PWE - Penn West Petroleum

[Packer16]

The interesting thing about PWE is the debt is trading near par versus at less than 80 for most other distressed names.

 

Packer

[thepupil]

The interesting thing about PWE is the debt is trading near par versus at less than 80 for most other distressed names.

 

Packer

 

I looked into this back in the fall/winter. The debt doesn't really seem to "trade" at all and is not in dealer runs from the trading desks at the U.S. Investment banks. If you are looking at Bloomberg, those might be stale or unrealistic marks. If you are getting an actual quote from a dealer, then that is interesting. I asked around here if anyone knew anyone at a Canadian desk that traded them, but that didn't get anywhere.

[Packer16]

It is from Bloomberg so it would be interesting if anyone at a desk has a recent trade.

 

Packer

[SharperDingaan]

Its consistent with what you would expect, & reflects their coverage ratios.

 

SD

 

 

[dutchman]

SharperD have you been adding to your position ?  Anything shaken your confidence in their survivability ?  Thanks

[SharperDingaan]

We added a modest trading overlay at the ultra-low prices.

By the end of next week we will know if we were right  ;)

 

SD

[Liberty]

We added a modest trading overlay at the ultra-low prices.

By the end of next week we will know if we were right  ;)

 

SD

 

What is your average cost on PWE?

[SharperDingaan]

Well under $C 2.00.

Courtesy of starting our hedges after the Feb run-up, and the generosity of all the short folks out there.

 

SD

 

[Liberty]

Thanks.

[Uccmal]

Earnings Release:

 

http://pennwest.mediaroom.com/index.php?s=27585&item=135253

 

They aren't making any headway on the debt with crude prices during the entire second quarter, let alone now.  Today it is costing them more to operate than they are making.

 

 

[SmallCap]

Earnings Release:

Today it is costing them more to operate than they are making.

 

I am trying to figure out if it's possible for them to fix this by changing the way they are operating through sizing working capx to fit the current pricing environment or is it only fixable by oil prices being higher.  I know higher oil prices could fix it but trying to figure out if they have enough time to fix operations before it goes under at these oil prices.

[SharperDingaan]

Look closer at P16, & P2:

 

Consequently, the Company is updating its funds flow from operations guidance range from $500 - $550 million to $350 - $400 million. Funds flow from operations was 151M for 1H; to get to 375M on the year, 2H flow (resulting from what they control) must be 224M. It is highly likely that the 73M difference is the July 2015 Power Point 200M of expected annual opex reduction kicking in. You do not see it this quarter, because it does not start until next quarter.

 

Look closer at P12:

 

The gain on asset dispositions (95M) in the second quarter of 2015 related to the Company’s royalty disposition and other non-core asset dispositions which were closed in the period. During the second quarter of 2015, Penn West reduced goodwill by $28 million as a result of a portion of goodwill being allocated to non-core property disposition.

 

Whatever they sold had a gross gain of 123M. The language also very clearly distinguishes between royalty & other dispositions (plural). We know there was a minor asset disposition for around 54-74M (If memory serves), but it is highly unlikely that these two sales together generated a 123M gain. It looks like there was another (& sizeable) disposition, agreed to in Q2 that is going to settle sometime in the 2H. What are the odds it’s Spear Point?

It would seem there are more announcements to come, and that by end of Q3 they will have met the agreed dividend restriction. What are the odds that the Q3 dividend declaration is going to be for more than 1c/share?

 

Management is clearly getting its ducks in order.

 

SD

 

[Cardboard]

"What are the odds that the Q3 dividend declaration is going to be for more than 1c/share?"

 

I would say none even if they achieve the $650 M asset disposition target which is highly likely by that time IMO.

 

Reason being that they are still planning to outspend fund flows from operations on Capex. So raising the dividend would not make sense or deviating from sustainability goals. It was kept at $0.01 per quarter or about the lowest level possible to keep in dividend investors such as indexers or to avoid more pressure on the stock. Current yield is also not insignificant with the price having dropped so much.

 

What is more important than the dividend is progress being made by the company:

- Operating cash costs are down 25% year over year.

- Well drilling and completion costs are down 20% in the Cardium and 15% in the Viking.

- Higher use of technology or devices such as reclosable sleeves in the wells to improve production which was first discussed by Crescent Point earlier this year or the perceived leader in Canada for technology usage.

- They moved from a large working capital deficit to neutral or a debt reduction if you will of $275 million.

- Production is flat or at guidance and the liquid content is going up or now at 69%.

- Higher netback production or from increasing light oil production in two of the lowest cost areas of North America.

- Still well within debt covenants or Senior debt to EBITDA at 3.2 times vs 5.0 limit. $700 million available out of $1.2 billion on credit facility.

- 20% of liquid production hedged at $70.40 - $72.57 CDN for the rest of this year. So keep upside with some protection at higher prices than current.

- Debt coming down slowly. Oil prices improvement would surely help on that front. As the $650 million gets done and with some luck on the oil price, fire sale pressure will abate and it will become much easier to take it down. Once it crosses the $2 billion net debt level, I think that we will see a change in investors attitude.

 

Cardboard

 

 

 

[newbee]

SD,

your quote "It is highly likely that the 73M difference is the July 2015 Power Point 200M of expected annual opex reduction kicking in". Where is this discussed? Can you please show me some pointers.

Also, what do you think about the hedging. They hedged only 12,500 bbls/d.(1/4 of the crude) and as per the CC they are comfortable with the hedging for 2H2015. Wouldn't be prudent to hedge most of the crude at that price till balance sheet issues are resolved? Can you please comment?

Thanks in advance.

[Uccmal]

Cardboard/SD,

 

A dividend increase is years away now. 

 

They haven't reduced debt at all.  They simply used their Credit Line.  Net Debt is unchanged and that was with an entire Q of much higher Crude prices.

 

In other words their daily outgoes are exceeding the daily incomes, right now.  Watch that line of credit.  It was untapped at year end and is now 300 million used up.  Without an increase in crude prices it will pass 500 M by the end of 3rd Q without any drop in the other debt. 

 

There is lots of time on this one.  I have definitely seen my thesis change.  I hate sinking ships, especially slowly sinking ships bolstered by false hope.  Management is putting on a brave face in a bad situation.  At these crude prices they go under, bankrupt, or they get bought out for a small premium.  The market is right this time. 

 

Edit: My numbers above are not quite right:

 

The situation and IMO the only thing you need to know right now about this company:

 

Dec. 31,14: Senior Notes: 2149; Total debt: 2149

June 30, 15: Senior Notes: 1722; Bank Facility: 484; Total Debt: 2206

 

They have added 50 Million of debt in 6 months while selling hundreds of millions in assets?

 

I think solvency is the real issue absent a significant oil price rise. 

 

[goldfinger]

Uccmal, what about the fact that they are deploying capital on wells that have high rates of return even at low prices:

http://screencast.com/t/H6AsnyQPulM

 

which seems to go quite quickly compared to total production:

http://screencast.com/t/ytSypfKTU

 

?  :P

[Uccmal]

Uccmal, what about the fact that they are deploying capital on wells that have high rates of return even at low prices:

http://screencast.com/t/H6AsnyQPulM

 

which seems to go quite quickly compared to total production:

http://screencast.com/t/ytSypfKTU

 

?  :P

 

Is it a fact if it hasn't happened, yet?

 

I am also troubled by no insider buying for over two months.  Management is worried, which isn't a bad thing.

[Cardboard]

No insider trading is normal and the law before quarterly results are released.

 

This is a market weakness continually exploited by shorts: point out that there has been no insider buying and short more as the share price keeps on plunging due to panic selling before results are finally issued.

 

Cardboard

[Cardboard]

Other things that you have ignored Al on the net debt issue is a large reduction in acccounts payable. Then there is the large move in the exchange rate from 1.16 at Dec 31 to 1.25 on Jun 30. That is pretty significant on over $1.5 billion of notes denominated in USD with only $400 million or so hedged against currency movement. I also understand it has gotten worst in July.

 

As oil returns to more normal levels, the CAD should appreciate substantially and become a tailwind on the debt front.

 

On that one, over $200 billion of projects have been cancelled globally. This week, we have finally seen the first large drop in U.S. oil production or down 151,000 barrels per day for Lower 48 States. Rig count reduction is and will have an effect. Stripper wells operator are also likely on their last leg.  2015 will be the highest consumption year ever for oil and 2016 should be even higher. Each year, 5 to 7% of global oil production disappears due to the decline rate.

 

Negativity around natural resources has reached a crescendo with 3 months of unabatted selling and bad news. I would not be surprised to see a stealth bull market emerge from here.

 

Cardboard

[Pelagic]

No insider trading is normal and the law before quarterly results are released.

 

This is a market weakness continually exploited by shorts: point out that there has been no insider buying and short more as the share price keeps on plunging due to panic selling before results are finally issued.

 

Cardboard

 

Learn something new everyday. I was curious about this myself regarding PWE especially in the last couple days it seemed like a great opportunity for insiders who had been buying pretty regularly through the downturn to pick up some shares.

[goldfinger]

Uccmal, what about the fact that they are deploying capital on wells that have high rates of return even at low prices:

http://screencast.com/t/H6AsnyQPulM

 

which seems to go quite quickly compared to total production:

http://screencast.com/t/ytSypfKTU

 

?  :P

 

Is it a fact if it hasn't happened, yet?

 

I am also troubled by no insider buying for over two months.  Management is worried, which isn't a bad thing.

 

This was H1 2015... so it is happening... why is it surprising?

[SharperDingaan]

Re 200M projected Opex saving. We downloaded the Corporate Presentation July 2015, on July 28. At that time there was a little more disclosure in the Execution and Cost Control component of the presentation; which has been removed from the current version posted. As it looks like they may have disclosed more than intended, we would rather not re-publish it.

 

Given the current 2nd round of cutting rippling through the industry, additional opex saving should not be unexpected. Some of it will also come from avoided operating cost on pending asset sales.

 

Re hedging: The same PP deck indicated they had a hedge on 12,500 bbls/day at USD 50, expiring June-30. They have simply rolled it up and out in a series of 3 month swaps, with a modest increase to 15,500 bbls/day in Q1-2016. Page 14 of the current Corporate Presentation July 2015.

 

This is their business, they are closer to the market than we are, and we are not about to second guess them. They may well also be quite right, as we also expect the post Halloween market to be quite a bit different from today. If there is an asset sale they will also be hedging more than their current 14% (12,500/91,000).

 

Re total debt change. Q2/2015 working capital (CA – CL) did decline to -332M, but it is essentially the same as the Q2/2014 number of -335M; and reflects the seasonality of the business. Q2 versus Q1 they paid down 152M of seasonal change in working capital, as well as the debt reduction. We don’t see an issue.

 

If the projected Opex saving is real, they are profitable at Q2 prices. Restoring the dividend back to the 3c/quarter that it was immediately before the covenant negotiation, is only an additional 11M, & hard evidence of the progress. Highly likely that it is also a bonus trigger.

 

Overall it was a solid quarter but with no headline, markets are indifferent. It will change very quickly when their asset sale is announced.

 

SD

 

[Uccmal]

Other things that you have ignored Al on the net debt issue is a large reduction in acccounts payable. Then there is the large move in the exchange rate from 1.16 at Dec 31 to 1.25 on Jun 30. That is pretty significant on over $1.5 billion of notes denominated in USD with only $400 million or so hedged against currency movement. I also understand it has gotten worst in July.

 

As oil returns to more normal levels, the CAD should appreciate substantially and become a tailwind on the debt front.

 

On that one, over $200 billion of projects have been cancelled globally. This week, we have finally seen the first large drop in U.S. oil production or down 151,000 barrels per day for Lower 48 States. Rig count reduction is and will have an effect. Stripper wells operator are also likely on their last leg.  2015 will be the highest consumption year ever for oil and 2016 should be even higher. Each year, 5 to 7% of global oil production disappears due to the decline rate.

 

Negativity around natural resources has reached a crescendo with 3 months of unabatted selling and bad news. I would not be surprised to see a stealth bull market emerge from here.

 

Cardboard

 

Maybe so, maybe not, on the stealth bull. I actually have substantial exposure to oil via Mullen Group, and Russell Metals, both bouncing along multi-year lows.  Both are well capitalized.  Both are, and will continue to pay their dividends.  Both will recover much more rapidly and sooner than PWT, since they supply the services.  In total, MTL, and RUS, with dividends, and capital gains will provide as much upside as PWT, with less risk.  PWT could return to $15.00 say, but it could take years.  Too many coulds, ifs, etc. 

 

I have probably lost my stomach for PWT style turnarounds.  Too many SFk/fbk, DGI, YPG, scenarios over the years.  I am fully invested in really good companies to be bothered with this shit: MTL, RUS, FN, SSW, BEP.UN, WFC, JPM, AIG, - FN and SSW have both announced record profits, and are cheap. 

 

I have held SSW for nearly 7 years and have nearly made my original purchase price back in dividends.  Of course, survivorship bias applies.  I have never been very good at cigar butt investing, either - I tend to over concentrate. 

 

[SharperDingaan]

Inclined to agree overall. We see it that at $2; it doesn’t take much (or that long) to get to $4, & double. But at $4 it takes more, & warrants taking at least some of the gain & redeploying it elsewhere.

 

SD

 

[kevin4u2]

I definitely agree that MTL and RUS have much less risk and arguable much better upside potential.  I recently initiated a RUS position too as the company rarely sells for current multiples.  The dividend may be cut but long term the company is solid and well run. 

 

PWT is not going to return to $15, that is certain, unless investors are totally irrational.  The falling oil prices have resulted in a permanent drop in the asset value for all oil companies

 

I think those who believe the investment here is "it used to be $4 and it will go back there" are engaging in wishful thinking.  The company is selling for the fair value of the reserves.  Keep in mind the reserve report uses a price deck that is 17% higher prices than today.  There is very little left for the equity holders as oil has fallen recently.  Falling CAD has helped somewhat, but it hasn't been enough to offset the drop in oil.   

 

 

Maybe so, maybe not, on the stealth bull. I actually have substantial exposure to oil via Mullen Group, and Russell Metals, both bouncing along multi-year lows.  Both are well capitalized.  Both are, and will continue to pay their dividends.  Both will recover much more rapidly and sooner than PWT, since they supply the services.  In total, MTL, and RUS, with dividends, and capital gains will provide as much upside as PWT, with less risk.  PWT could return to $15.00 say, but it could take years.  Too many coulds, ifs, etc. 

 

I have probably lost my stomach for PWT style turnarounds.  Too many SFk/fbk, DGI, YPG, scenarios over the years.  I am fully invested in really good companies to be bothered with this shit: MTL, RUS, FN, SSW, BEP.UN, WFC, JPM, AIG, - FN and SSW have both announced record profits, and are cheap. 

 

I have held SSW for nearly 7 years and have nearly made my original purchase price back in dividends.  Of course, survivorship bias applies.  I have never been very good at cigar butt investing, either - I tend to over concentrate.