PWE - Penn West Petroleum

[constala]

For PWE bulls: have a look at the LEAP calls! If we agree that we face here a "make or break situation" and that PWE equity value could be totally wiped out should oil stay low and the non core assets non sold, but that upside is multifold, then we might as well buy a Call Option on PWE to extract maximum leverage: buy as much CALL premium as our anticipated risk budget in the common cash value....and get free non recourse leverage...I just wanted to highlight the Jan 2017 Call strike $1.00 which are offered at a meager 0.25.....@500 days for a come back.....and a very handsome leverage indeed: should PWE get back quickly to $2.00 the LEAP could well be a 5 bagger versus 3.5 bagger on the "delta 1" vanilla PWE equity.

[jmp8822]

Regarding oil, this is not a repeat of 1986. Back then Saudi Arabia was producing around 3.6 million barrels a day down from a production above 10 million in 1980.

 

Today they are maxed out. They have no spare capacity.

 

A ton of big projects were also coming on stream back then: North Sea, Alaska ,etc. These were already funded projects and could not be stopped easily and Saudi Arabia wanted to sell 6 more million barrels a day.

 

Where is the comparison today? Shale is already shut and coming down fast. Oil sands expansion will grind to a halt. Brazil is forecasting half or what they were supposed to produce in 2020. Irak has sent notices to majors to slow spending because they cannot afford their share. I guess it leaves Iran or 500,000 to 1 million barrels a day?

 

The other thing that people do not seem to comprehend is that lifting oil once all infrastructure, drilling and completion has been done is very cheap unless you are operating a stripper well that produces 2 or 3 barrels a day. These are netbacks. That is the cost to extract your ready to go production, not your entire reserves.

 

People that claim that oil can be profitably extracted at these prices in NA are crazy. This excludes any capital to get there. Hence higher prices are needed to obtain positive ROCE and the bankers know that. So forget about shale being some kind of switch that can be simply turned on and off: you need people: gone (you think that they will simply sit and wait after around after being fired for months?), cheap capital: gone and profitable projects/land: more and more gone as they are being used up with high grading.

 

You can mark my words, funding will not be available for a long time or only if hedged and on really low cost projects. This can only mean one thing and that is declining supply.

 

Cardboard

 

I disagree with several things you said.

 

OPEC does have spare capacity in the tunes of 2.5 million bbl/d to 3.5 million bbl/d.

 

Private equity capital are abundant and on the sidelines waiting for deals, so cheap capital is still there.

 

This is not to say oil production won't decline. It will, I estimate most of the oversupply to get fixed given current pricing economics by the end of 2016. This is not to say that oil will spike back to 100. I think oil will spike, then fall, spike, fall, as market anticipates potential demand from the Permian, Eagle Ford, and Bakken.

 

I think oil might go back to $60-$70 and fluctuate and overshoot.

 

Looking at Penn West's financials, using Q4 2014 numbers, PWE won't be able to keep productions flat giving current prices. PWE operates currently at a ~C$100 million give or take deficiency. So investors have to figure out, even if oil spikes to C$70, how long can PWE last? My estimates indicate 2.5 - 3 years.

 

Aren't there several Penn West-like firms throughout the world? Many of the 'good' firms are guiding to much lower capex spend, let alone the ones that go bankrupt and discontinue all capex. This will eventually lead to substantial production declines - although I can't tell you how long that will take. Not trying to put words in your mouth, but don't you think that dramatic capex reduction will lead to a dramatic undersupply of oil in the next 12-24 months, with the only exception being prices slowly rising now?

 

I tend to believe that supply will greatly decrease at current pricing over time, which would lead to an enormous price spike the longer this pricing continues. There are too many players, with lagging capex changes to the oil price, for the capex reductions to precisely hit a supply equilibrium.

[Wilson-TPC]

There's this notion that rig count fall off 50% or capex cut by 50% means oil production will go down by 50%.

 

This isn't 1:1.

 

What does rig count tell us? It tells us that each rig in operation can drill x amount of wells per month. So the lower the rig count, the lower the amount of wells drilled. This doesn't mean productions fall off. Actually, not even close, because old wells are still producing, while new ones have much higher initial production rates, hence the GRADUAL decline in production.

 

What does capex cuts mean? When a company says, we are cutting capex. All it means is that it could stop growth in productions. A lot of firms I follow are KEEPING PRODUCTIONS FLAT with the capex cuts. This reinforces the point that oil production WON'T FALL OFF A CLIFF.

 

Finally, a lot of people don't understand that even though rig counts fall by 50%, there's a point in time which production declines will stop, because the current rig count can support this level of production without any problems (assuming similar EURs).

 

There are a lot of things in O&G that many people with no experience looking from the outside will say, "Gee, look at the decline in capex, productions should follow." But that's not how it works. There are so many other variables that play into it like rig productivity, the amount of levels a horizontal rig could go, spud, porosity and permeability of the play, servicing costs, supply costs, transportation costs, and more.

 

I'm heavily invested in O&G, but there are zeros on the market. And I think if you don't pick your pockets well, you will find zeros. Like I said in my last post, the way an investor handicaps the Penn West bet is you have to figure out what the current capital efficiency is. What's the capex just to keep productions FLAT? Then you calculate the level of sensitivity as with price movements and determine at what price environment will Penn West see a lot of trouble, and at what price it can live to fight another day. I have yet to see anyone give me this answer on this board.

 

You also have to remember, if someone wanted to buy Cardium assets, they would've bought already at prices above C$43,000. There are productions in Eagle Ford and Permian selling for $35,000 boe/d. So the relative valuations given the EUR profiling has to be taken into account.

 

I just have yet to find comparable companies with similar EURs and similar debt profiles indicate to me that $50k boe/d is a FAIR or good valuation.

 

 

 

[ERICOPOLY]

For PWE bulls: have a look at the LEAP calls! If we agree that we face here a "make or break situation" and that PWE equity value could be totally wiped out should oil stay low and the non core assets non sold, but that upside is multifold, then we might as well buy a Call Option on PWE to extract maximum leverage: buy as much CALL premium as our anticipated risk budget in the common cash value....and get free non recourse leverage...I just wanted to highlight the Jan 2017 Call strike $1.00 which are offered at a meager 0.25.....@500 days for a come back.....and a very handsome leverage indeed: should PWE get back quickly to $2.00 the LEAP could well be a 5 bagger versus 3.5 bagger on the "delta 1" vanilla PWE equity.

 

For the $2 price target scenario, what is better... writing that call or buying it?  Let's see...

 

It would be a 4 "bagger" (not a 5 as you claim) if you are paying your stated 25 cents for it.  So you are risking 100% loss due to option decay alone in order to outperform the plain vanilla common stock and it's 3.5x return.  I'm not finding that terribly compelling risk/reward -- you'd better be aiming for a lot more than $2 per share if that's the plan..

 

However, if you buy the common at 55 cents and write that $1 strike call for 25 cents (a covered call), you are risking 30 cents per share on a longer horizon.  And it's 3.03x if the shares reach $1.  For that matter, if the stock is still at 55 cents you've made an 83% return.  83% return if the stock goes absolutely nowhere.  Or more if they keep paying that dividend.

 

 

EDIT:  I now realize you said "should it get back quickly" meaning you expect there to be a premium still in it, in which case it could easily be a 5 "bagger" at $2...  I guess we have differing views on "quickly", but I guess you meant long before expiry.

[jmp8822]

There's this notion that rig count fall off 50% or capex cut by 50% means oil production will go down by 50%.

 

This isn't 1:1.

 

I just have yet to find comparable companies with similar EURs and similar debt profiles indicate to me that $50k boe/d is a FAIR or good valuation.

 

I agree that a 50-percent decline in global production would be a big deal (tongue certainly in cheek). However, I was referring to a potential 3-5 percent decline in global production in 2016. Do you think that would create a price spike? How much?

[goldfinger]

Looking at Penn West's financials, using Q4 2014 numbers, PWE won't be able to keep productions flat giving current prices. PWE operates currently at a ~C$100 million give or take deficiency. So investors have to figure out, even if oil spikes to C$70, how long can PWE last? My estimates indicate 2.5 - 3 years.

 

At 60$+ their netbacks would be (conservalively, without focusing on the better acreage) north of 25/30$/barrel given cost cutting already realized and operational optimizations realized and to be realized. Why is this bad?

[kevin4u2]

There's this notion that rig count fall off 50% or capex cut by 50% means oil production will go down by 50%.

 

This isn't 1:1.

 

What does rig count tell us? It tells us that each rig in operation can drill x amount of wells per month. So the lower the rig count, the lower the amount of wells drilled. This doesn't mean productions fall off. Actually, not even close, because old wells are still producing, while new ones have much higher initial production rates, hence the GRADUAL decline in production.

 

What does capex cuts mean? When a company says, we are cutting capex. All it means is that it could stop growth in productions. A lot of firms I follow are KEEPING PRODUCTIONS FLAT with the capex cuts. This reinforces the point that oil production WON'T FALL OFF A CLIFF.

 

Finally, a lot of people don't understand that even though rig counts fall by 50%, there's a point in time which production declines will stop, because the current rig count can support this level of production without any problems (assuming similar EURs).

 

I would add that 50% of rigs were also drilling for more marginal production.  So the remaining rigs are targeting the cream of the cream and all the exploration and marginal stuff is gone.  The remaining rigs are laser focused on the best prospects. 

 

Most every major oil company drills wells across the return spectrum.  At least that is how it worked when I worked in the industry.  There are high return prospects, mid return prospects, and low return prospects.  There are multiple reasons for spending capital across the return spectrum.  One is that you can't have one geographic area spending all the capital while everyone else just sits on their hand.  I would bet that has changed and companies are being much more selective while slashing headcounts.

[kevin4u2]

Here is what some O&G investors will learn the hard way before this cycle ends.  It doesn't matter how much capital you need to maintain production or what OPEC is doing.  What matters is that the value of the assets is greater than the value of the debt.  There is an oil price where that crossover occurs.  The bank will own the assets and the equity holders will hold worthless pieces of paper. 

 

With PWE, at what WTI price does that occur? 

 

Secondly, if PWE is close to that point, is this really a value opportunity or a lottery ticket?

[Packer16]

Another complication is that with new technology the marginal cost of production is declining.  This leads to a declining crossover point and those firms whose costs are low and declining faster than other firms are at an advantage.  We may find that there are many uneconomic locations in the future that may be close to break-even today.  This may also be why Saudi is pumping as much as it can today with higher marginal prices than tomorrow when they will be lower.

 

Packer

[SharperDingaan]

This is really very straight forward....

 

What is your best guess on the price of WTI 6 months (Mar 16), & 9 months out (Jun 16).

Is it higher than it is today. $5, 10, 15 ....

What would eps be at the WTI price.

Use a conservative multiple.

 

Folks, it is only US$0.55 - if it goes up to US$1.10 at any point in the next 6 months, simply sell it down - & take your $ contribution off the table.

2 shares, or a cup of coffee; what the hell risk do you really have.

 

SD

 

[influx]

you may find something useful

http://analysisreport.morningstar.com/stock/research?t=PWT&region=can&culture=en-US&productcode=MLE

http://cobrands.morningstar.ca/ProfileService/report/pdf/7AVeC9IEuZ/en-CA/0P000080HW/ST/Quote

http://cobrands.morningstar.ca/ProfileService/report/pdf/7AVeC9IEuZ/en-CA/0P000060NZ/ST/Quote

 

 

 

 

 

[influx]

This is really very straight forward....

 

What is your best guess on the price of WTI 6 months (Mar 16), & 9 months out (Jun 16).

Is it higher than it is today. $5, 10, 15 ....

What would eps be at the WTI price.

Use a conservative multiple.

 

Folks, it is only US$0.55 - if it goes up to US$1.10 at any point in the next 6 months, simply sell it down - & take your $ contribution off the table.

2 shares, or a cup of coffee; what the hell risk do you really have.

 

SD

 

I tend to agree BUT haven't pull the trigger

Folks I have this reasoning, bull-biased I think it is.

I'll pose some questions and items to really attack the bull case.

 

1. Management that is involved.

A. Why would Rick join?

i. To save RBC 1% of the money they have in PWT/PWE? He is board member there too after all. This is a potential reason why he is in the place. Or is he in the place because multiple investors vouched for him?

ii. To make money for himself ?

iii. Career risk? Embarrassing him self. I dont believe this is possible.

iv. Honesty, to reveal accounting errors

I am sure he thought of oil going down as a risk to his involvement

His involvement, and money he spent (though it could be little compared to his total net worth)

My verdict for point 1: Bull

 

B. Why would Roberts join?

i. CEO challenge? He is not young to look for CEO challenge alone

ii. Money? Sure.

iii. Career risk? Sure, related to b.i

iv. Honesty, to reveal accounting errors

My verdict: Neutral to Bull

 

2. Near term catalyst

i. NYSE delisting. THEY MUST DO SOMETHING within 6 months? What? 2:1 (x:1) share consolidation? :)

ii. higher oil prices. I am not sure.

iii. Asset sales?

My verdict: Neutral to Bull

 

3. First Eagle involved, ~5%.

i. Good sign

My verdict: Bull

 

4. Banks

i. Obviously the management is well connected and has bank relations. That is fairly simple. Banks want to make this work

ii. They may further relax the covenant terms. I dont like the extra % above 3 for the EBITDA debt ratio.

My verdict: Bull

 

5. Asset dispositions, workforce cut and etc.

i. Is there a time? Depends how long this low oil environment is?

My verdict: Neutral

 

6. Oil price & time

i. I thought and still think this will go lower to 'cure' for the high price

ii. Even if Saudis want a larger market share, they will need time to get it. 1-2 years of low prices is simply to little time. I read Harvard Kennedy School report on SA, their wealth fund, budgets and all that. It doesnt look like they are anywhere near break even.

PWT/PWE will have to find a way to keep itself live. I think based on point 1,2 and 4

My verdict: Bear

 

7. Asymmetric possibility for gain ?

i. Given the management and insider buying, I think there is great opportunity. Am I bull biased because I want to see this?

 

8. PWE/PWT numbers vs debt

My verdict just looking at this one only: Bear

I dont know when oil will go a little up or how long it will stay this low (or go lower)

Taking other points above into consideration I can make this verdict into Neutral with ease :)

I am rationalizing.

 

 

 

 

Thanks

[influx]

And one line I forgot to add:

At C$0.72 per share, I am thinking this is almost impossible to go to 0 (restructuring) and fill for bankruptcy. Can it go lower and stay there for some time? Yes I think so. That is one risk I have not accepted yet. But, I am thinking the share going higher has a greater probability (subjective reasoning).

[Wilson-TPC]

And one line I forgot to add:

At C$0.72 per share, I am thinking this is almost impossible to go to 0 (restructuring) and fill for bankruptcy. Can it go lower and stay there for some time? Yes I think so. That is one risk I have not accepted yet. But, I am thinking the share going higher has a greater probability (subjective reasoning).

 

Given where Penn West's debt is at, the phrase "this is almost impossible to go to 0 (restructuring) and fill for bankruptcy" is so wrong, I don't even know where to begin with.

 

In the points you've stated, you said, "PWT/PWE will have to find a way to keep itself live. I think based on point 1,2 and 4." This point overrides everything else. Assets are O&G comps' only competitive advantage. There's nothing else to it. And then the numbers are all boiled down to capital efficiency and cost. These are two numbers not used very interchangeably on this thread. No one, and I mean not a single bull has talked about the ACTUAL calculation of the longevity of PWE.

 

I have calculated, and like I said earlier.

 

@ 60 WTI, PWE got 2.5 years. @50 it's got 1.5 before bk.

 

You make the decision.

[Novak]

@ 60 WTI, PWE got 2.5 years. @50 it's got 1.5 before bk.

You make the decision.

 

Is that with or without asset sales? I agree that if management fails to sell any assets, whether non-core properties, royalties, or even one of their core properties, we have a couple years of life left in this thing. I'm okay with that because:

(1) management has demonstrated that they are focused on paying down debt;

(2) lenders have demonstrated reasonable forbearance / flexibility;

(3) there is a proven market for PWE's properties;

(4) there is a proven market for their royalties; and

(5) My math tell me there's going to be a global supply shortfall in oil of more than 1 MMboe/d by mid-2016, with oil prices rising meaningfully in advance of that.

 

So, if PWE management changes course 180-degrees and sits on their hands from this point forward, I still think the company will be saved by higher oil prices and the stock will spike for some period in the next 18 months as traders euphorically rush into oil equities. But management will sell assets and they will reduce the debt load and they will push their survivability at ~$50 oil out for years.

We also have evidence that PWE's asset value substantially exceeds the value of their liabilities as it is today, so even with a liquidation at these prices there's a decent chance that equity will recover something - perhaps even more than $0.55/share.

Wilson-TPC, I get your concerns about the quality of the assets and efficiency and all of that, but we have evidence of its value regardless. I also wish we had everything needed to calculate the answer ourselves, but luckily we've been given the answer by an arms-length transaction.

Permanently losing investment capital from these levels requires a very improbable set of scenarios that reflect overly-bearish thinking that's counter to very recent evidence.

When I weigh that against the potential for a ridiculously high near-term return, PWE is a smart play at these prices.

 

Novak

[influx]

And one line I forgot to add:

At C$0.72 per share, I am thinking this is almost impossible to go to 0 (restructuring) and fill for bankruptcy. Can it go lower and stay there for some time? Yes I think so. That is one risk I have not accepted yet. But, I am thinking the share going higher has a greater probability (subjective reasoning).

 

Given where Penn West's debt is at, the phrase "this is almost impossible to go to 0 (restructuring) and fill for bankruptcy" is so wrong, I don't even know where to begin with.

 

In the points you've stated, you said, "PWT/PWE will have to find a way to keep itself live. I think based on point 1,2 and 4." This point overrides everything else. Assets are O&G comps' only competitive advantage. There's nothing else to it. And then the numbers are all boiled down to capital efficiency and cost. These are two numbers not used very interchangeably on this thread. No one, and I mean not a single bull has talked about the ACTUAL calculation of the longevity of PWE.

 

I have calculated, and like I said earlier.

 

@ 60 WTI, PWE got 2.5 years. @50 it's got 1.5 before bk.

 

You make the decision.

 

You take all in consideration right? Including:

1. credit available, ~US$700M, could give more life if needed. I think this can be extended / increased if needed to. Why? Because the banks will get more in turnaround of oil prices from pwe, rather than (fire) sale of assets. Am I wrong in this reasoning?

2. no further (non)-core assets disposal

 

Please keep attacking the bull case. This is healthy.

 

You are more for BXE than for PWE from what I remember. What else in the more risky set of stocks? Apart from crc and oas. Some TSX listed. Want to compare.

[Uccmal]

This is really very straight forward....

 

What is your best guess on the price of WTI 6 months (Mar 16), & 9 months out (Jun 16).

Is it higher than it is today. $5, 10, 15 ....

What would eps be at the WTI price.

Use a conservative multiple.

 

Folks, it is only US$0.55 - if it goes up to US$1.10 at any point in the next 6 months, simply sell it down - & take your $ contribution off the table.

2 shares, or a cup of coffee; what the hell risk do you really have.

 

SD

 

I tend to agree BUT haven't pull the trigger

Folks I have this reasoning, bull-biased I think it is.

I'll pose some questions and items to really attack the bull case.

 

1. Management that is involved.

A. Why would Rick join?

i. To save RBC 1% of the money they have in PWT/PWE? He is board member there too after all. This is a potential reason why he is in the place. Or is he in the place because multiple investors vouched for him?

ii. To make money for himself ?

iii. Career risk? Embarrassing him self. I dont believe this is possible.

iv. Honesty, to reveal accounting errors

I am sure he thought of oil going down as a risk to his involvement

His involvement, and money he spent (though it could be little compared to his total net worth)

My verdict for point 1: Bull

 

B. Why would Roberts join?

i. CEO challenge? He is not young to look for CEO challenge alone

ii. Money? Sure.

iii. Career risk? Sure, related to b.i

iv. Honesty, to reveal accounting errors

My verdict: Neutral to Bull

 

2. Near term catalyst

i. NYSE delisting. THEY MUST DO SOMETHING within 6 months? What? 2:1 (x:1) share consolidation? :)

ii. higher oil prices. I am not sure.

iii. Asset sales?

My verdict: Neutral to Bull

 

3. First Eagle involved, ~5%.

i. Good sign

My verdict: Bull

 

4. Banks

i. Obviously the management is well connected and has bank relations. That is fairly simple. Banks want to make this work

ii. They may further relax the covenant terms. I dont like the extra % above 3 for the EBITDA debt ratio.

My verdict: Bull

 

5. Asset dispositions, workforce cut and etc.

i. Is there a time? Depends how long this low oil environment is?

My verdict: Neutral

 

6. Oil price & time

i. I thought and still think this will go lower to 'cure' for the high price

ii. Even if Saudis want a larger market share, they will need time to get it. 1-2 years of low prices is simply to little time. I read Harvard Kennedy School report on SA, their wealth fund, budgets and all that. It doesnt look like they are anywhere near break even.

PWT/PWE will have to find a way to keep itself live. I think based on point 1,2 and 4

My verdict: Bear

 

7. Asymmetric possibility for gain ?

i. Given the management and insider buying, I think there is great opportunity. Am I bull biased because I want to see this?

 

8. PWE/PWT numbers vs debt

My verdict just looking at this one only: Bear

I dont know when oil will go a little up or how long it will stay this low (or go lower)

Taking other points above into consideration I can make this verdict into Neutral with ease :)

I am rationalizing.

 

 

 

 

Thanks

 

Very Nice analysis. 

 

To point 7: The costs of production in  NA and at PWt are coming down fast.  I am not thinking the Saudi's, .Russians, or others bother to keep up on the technology front.  Not because they cant steal the ideas, but because oil co.s are part of the social support fabric and there are built in costs to keeping employees, that the US and Canada dont have. 

 

It is quite conceivable if the low price regimen continues that drilling costs in NA drop below many other state controlled regimes. 

 

PWT is driving its costs way down.  As others above have referenced, the 50% rig reduction is targeting the best fields - the same applies to PWT. 

 

The situation is very dynamic.  As costs come down, cash flows rise, and debt repayment continues, etc.  We know PWT has taken dramatic steps to rein in costs, as have others.  The one benefit of being a bigger operation is access to technology and economies of scale. 

 

 

 

 

[Uccmal]

For PWE bulls: have a look at the LEAP calls! If we agree that we face here a "make or break situation" and that PWE equity value could be totally wiped out should oil stay low and the non core assets non sold, but that upside is multifold, then we might as well buy a Call Option on PWE to extract maximum leverage: buy as much CALL premium as our anticipated risk budget in the common cash value....and get free non recourse leverage...I just wanted to highlight the Jan 2017 Call strike $1.00 which are offered at a meager 0.25.....@500 days for a come back.....and a very handsome leverage indeed: should PWE get back quickly to $2.00 the LEAP could well be a 5 bagger versus 3.5 bagger on the "delta 1" vanilla PWE equity.

 

The time is too short.  I held the very same Leaps last spring and the price has dropped dramatically since then.  Its very tough, Emotionally, trying to hold Leaps in this situation. 

 

My rationale is that, if/when PWT gets out of mortal danger the stock price will rebound for years.  500 days is simply not long enough. 

[kfh227]

For PWE bulls: have a look at the LEAP calls! If we agree that we face here a "make or break situation" and that PWE equity value could be totally wiped out should oil stay low and the non core assets non sold, but that upside is multifold, then we might as well buy a Call Option on PWE to extract maximum leverage: buy as much CALL premium as our anticipated risk budget in the common cash value....and get free non recourse leverage...I just wanted to highlight the Jan 2017 Call strike $1.00 which are offered at a meager 0.25.....@500 days for a come back.....and a very handsome leverage indeed: should PWE get back quickly to $2.00 the LEAP could well be a 5 bagger versus 3.5 bagger on the "delta 1" vanilla PWE equity.

 

Why not just get the $2 options for 5 cents?

 

If PWE recovers, it's probably going well north of $2/share.  Even $3/share would be a 20x gain (ignoring premiums)

whenever that would occur

 

[constala]

@kfh227,

the OTM call strike 2.00 is not a bad idea, but it is 5 bid 15 offer....so not so cheap....I'd rather hold the Strike 1.00 at 25 (20 bid 25 offer).

 

[kevin4u2]

This is really very straight forward....

 

What is your best guess on the price of WTI 6 months (Mar 16), & 9 months out (Jun 16).

Is it higher than it is today. $5, 10, 15 ....

What would eps be at the WTI price.

Use a conservative multiple.

 

Folks, it is only US$0.55 - if it goes up to US$1.10 at any point in the next 6 months, simply sell it down - & take your $ contribution off the table.

2 shares, or a cup of coffee; what the hell risk do you really have.

 

SD

 

2012, the company earned $125 million at $94.17/boe WTI.

 

2013, the company lost $809 million at $98.00/boe WTI.

 

2014, the company lost $1733 million at 93.02/boe WTI.

 

At $45 WTI, what is the EPS going to be?  YTD they have already lost another $276 million.

 

[SharperDingaan]

Just to throw out some points to the bear case.

 

1. Lenders cut back the credit lines. Negates the debt repayment of the asset sales.

- the PWT lenders have already reduced & tightened covenants

- much harder to push for it again when 500M has been repaid in the last 6 months

Yes it could happen. But drastic change is unlikely; it has already happened.

 

2. GS $20 oil in the near-term, $50 average for the next decade.

- GS actually thought there was a less than a 50% probability of $20 oil; their base case was $50-$60

- The headline is noise, & is clearly intended to herd traffic

GS published the report, it is a marketing piece, & all marketing is done to promote business.

 

3. Highly likely a horrible Q3 coming up.

- Quite true, especially where there also large layoffs

- Possibly loss along with the recent asset sale

Yes it is probably a loss quarter; but relatively speaking - most likely better than their peers

 

4. Highly likely a bad Q4 as well

- If oil stays at USD 50 there will be more reserve write-downs.

No. At the current $0.70 FX rate, USD 50 oil is CAD 71.42, and above the price reserves were last calculated at.

 

5. NYSE delisting

- This would be a disaster; no credibility at all.

- Has to be fixed, & right now!

No, this is US myopia. PWT has 6 months to fix it, & consolidation is a very easy last fix. Institutions (minor exceptions) are not invested in PWT at under USD 1, because they are not allowed to. No credibility to lose

 

6. Asset sale uncertainty

- Is there a Spearfish sale.

- Can they sell, for better than fire-sale prices.

Traders don't like uncertainty, longer term investors have much higher tolerances. This is just time arbitrage.

 

7. Takeover

- It could easily get stolen at a low price.

- Bankers could force the sale to protect their loans.

Yes it could happen, but most likely for a lot more than many would expect. Cross the USD 1 & USD 3 lines, & institutions can come back in; & would do so in quantity. Large blocks in strong hands are not going to sell overly cheaply.

 

The bear points are essentially short-term - done in 6 months. Trading. Invest longer & you are arbitraging time horizon.

Cdn bank brokerages just lowered their one year target price, yet the average is around $C 1.40. 100% higher.

The real fear is career risk, to bucking the trading view; not the actual future price of PWT, or oil.

 

SD

 

 

[SharperDingaan]

This is really very straight forward....

 

What is your best guess on the price of WTI 6 months (Mar 16), & 9 months out (Jun 16).

Is it higher than it is today. $5, 10, 15 ....

What would eps be at the WTI price.

Use a conservative multiple.

 

Folks, it is only US$0.55 - if it goes up to US$1.10 at any point in the next 6 months, simply sell it down - & take your $ contribution off the table.

2 shares, or a cup of coffee; what the hell risk do you really have.

 

SD

 

2012, the company earned $125 million at $94.17/boe WTI.

 

2013, the company lost $809 million at $98.00/boe WTI.

 

2014, the company lost $1733 million at 93.02/boe WTI.

 

At $45 WTI, what is the EPS going to be?  YTD they have already lost another $276 million.

 

 

2012 & 2013 were different management; the losses are also understated as we know management was manipulating accounting.

2014 included write-downs, & an accounting restatement, to fix previous management errors.

None of the comparable is valid.

 

SD

 

[plato1976]

Hi, Packer: do you own any of these names? Thanks!

 

I am not pessimistic per se but when you can get companies that have better capital efficiency at prices that are at or lower than Penn West why invest in Penn West.  Wilson has mentioned BXE (which is a combination of an asset with comparability to some of Penn West' better properties and on of the best asset in the Spirit River) but there is also Gear, RMP and Bonavista in the WSB and Southwestern and Antero in the Utica/Marcellus.  All of these have much better capital efficiencies and are growing production per share, except Bonavista who is flat. 

 

If you listen to Ken Peak's last interview on Bloomberg he clearly states that low cost is the way to go to reduce risk in O&G as you have no influence on pricing.  He also practiced that it doesn't take alot of folks to do this correctly.  One way to look at the people issue is to calculate production per employee.  Contango has about 250k boe/d/employee.  From list above, I think Gear, RMP and Antero, along with Peyto, clearly fit into the Ken Peak type companies.  BXE is on its way there.  Both BXE and Sothwestern do have alot of employees versus other Peak type companies.  Peyto is very expensive versus the other three but Peyto has a nice track record that the others do not have at this time.  Interestingly enough his three area of investment were offshore GoM, the Piceane in Colorado and the WSB in Alberta, some of the lowest cost geographies out there.

 

Packer

[influx]

I just wrote investor relations asking (basically plagiarized FB's comment) above. Hopefully I'll hear back, and I'll post the response.

 

Did you get an answer?

 

 

Thanks