etc.

 

5b- Their forecasted prices may be total bull****.  They do not resemble the forwards curves of the futures market.  See page A3-8.

 

I pretty much think that Sproule are a bunch of engineering whores.

 

[peter1234]

Like you say, oil could stay down and this is a zero.  I got interested in the sector after reading the recent interview of a man who has seen a lot of these cycles -- T. Boone Pickens.  Explains that $100 oil in 12 months wouldn't surprise him.

 

The other one is Hamm who put his money where his mouth is and has removed all edges. He is one of the fathers of the current shale oil "revolution" and he recently explained his move a bit better: basically OPEC (including saudis) are all talks (their reserves are probably super inflated and their total prod has peaked a while ago..., along with the rest of conventional world production), oil prices will have to come back within next year...

 

Would you guys mind posting links to the interviews you read? TIA

 

Here is one with Pickens at our favorite show Mad Money with Cramer...

http://www.marketwatch.com/story/oil-tycoon-t-boone-pickens-predicts-return-to-100-a-barrel-2014-12-02

 

Can't find find the link to the interview, I believe it was on Dec 4. Pickens basically said he had seen so many of these cycles in 50 years and thinks oil will get back to $100 within 12-18 months.

 

[meiroy]

ItsAValueTrap,

 

Thank you for your thoughts. I have no idea where this company is going but always good to see some negative thoughts on companies.  IMHO commodities will keep going down for awhile if for the single reason they got to where they were due to China which is starting to adjust now, while various Commodities CEOs are talking BS how it will all get better. Low prices is indeed a cure for low prices just as high prices is a cure for high prices but it can take quite awhile. Gold will keep going down as well, I'll take a look when it goes again below 900...  Oil is somewhat different but it does seem to be partially secular not just because of shale but due to the solar/battery revolution which is already happening. Can anyone look at it and decide if the problem is temporary or permanent? If not it's speculation. Some big companies will definitely go down, being big won't help them. Could be an interesting hedge to auto companies. Pent up demand + Cheap Oil vs. Rising Oil.

[Uccmal]

Who else here has been trying to buy the 2*2017 PWE Calls? 

 

Maybe we should alternate.  Is it legal to suggest that, or do it for that matter?

[AtlCDore]

Who else here has been trying to buy the 2*2017 PWE Calls? 

 

Maybe we should alternate.  Is it legal to suggest that, or do it for that matter?

 

I think if you were to operate as a group or multiple individuals and collectively own 5% then you would have to file.  In this instance, I would think it is legal.

[vinod1]

Who else here has been trying to buy the 2*2017 PWE Calls? 

 

Maybe we should alternate.  Is it legal to suggest that, or do it for that matter?

 

Sorry Uccmal. I had a bid first at $0.85 then chased it all the way up to $1 until it got filled. I am not going to chase it anymore.

 

Vinod

[fareastwarriors]

Oil’s Slump Puts Canada Aquistions Streak on Ice

 

 

http://www.bloomberg.com/news/2014-12-08/oil-s-slump-puts-canada-aquistions-streak-on-ice.html

[Uccmal]

Who else here has been trying to buy the 2*2017 PWE Calls? 

 

Maybe we should alternate.  Is it legal to suggest that, or do it for that matter?

 

Sorry Uccmal. I had a bid first at $0.85 then chased it all the way up to $1 until it got filled. I am not going to chase it anymore.

 

Vinod

 

Lol, thought there might be somebody on the board. 

[yzstevie]

Does anyone know the email address of Dave Roberts?  I would like to send him an email suggesting the following.  Stop the dividend next year and use the money saved from the dividend to buy back stock opportunistically.  This exercise should dramatically enhance shareholder value compared to simply paying out the dividend, as the share price now is extremely distressed, and the company's much improved operating performance and financial position offer a considerable margin of safety in doing so.  Anyone can think of an idea to push management to do this? 

[Uccmal]

Does anyone know the email address of Dave Roberts?  I would like to send him an email suggesting the following.  Stop the dividend next year and use the money saved from the dividend to buy back stock opportunistically.  This exercise should dramatically enhance shareholder value compared to simply paying out the dividend, as the share price now is extremely distressed, and the company's much improved operating performance and financial position offer a considerable margin of safety in doing so.  Anyone can think of an idea to push management to do this? 

 

I would think they are aware if the options.  Cutting the dividend to save money is okay, but buybacks for an oil company - absolutely not - total waste of money.  Its a small oil company.  They pay their people in stock.  Oil companies above all need the discipline a dividend enforces. 

[yzstevie]

Does anyone know the email address of Dave Roberts?  I would like to send him an email suggesting the following.  Stop the dividend next year and use the money saved from the dividend to buy back stock opportunistically.  This exercise should dramatically enhance shareholder value compared to simply paying out the dividend, as the share price now is extremely distressed, and the company's much improved operating performance and financial position offer a considerable margin of safety in doing so.  Anyone can think of an idea to push management to do this? 

 

I would think they are aware if the options.  Cutting the dividend to save money is okay, but buybacks for an oil company - absolutely not - total waste of money.  Its a small oil company.  They pay their people in stock.  Oil companies above all need the discipline a dividend enforces.

 

I agree that generally it's good to have the discipline to be paying stable dividends for oil & gas companies, but right now the situation is very special, and warrants an out-of-the-box response to actually take advantage of the situation to create shareholder value.  PWE's current management is disciplined enough to spend the company's cash prudently, and they now have the opportunity to purchase its stock at a massive discount to its intrinsic value.  I do believe the company has the financial and operating power to withstand a prolonged low oil price, and by using the quarterly dividends to buy back the stock at this level can create great value for shareholders and the company.  The company can simply reinstate the dividend when the stock trades at a fairer level. 

[Guest wellmont]

i don't think companies like pwt think "that way"...like how a value investor or p/e investor would look at their capital allocation decision and options. what they are doing now is decidedly old fashioned: rewarding widows and orphans, and Canadian pensioners with a return of their capital for "sticking with them" through hard times. like lots of investors they got more bullish as energy prices went up. they took off hedges maintained dividend, ended up with limited financial flexibility. they weren't prepared for approaching storms. the assets may be there. but often asset plays can be value traps.

[ItsAValueTrap]

PWE is probably trying to raise more capital so that insider salaries go up.  More capital also ensures that their jobs will last a longer time.

 

They don't want to cut the dividend because they think that the stock will tank.  In the past, PennWest was marketed towards dividend-chasing investors.

[Cardboard]

Anyway, for those who fear a dividend cut and its impact on the stock price, then please take a look at Baytex today. While energy stocks rebounded, it is still surprising that this one went up.

 

Sometimes, the stock market it seems, really has these things priced in.

 

Cardboard

 

 

[plato1976]

priced in?...

 

btw, anyone alive here?

 

Anyway, for those who fear a dividend cut and its impact on the stock price, then please take a look at Baytex today. While energy stocks rebounded, it is still surprising that this one went up.

 

Sometimes, the stock market it seems, really has these things priced in.

 

Cardboard

[Cardboard]

Well, I guess I should re-phrase that... Based on Baytex move yesterday, the dividend cut is priced in. However, the bankruptcy of Penn West is not fully priced in yet...

 

Cardboard

[alertmeipp]

This is all oil price driven for now.

 

The market is so focus on bad news right  now. It is unreal.

 

 

[Viking]

It looks like we are experiencing a full fledged panic in the oil market. Investors just want out of the sector. Now. The question is does this morph into something bigger. So much for the Christmas  stock market rally this year!