PWE - Penn West Petroleum

[Wilson-TPC]

Surreal. I think i'm getting a better sense of how these deals are being priced.

 

Will need a few more of these to confirm my understanding of how these deals are being priced.

 

Must say, Penn West's CEO is a dealmaker. He's doing a great job.

[Uccmal]

I just worked a back of the envelope carrying cost for the debt:

 

At 2.2 B and 6.5% interest it cost ~ 140 M/annum

 

bring it down to 1.8 b at - 6.0% - 108m/annum (I used 6% on the assumption they are retiring the most expensive debt where they can. 

 

There is also an surcharge reduction on some of the debt with their senior debt to Ebitda being kess than 3.1 now.  There might be some savings on the credit line portion with this adjustment 0.5 %.

 

40 million per annum debt savings plus 20 from dividend = 60 m total without even getting into operating costs reductions, and reductions in currency hedge cost.  There will be some one time prepayment hits this quarter.  The existing oil and gas hedges will cover more of the remaining production - this could work either way I guess.

 

This is just back of the envelope stuff so dont tear me to shreds over it.

[plato1976]

I just worked a back of the envelope carrying cost for the debt:

 

If oil stay at 40 (it could go even lower but long term I see $40 as the worst case long-term avg price), how much more debts do they need to shed? now they are at 1.8b CAD

 

=====

 

At 2.2 B and 6.5% interest it cost ~ 140 M/annum

 

bring it down to 1.8 b at - 6.0% - 108m/annum (I used 6% on the assumption they are retiring the most expensive debt where they can. 

 

There is also an surcharge reduction on some of the debt with their senior debt to Ebitda being kess than 3.1 now.  There might be some savings on the credit line portion with this adjustment 0.5 %.

 

40 million per annum debt savings plus 20 from dividend = 60 m total without even getting into operating costs reductions, and reductions in currency hedge cost.  There will be some one time prepayment hits this quarter.  The existing oil and gas hedges will cover more of the remaining production - this could work either way I guess.

 

This is just back of the envelope stuff so dont tear me to shreds over it.

[Cardboard]

Less debt is normally always better but, when is it low enough or an adequate amount of leverage?

 

I did some quick math today to compare PWT with some of the favourites oily stocks in the Canadian oil patch or those that trade at EV/boe/d of $80,000 to $120,000 or far above PWT current $24,500:

 

CPG has $4.3 billion in net debt or $26,300 per boe/d

VET has $1.3 billion in net debt or $23,600 per boe/d

WCP has $0.75 billion in net debt or $18,700 per boe/d

 

PWT has now $1.75 billion in net debt (following this transaction and adjusting for the move in exchange rate since June 30) or $20,350 per boe/d

 

Now, some will argue that these companies are better hedged, that they will show production growth in 2016 or that the assets are better (not so sure on that one: each one has very good and some ok assets). However, it is kind of clear that something is really out of whack.

 

I think that considering its history, that investors and analysts will demand less debt per boe/d from PWT. More asset sales will also improve its ability to re-invest in its core plays and produce more EBITDA which eventually will become a virtuous circle with among other things less interest payments going out the door as Uccmal pointed out.

 

The thing is that they only sold 2 out of the 7 listed non-core assets from the September 1 corporate presentation and they are already in much better shape than they were. Bargaining power to sell the rest is going up, not down. So eventually the Street will wake up and price the stock at least as a going concern.

 

Regarding $40 or $45 oil long term, then I believe that none of the companies listed above can retain any debt. Hedges would all runoff and there would simply be not enough free cash flow to service any debt repayment. IMO, they would all see production declines eventually since they would run out of cheap developed assets and would not have the capital to develop new ones. All-in costs and with a decent rate of return for these companies are quite a bit higher than $40 a barrel over a 5 or 10 year time frame.

 

Cardboard

[Wilson-TPC]

Less debt is normally always better but, when is it low enough or an adequate amount of leverage?

 

I did some quick math today to compare PWT with some of the favourites oily stocks in the Canadian oil patch or those that trade at EV/boe/d of $80,000 to $120,000 or far above PWT current $24,500:

 

CPG has $4.3 billion in net debt or $26,300 per boe/d

VET has $1.3 billion in net debt or $23,600 per boe/d

WCP has $0.75 billion in net debt or $18,700 per boe/d

 

PWT has now $1.75 billion in net debt (following this transaction and adjusting for the move in exchange rate since June 30) or $20,350 per boe/d

 

Now, some will argue that these companies are better hedged, that they will show production growth in 2016 or that the assets are better (not so sure on that one: each one has very good and some ok assets). However, it is kind of clear that something is really out of whack.

 

I think that considering its history, that investors and analysts will demand less debt per boe/d from PWT. More asset sales will also improve its ability to re-invest in its core plays and produce more EBITDA which eventually will become a virtuous circle with among other things less interest payments going out the door as Uccmal pointed out.

 

The thing is that they only sold 2 out of the 7 listed non-core assets from the September 1 corporate presentation and they are already in much better shape than they were. Bargaining power to sell the rest is going up, not down. So eventually the Street will wake up and price the stock at least as a going concern.

 

Regarding $40 or $45 oil long term, then I believe that none of the companies listed above can retain any debt. Hedges would all runoff and there would simply be not enough free cash flow to service any debt repayment. IMO, they would all see production declines eventually since they would run out of cheap developed assets and would not have the capital to develop new ones. All-in costs and with a decent rate of return for these companies are quite a bit higher than $40 a barrel over a 5 or 10 year time frame.

 

Cardboard

 

Are you using the new production guidance as your denominator?

[Cardboard]

Yes, 86,000 boe/d or the middle of the new guidance: 84,000 - 88,000 boe/d.

 

http://www.bloomberg.com/news/articles/2015-10-01/penn-west-seen-selling-most-prized-oil-assets-as-debt-weighs?cmpid=yhoo

 

I can't believe that this analyst from Dundee Securities still published that bs this afternoon. He claims that we would need another $800 million in asset sale and that it should come from selling what is likely our best asset or the Viking while PWT has proven twice in a row, in less than a month, in what has been a terrible period for oil & gas, that they can get good pricing from non-core assets. If they sell the remaining 5 non-core assets, they would be close IMO to that additional $800 million.

 

Cardboard

[Wilson-TPC]

Yes, 86,000 boe/d or the middle of the new guidance: 84,000 - 88,000 boe/d.

 

http://www.bloomberg.com/news/articles/2015-10-01/penn-west-seen-selling-most-prized-oil-assets-as-debt-weighs?cmpid=yhoo

 

I can't believe that this analyst from Dundee Securities still published that bs this afternoon. He claims that we would need another $800 million in asset sale and that it should come from selling what is likely our best asset or the Viking while PWT has proven twice in a row, in less than a month, in what has been a terrible period for oil & gas, that they can get good pricing from non-core assets. If they sell the remaining 5 non-core assets, they would be close IMO to that additional $800 million.

 

Cardboard

 

You know what's crazy. I'm really loving these asset sales, because it helps me get a sense of how to calculate these per flowing multiples.

 

PGF sold almost an identical sized piece of the Weyburn unit back in 2012 for $315MM when oil prices were around US$90/bbl.

 

Penn West got 65% of 2012's valuation. That's inline with the 50% selloff in oil.

[Wilson-TPC]

I'm getting 24k per flowing in canadian. Can you walk me through how you are getting 20k?

 

That article you linked. That analyst is on crack or something.

 

Viking netback is $23.50 and produces 18,500 boe/d. If PWE sells this at 800 mil, then implied per flowing is 43k.

 

Crazy stupid valuation. I might not be a bull, but to me, that sounds stupid.

 

So if Penn West can sell the remainder of its noncore at a valuation of 30k per flowing, then it can pay off an additional 900 mil in debt.

 

That will leave it at 850 mil in debt and with 54,000 in core production. Decline seems to be 15% for that region.

 

.15*54,000 = 8,100 in production you have to replace per year.

 

Assuming Capital efficiency is around 25k, maintenance capex is 202.5 million.

 

PWE is assuming first half price deck, and doesn't say if it includes hedges or not. Let's assume no hedges included.

 

22.5*54,000*365 = 443.475 million in NOI.

 

With 850 mil in debt @ blended 6-7%, 51 - 59.5.

 

Cash flow would in essence be 443.475 - 202.5 - 55 in interest = 185.975 in remaining cash flow to pay down more debt.

 

There's a lot of change that has happened with these numbers. Q2 netbacks were higher thanks to WTI @60. So take that all into account, but numbers look good if they can divest all of the non-core.

[Cardboard]

This was a calculation of mine or Net debt to boe/d to illustrate how many dollars of net debt are attached to each barrel (equivalent) produced for PWT and some peers. It was simply to show that other companies have as much debt per boe/d as PWT now and don't have a market cap of just a few hundred million $.

 

So, $1.75 billion of net debt divided by 86,000 boe/d = $20,350 per boe/d

 

The EV/boe/d or the traditional metric: ($0.34 B + $1.75 B) / 86,000 = $24,300 per boe/d

 

Cardboard

[Wilson-TPC]

Gotcha. Thanks.

[Uccmal]

The revised balance sheet gives them alot more breathing room.  At this point they can probably sit back a little and see how other things unfold.  One doesn't want to get rid of all your production either.

 

As to asset sale prices I think there is a certain amount of "Gentlemen's agreement" going on out west to this point.  Most of these people know each other.  They all know they could be in the same position as Rick George and Dave Roberts.  How many of the CEO's at other oil companies have actually worked for Rick George?  I dont think the deal making is as ruthless as members on this board think.  These guys are also in a perpetual job search so you dont want to piss off potential employers either. 

 

Round about way to say that fair pricing will be the rule, for now. 

[influx]

As to asset sale prices I think there is a certain amount of "Gentlemen's agreement" going on out west to this point.  Most of these people know each other.  They all know they could be in the same position as Rick George and Dave Roberts.  How many of the CEO's at other oil companies have actually worked for Rick George?  I dont think the deal making is as ruthless as members on this board think.  These guys are also in a perpetual job search so you dont want to piss off potential employers either. 

 

Round about way to say that fair pricing will be the rule, for now.

 

Interesting observation. Thanks for sharing. Didnt think about it. But this is another pros (bull-bias) if this is a market reality over there in NA and Canada

[aws]

Wow, it's up 23% after being flat for most of the morning.  Delayed reaction to yesterday's news?

[goldfinger]

Wow, it's up 23% after being flat for most of the morning.  Delayed reaction to yesterday's news?

 

Mister market is efficient  ;D

[Packer16]

Does anyone know the amount of cap-ex PWE requires to keep production flat?  I have not been able to find this number on the website or in their filings.  TIA.

 

Packer

[SharperDingaan]

Nice to see the sale announcement this week; the market reaction was also very illuminating.

 

Keep in mind that in the WCSB, ya dance with the one that brung ya - and the dance partners go way back. It is widely expected that a lot of very good operators are going to lose their firms on this cycle; for no other reason than they were simply overleveraged, and unlucky, in a drop so severe - that nobody could have reasonably predicted it. Talent is rare, oil fields aren’t.

 

PWT has great land holdings, but needs to drill to keep the licenses. Many a start-up gets its break via a farm-in on a known field - in return for drilling it, & paying a royalty in production. Most hosts will also help out on the cost, distribution, & selling sides as well – by granting access to their facilities, at their lower cost (i.e.: flow through). Nobody resents it, because these are going to be tomorrow’s players, & one day it could be you.

 

It is highly likely that maintenance capex is also going to be a lot lower than many think, simply because of farm-ins. We would also expect that Greater Viking is going to be one of the main beneficiaries.

 

With the hard sales now done, & a wealth of very good talent coming available over the next year or so, PWT should do very well.

 

SD

 

[plato1976]

Hard sales way from done, right? They need to deleverage more

 

Nice to see the sale announcement this week; the market reaction was also very illuminating.

 

Keep in mind that in the WCSB, ya dance with the one that brung ya - and the dance partners go way back. It is widely expected that a lot of very good operators are going to lose their firms on this cycle; for no other reason than they were simply overleveraged, and unlucky, in a drop so severe - that nobody could have reasonably predicted it. Talent is rare, oil fields aren’t.

 

PWT has great land holdings, but needs to drill to keep the licenses. Many a start-up gets its break via a farm-in on a known field - in return for drilling it, & paying a royalty in production. Most hosts will also help out on the cost, distribution, & selling sides as well – by granting access to their facilities, at their lower cost (i.e.: flow through). Nobody resents it, because these are going to be tomorrow’s players, & one day it could be you.

 

It is highly likely that maintenance capex is also going to be a lot lower than many think, simply because of farm-ins. We would also expect that Greater Viking is going to be one of the main beneficiaries.

 

With the hard sales now done, & a wealth of very good talent coming available over the next year or so, PWT should do very well.

 

SD

[goldfinger]

Hard sales way from done, right? They need to deleverage more

 

Nice to see the sale announcement this week; the market reaction was also very illuminating.

 

Keep in mind that in the WCSB, ya dance with the one that brung ya - and the dance partners go way back. It is widely expected that a lot of very good operators are going to lose their firms on this cycle; for no other reason than they were simply overleveraged, and unlucky, in a drop so severe - that nobody could have reasonably predicted it. Talent is rare, oil fields aren’t.

 

PWT has great land holdings, but needs to drill to keep the licenses. Many a start-up gets its break via a farm-in on a known field - in return for drilling it, & paying a royalty in production. Most hosts will also help out on the cost, distribution, & selling sides as well – by granting access to their facilities, at their lower cost (i.e.: flow through). Nobody resents it, because these are going to be tomorrow’s players, & one day it could be you.

 

It is highly likely that maintenance capex is also going to be a lot lower than many think, simply because of farm-ins. We would also expect that Greater Viking is going to be one of the main beneficiaries.

 

With the hard sales now done, & a wealth of very good talent coming available over the next year or so, PWT should do very well.

 

SD

 

You have already seen the list of non-core assets multiple times. This management is aggressively getting rid of non core assets as they now believe in oil lower for longer. Swan Hills is a big one that is still in the list. I think the expectations were around 700M for that one but in 2014. It seems they can still get around 400M for this one and then you have others. In the last investor meeting they reiterated that they are not sacrificing future drilling opportunities with these sales either.

[goldfinger]

Yesterday's rig count decline news along with consumption growth outlook much stronger than thought are additional clues that indicate potential shortfall of oil supply against consumption in H2 2016...

[kevin4u2]

Does anyone know the amount of cap-ex PWE requires to keep production flat?  I have not been able to find this number on the website or in their filings.  TIA.

 

Packer

 

Go with with $880 million and you'll be in the ball park.  In the short run they may be able to keep production flat with a little less capex but it will be an illusion.  If they produce the midpoint of their guidance, 86,000 boe/d, they need to spend at least $880 million to replace those barrels being produced, using the three year average F&D costs. 

 

Their netbacks have been $16/boe for the first 6 months of the year and they can't find barrels that cheap.  3 Year average F&D cost is around $28/boe.  Recycle ratios of less than 1 is a destruction of capital.  Creditors should be demanding they quit turning dollar bills into 50 cents. 

 

I ran their production profile at the current price deck and their is no value left over for equity holders.  Asset sales won't help.  It's really an NPV exercise and the math doesn't work, unless your discount rate is less that 5%.  At 10% discount rate the last years reserve report has -$2.00/shr in equity value and at 15% discount rate the equity value is -$3.60/sh.  This one is an option on rising oil prices.  Stick with your other picks and you won't be playing with fire. 

 

[Wilson-TPC]

Does anyone know the amount of cap-ex PWE requires to keep production flat?  I have not been able to find this number on the website or in their filings.  TIA.

 

Packer

 

Go with with $880 million and you'll be in the ball park.  In the short run they may be able to keep production flat with a little less capex but it will be an illusion.  If they produce the midpoint of their guidance, 86,000 boe/d, they need to spend at least $880 million to replace those barrels being produced, using the three year average F&D costs. 

 

Their netbacks have been $16/boe for the first 6 months of the year and they can't find barrels that cheap.  3 Year average F&D cost is around $28/boe.  Recycle ratios of less than 1 is a destruction of capital.  Creditors should be demanding they quit turning dollar bills into 50 cents. 

 

I ran their production profile at the current price deck and their is no value left over for equity holders.  Asset sales won't help.  It's really an NPV exercise and the math doesn't work, unless your discount rate is less that 5%.  At 10% discount rate the last years reserve report has -$2.00/shr in equity value and at 15% discount rate the equity value is -$3.60/sh.  This one is an option on rising oil prices.  Stick with your other picks and you won't be playing with fire.

 

Hey Kevin,

 

I'm not a bull on PWE nor a bear, so just trying to understand the math here.

 

The 86,000 production. 30k of it is noncore, but if you look at their core production, the decline is only high teens.

 

If you use 17% as decline rate, your math would indicate capital efficiency of 60k per flowing. I don't think that's right.

 

I've reached out to management, haven't heard back. These types of stuff should be disclosed on the presentations. 

[goldfinger]

Does anyone know the amount of cap-ex PWE requires to keep production flat?  I have not been able to find this number on the website or in their filings.  TIA.

 

Packer

 

Go with with $880 million and you'll be in the ball park.  In the short run they may be able to keep production flat with a little less capex but it will be an illusion.  If they produce the midpoint of their guidance, 86,000 boe/d, they need to spend at least $880 million to replace those barrels being produced, using the three year average F&D costs. 

 

Their netbacks have been $16/boe for the first 6 months of the year and they can't find barrels that cheap.  3 Year average F&D cost is around $28/boe.  Recycle ratios of less than 1 is a destruction of capital.  Creditors should be demanding they quit turning dollar bills into 50 cents. 

 

I ran their production profile at the current price deck and their is no value left over for equity holders.  Asset sales won't help.  It's really an NPV exercise and the math doesn't work, unless your discount rate is less that 5%.  At 10% discount rate the last years reserve report has -$2.00/shr in equity value and at 15% discount rate the equity value is -$3.60/sh.  This one is an option on rising oil prices.  Stick with your other picks and you won't be playing with fire.

 

Hey Kevin,

 

I'm not a bull on PWE nor a bear, so just trying to understand the math here.

 

The 86,000 production. 30k of it is noncore, but if you look at their core production, the decline is only high teens.

 

If you use 17% as decline rate, your math would indicate capital efficiency of 60k per flowing. I don't think that's right.

 

I've reached out to management, haven't heard back. These types of stuff should be disclosed on the presentations.

 

Isn't the decline rate in the cardium around 16% and around 10% in the Greater Viking for example?

[Packer16]

All I could fins was an Dec 14 analyst report with a capital efficiency of about $30k.  This would imply with a 17% decline rate would imply about $450m.  It would be nice for the company to provide this so we can see the economics going forward.  Gear does a great job showing CF sensitivity to oil prices.

 

Packer

[Wilson-TPC]

All I could fins was an Dec 14 analyst report with a capital efficiency of about $30k.  This would imply with a 17% decline rate would imply about $450m.  It would be nice for the company to provide this so we can see the economics going forward.  Gear does a great job showing CF sensitivity to oil prices.

 

Packer

 

I used 25k, but need a response from the company.

[kevin4u2]

 

Hey Kevin,

 

I'm not a bull on PWE nor a bear, so just trying to understand the math here.

 

The 86,000 production. 30k of it is noncore, but if you look at their core production, the decline is only high teens.

 

If you use 17% as decline rate, your math would indicate capital efficiency of 60k per flowing. I don't think that's right.

 

I've reached out to management, haven't heard back. These types of stuff should be disclosed on the presentations.

 

What do you think it should be?  $/flowing BOE is calculated after the fact, it's not something you target.

 

Maintaining the asset base of a O&G company is straightforward.  If you pull x BOEs out of the ground you need to find x BOEs to replace those ones removed.  Keep in mind that not all BOEs are not created equal.  Secondly, a company can shorten or lengthen their reserve life index based on the mix of wells drilled so that is why it is difficult to use production as a measure.  Production may be flat but reserves can be declining if the RLI is decreasing.  They can drill short term high flush production wells that lack same volume of reserves and this will allow for flat production as the asset base is being depleted.  I call this an illusion. 

 

It's no mistake why many of these companies sell for below book value.  It's because capital has been destroyed.  They keep the game going by raising more equity. 

 

The recycle ratio is one way of measuring capital efficiency in the oil patch.  If a company's netback is $40/boe and their finding costs are $20 per boe that means they are creating 2x cash on cash undiscounted.  This doesn't mean the return is 100% as the BOEs will be produced between now and 100 years from now.  You have to calculate the IRR of the cumulative cashflow stream to determine the return.  Or you can simply look at returns on total capital to see what the actual full cycle IRRs are from the financial statements, but for most companies the calculation is easy because the numerator is zero. 

 

So talking about production numbers can be very misleading.  Every well is basically an NPV exercise.  If you take every BOE of production from today until the last well runs dry multiplied by the netback of that specific BOE and discount the entire stream back to today and you will have the total value of the company.  Of course these are operating cashflows. 

 

Talking about maintenance capex is not something you will ever find in a presentation because the variables that would go into the calculation is too difficult to determine.  BOEs from one area may be plowed back into the ground in another area, and the economics changes where ever you go.  You can only do rough approximations as I did above. 

 

As an alternative to my estimate above, you can look at their depletion expense which is the book value of the PP&E divided by total reserves times the percentage pull out of the ground that quarter.  For PWE that is just over $700 million annualized but with the asset sales it may be somewhere slightly less than that now.  This method is also fuzzy because in Canada under IFRS it is based on 2P reserves, which involves so many assumptions since many of the BOEs are not even on production. 

 

My number was based on replacing the BOEs taken out of the ground times the 3 year average finding costs.  If you want to use the depletion method you'd better hope they are much more efficient at finding new BOEs today than in the past and secondly that they don't have any more writedowns this year, which is not likely.  Last year the finding costs were in the $50-60 per BOE range if I recall correctly.  High 20's per BOE is a realistic number for this exercise. 

 

Hope this makes sense.