PWE - Penn West Petroleum

[yadayada]

That's what I though too but wasn't sure. If they only own the mineral rights it's even worse.

 

So let's go back to my original thought. Who's actually going to step up and buy these rights? And if somehow someone does come up why would they pay anything but bottom dollar?

They currently produce about 35m barrels per year, and developed proved reserves are 230m barrels. So with little capex they can keep producing for like 6 years. That alone is probably worth 1.5-2bn$. Then there are about 250m undeveloped 2p and 1p reserves. They potentially have huge fields that can be break even at around 50$ per barrel that can produce 40-60k BOE (or about 15-22m per year). Those fields alone could give them a profit stream of like 2-300m$ a year at 75$ oil (if you think it will level out there).

 

And then there is their undeveloped land which potentially holds a couple hundred million more BOE of 1p and 2p reserves. So if you give this a per barrel value of 2$, then potentailly that is another billion $ for undeveloped land. Given that they have added over the years to their reserves, that does not seem too unlikely.

 

Then there are cost cuts, since this was a bureaucratic nightmare a few years ago. And what I like is that management comes from other large oil companies, they have good reputations. They have made this company more easily digestible for a oil major.

 

There might be larger companies that can just eliminate certain costs too. Im seeing this as a nice cheap option on oil at this point. Risky but upside too juicy to ignore. ANd the fact that it is so hated, and blindly sold off by idiot investors chasing dividends makes me more comfortable that it is mispriced too (in case the above is just a bunch of gibberish).

[plato1976]

As you said, "If oil prices stay this low, they will struggle along in a permanent state of doldrums." I am just wondering if the oil price stays this low, or even lower, how long can they hang on there? 1 year? 2 years? assuming they can no longer sell meaningful assets at meaningful prices

 

That's what I though too but wasn't sure. If they only own the mineral rights it's even worse.

 

So let's go back to my original thought. Who's actually going to step up and buy these rights? And if somehow someone does come up why would they pay anything but bottom dollar?

 

Black spruce, balsam, some swamp grass, and turtles, to answer your 'growing' question.

 

No one is going to buy the land at anything other than fire sale prices.  Your question was rhetorical, right?  Oil companies, like anyone else, generally only buy when they get to pay top dollar.  Thats how PWT and other weak operators got to where they are.

 

The only real option Pennwest has is to make enough money at these oil/gas prices to service the debt going forward.  If oil prices go up, they will be fine.  If oil prices stay this low, they will struggle along in a permanent state of doldrums.  PWTs managers have ridden some cycles.  There are others in much worse shape that should fold more quickly.  We have been here before many times, and some survive every cycle - SU, Arx, Imperial oil, etc. 

 

Hardly an optimistic note, but I bought about 12000 shares this week.  I sold everything at a small loss, nearly two months ago to get clear with the tax man.  It is a pretty clear binary outcome at this point.  No options or anything that has a time limit.  And, I will even get a 3.9% yield on my shares, for now.

[yadayada]

Cash flows of 3-500m$ in next two year? If SD is right about sale + line of credit of like 800m$ (too lazy to check but somewhere in that area), then Id say they can survive for a few years. They have some hedges running too. Some low cost production coming online.

 

SD, how do you get those 200m$ cost cuts? I can't find that anywhere. You said that it was in a release that was soon deleted? That would lift cash flows to 500m$ next year if you assume similar oil prices (and similar hedges I guess).

[no_free_lunch]

I don't know where else to put this.  OPEC has complete power to change the dynamics of the oil glut and current prices are really starting to bite.  Not trying to call a bottom but it is important to remember that it is not all about true supply and demand, never has been for the past 40 years.

 

Economists are predicting a budget deficit of as much as 20 percent of gross domestic product and the International Monetary Fund forecasts a first Saudi current-account deficit in more than a decade. Reserves at the central bank tumbled 10 percent from a year ago, or by more than $70 billion.

 

http://www.bloomberg.com/news/articles/2015-08-21/how-much-longer-can-saudi-arabia-s-economy-hold-out-against-cheap-oil-

[rb]

I don't know where else to put this.  OPEC has complete power to change the dynamics of the oil glut and current prices are really starting to bite.  Not trying to call a bottom but it is important to remember that it is not all about true supply and demand, never has been for the past 40 years.

 

Economists are predicting a budget deficit of as much as 20 percent of gross domestic product and the International Monetary Fund forecasts a first Saudi current-account deficit in more than a decade. Reserves at the central bank tumbled 10 percent from a year ago, or by more than $70 billion.

 

http://www.bloomberg.com/news/articles/2015-08-21/how-much-longer-can-saudi-arabia-s-economy-hold-out-against-cheap-oil-

I think I posted something about here or some other thread. I ran the numbers and looks like if the Saudis don't cut somewhere else you get a deficit of about 10% not 20%. Reserves going down by 70% is also consistent with a 10% deficit. Btw, those aren't really reserves but more like a sovereign fund and that fund has about $700 B. The country has no debt. If they also slow down arms purchases they can lower the deficit quite a bit. So they have a lot of staying power.

[no_free_lunch]

Oil prices have been falling throughout the year so that deficit doesn't reflect current prices.  They also have a fast growing population to take care of.  I think arm's purchases are going to go up not down, middle east does not exactly seem to be cooling down.  At some point in the future they are going to have to rely on that soverign fund for their income as there is very little other exporting economy.  So right now, today, it is kind of madness to be spending the fund except for brief periods.  I think they are in a worse situation than you do.

[SharperDingaan]

The 200M Opex saving started 2H 2015 and was in an early version of their July presentation that we downloaded. As they removed it later, they may have inadvertently disclosed more than they intended; hence we’re not republishing it.

 

From one of our earlier posts. Look closer at P16, & P2 (July 2015 MD&A):

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.

 

They expected full year production to remain flat, and still think that; so it must be a lot of barrels - about 2015’s new production net of depletions. The volume suggests it’s the Waskada assets, and that saved annual opex cost would be around the 150-200M mark. If the buyer is whom most would expect, a compromise price adjustment formula would also not be unreasonable.

 

Doesn’t mean it’s a done deal, but it does mean that the upside P(X) is probably higher than many are giving them credit for.

 

SD

 

[Guest wellmont]

That's what I though too but wasn't sure. If they only own the mineral rights it's even worse.

 

So let's go back to my original thought. Who's actually going to step up and buy these rights? And if somehow someone does come up why would they pay anything but bottom dollar?

They currently produce about 35m barrels per year, and developed proved reserves are 230m barrels. So with little capex they can keep producing for like 6 years. That alone is probably worth 1.5-2bn$. Then there are about 250m undeveloped 2p and 1p reserves. They potentially have huge fields that can be break even at around 50$ per barrel that can produce 40-60k BOE (or about 15-22m per year). Those fields alone could give them a profit stream of like 2-300m$ a year at 75$ oil (if you think it will level out there).

 

And then there is their undeveloped land which potentially holds a couple hundred million more BOE of 1p and 2p reserves. So if you give this a per barrel value of 2$, then potentailly that is another billion $ for undeveloped land. Given that they have added over the years to their reserves, that does not seem too unlikely.

 

Then there are cost cuts, since this was a bureaucratic nightmare a few years ago. And what I like is that management comes from other large oil companies, they have good reputations. They have made this company more easily digestible for a oil major.

 

There might be larger companies that can just eliminate certain costs too. Im seeing this as a nice cheap option on oil at this point. Risky but upside too juicy to ignore. ANd the fact that it is so hated, and blindly sold off by idiot investors chasing dividends makes me more comfortable that it is mispriced too (in case the above is just a bunch of gibberish).

those millions of acres are worth nothing in this price environment. lots of companies have acreage. take a look at POU on toronto. tons and tons of acreage. non of it viable at anywhere near these prices. prices would have to get north of $80 for these acres to be close to viable and even then it depends on somebody buying it as a speculation. only thing that will change hands these days is property that is producing in a low price environment. putting those acrese in the valuation of pwt is aggressive. pwe sells at a fraction of it's stated book value because the market has decided that land has no value. why invest in undeveloped land when you can buy producing oil companies on the stock market at fractions of their book value?

[ERICOPOLY]

I sold this thing after a 25% loss, and now it's fallen another 2/3 since then.  It's a reverse multi-bagger (well, not really), given that I got more than 3x the current price.

 

Uhhgg...  what an experience for my first oil stock of any significance.

 

I'm not particularly game to try again either.

[Cardboard]

Ericopoly, you are a smart man.

 

I would like to know when you sold your Penn West shares and what was your thought process at the time that made you sell?

 

Cardboard

[gary17]

Fwiw I sold my shares about an hour after I bought.  I realized if I needed to ask all my contacts in OandG to explain to me how this works I don't know this enough to own lol

 

Good luck to all

[ERICOPOLY]

Ericopoly, you are a smart man.

 

I would like to know when you sold your Penn West shares and what was your thought process at the time that made you sell?

 

Cardboard

 

I had bought it in early December near $3 -- about 2% of net worth position.  That was going to be my great speculation stock for the year because if oil prices had rebounded in 6 months or so as some people thought entirely possible, then it might have been a nice booster.

 

But the stock kept dropping and it went a bit below $1.50 in late January -- then on the first rally back up I sold it around $2.25 in February.  It then kept going up and for a while I felt stupid because it nearly went back all the way to my purchase price (of course that was eating at me).  But I never bought back in again after it then started dropping again.

 

It was purchased in the first place as a small speculative position.  Even so, small or not, once it was losing money I just wasn't interested anymore and was happy to part with it -- so typical!  Hah. 

 

About as shrewd as Forrest Gump.

[sampr01]

Hi Eric

 

Why did you reenter PWE :)?

 

Thanks

[ERICOPOLY]

Hi Eric

 

Why did you reenter PWE :)?

 

Thanks

 

I didn't.  I wrote:

 

"I'm not particularly game to try again either."

 

[sampr01]

Thanks for Clarification

[sculpin]

Wow - is this the max repulsion for energy stocks - been about a 11 or 12 year bear market now for most of these equities. Oil is the most important commodity in the world yet the mainstream media & the public hate it. 90+% of investors do not want to hear or think about it. This may tell you something about what may happen in the next 2 or 3 years.

 

 

 

[Liberty]

Wow - is this the max repulsion for energy stocks - been about a 11 or 12 year bear market now for most of these equities. Oil is the most important commodity in the world yet the mainstream media & the public hate it. 90+% of investors do not want to hear or think about it. This may tell you something about what may happen in the next 2 or 3 years.

 

Something being an important commodity doesn't mean that the companies operating in that industry will make any money. Oil was more important per unit of GDP in the 80s and 90s yet prices were low for years and years...

[Granitepost]

Oil producer Penn West to cut jobs suspend dividend Sept 1 2015

 

Canadian oil and gas producer Penn West Petroleum Ltd said it would lay off about 35 percent of its workforce and suspended its dividend as it copes with a slump in crude oil prices.

The company also lowered its 2015 capital spending forecast by 13 percent to C$500 million.

 

[SharperDingaan]

Very, very good announcement.

http://pennwest.mediaroom.com/index.php?s=27585&item=135255

 

SD

[constala]

Very, very good announcement.

http://pennwest.mediaroom.com/index.php?s=27585&item=135255

 

SD

why so  good? no asset sales here.Sure, there is  at  last a  captain at the helm: but annual savings are just div 1c=20m+job cuts (35% worforce)45m; and as one-off, capex down 75m+fx hedge monetizing 75m . Not quite enough to change course or am I missing something?

 

 

[Cardboard]

IMO, there is an asset sale: Spearfish/Waskada in Manitoba, but for some reasons it is not reported yet.

 

The asset is not listed in the non-core assets on the presentation and the change in production guidance is too large to be explained just by a reduction in capex for what is left of H2 vs decline rates.

 

Regarding savings; the dividend elimination, employee reduction and others is $100 million a year per the conference call. That is pretty significant based on current fund flows and could be considered permanent. I think it can be based on their overall G&A/boe vs others. It will give them breathing room to continue funding capex and meet their debt covenants.

 

Cashing in the forex now makes sense IMO. Everyone including mom and pop now knows that China is slowing down and that commodities are untouchable as investments. So, I think that the drop in the CAD$ vs the USD is pretty much over.

 

The presentation gives a crystal clear thesis as to why invest in PWT now and it is on the Core Assets page.

 

You have 54,000 boe/d with 76% liquids in 3 low costs areas and all profitable today. Very respectable Opex and netbacks. And low risk drilling locations. If you are to assign a very low multiple of $60,000 per boe/day, that is $3.24 billion. Substract the debt of $2.1 billion and divide by 500 million shares and you get $2.28 per share.

 

This is an incredibly low valuation to take-out some of the best acreage in Canada and NA (Viking and Cardium) and gives zero value for all other non-core assets and we are talking about 34,000 boe/day with some being pretty valuable. Zero value for the Duvernay.

 

Cardboard   

[redwood]

from Merrill  "we anticipate PWT will trip debt covenants in Q316 "

 

"Suspends dividend; cuts costs; trips covenant Q3 16

PWT announced several cost initiatives as it battles debt concerns and ongoing

commodity price weakness. 1) it will suspend its dividend following the October

payment (was $0.01/sh per quarter) resulting in $20mn in annual savings, 2) it is

reducing its FY15 budget to $500mn (was $575) resulting in lower FY15 production

guidance of 86-90 mboe/d (was 90-100) and opex of $19.25-$19.75/boe; 3) workforce

reductions of 35% (400 people) saving $45mn annually and 4) reducing Board comp.

We update our model accordingly, including incremental hedging, higher per boe

operating costs and lower production levels on reduced spending. FY15 CFPS falls to

$0.46/sh (was $0.55) on production of 88 mboe/d (was 90). FY16 CFPS drops to $0.53

(was $0.64) on production of 74 mboe/d (was 83) and spending of just $250mn (cash

flow is $265mn) and capital efficiency of $27k/boe/d. Our estimates do not include

asset sales but do include a one-time possible FX hedging monetization for $75mn in

Q315 (for EBITDA debt calculation, but not cash flow). Including the FX hedge

monetization, we anticipate PWT will trip debt covenants in Q316 (was Q1) with debt to

trailing EBITDA of 4.8x (allowable 4.5x), based on our US$53/bbl WTI (and in line with

today’s future strip price of US$51/bbl)."

[investor-man]

...Our estimates do not include asset sales...

 

I can create estimates where they trip convenants and don't trip convenants, and buy Disney World

[goldfinger]

...Our estimates do not include asset sales...

 

I can create estimates where they trip convenants and don't trip convenants, and buy Disney World

 

Thanks Merrill for such amateurish reports, this is providing opportunity!  8)

[influx]

IMO, there is an asset sale: Spearfish/Waskada in Manitoba, but for some reasons it is not reported yet. 

 

in the latest conference call, non core assets for disposition are:

Mitsue

Weyburn

Swan Hills

NЕ BC & NW AB

East Central AB

PROP

Other

 

Total: 34,000boe/d production

 

Which one do you refer to?