PWE - Penn West Petroleum

[Cardboard]

"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."

 

Oh really?

 

They sold two weeks ago a so-so asset at $43,000 per boe/d for which the buyers and financiers, I am sure, were all well aware of the current price desk.

 

And somehow we should believe your analysis that what is left or 86,000 boe/d, the Duvernay, other land/reserves is not even worth the debt or $1.75 billion or $20,350 per boe/d?

 

Cardboard

[goldfinger]

"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."

 

Oh really?

 

They sold two weeks ago a so-so asset at $43,000 per boe/d for which the buyers and financiers, I am sure, were all well aware of the current price desk.

 

And somehow we should believe your analysis that what is left or 86,000 boe/d, the Duvernay, other land/reserves is not even worth the debt or $1.75 billion or $20,350 per boe/d?

 

Cardboard

 

I have my eyes on a 54K core production producing in CAD$ with ratios among the best in the 3 core areas with all non-core assets sold or to be sold, debt at 1B max and literally world class shareholder management in an environment that realizes that it overreacted. All this for the price of cheap option...

[SharperDingaan]

We said the hard sales are over - not that there should be no further sales.

Their debt/boe flowing is now less than their peers, & they are in a more equal negotiating position than they were.

 

Practical well economics is a payback exercise, not an NPV one.

We have no idea what the price, or cost, deck will be six months out - let alone 40 years. Same thing for the discount rate or the expected well life.

And we know, with certainty, that both are going to change over the life of the well.

BS analysis.

 

If you can get the cost back before the loan comes due - you drill (US shale). If you had to hi-grade to do it, you will be in surplus - but not for very long. Drill normally & you could be in surplus for some time. A better field has a higher total upfront cost, with lower upfront cost/boe flowing costs, & a longer life. You get what you pay for.

 

Real production varies by year, according to economic conditions; maintenance capex is just analyst convention.

At higher prices the well next to mine becomes economic again, & is no longer shut-in; production from zero capex. If my SCFP tolerates it, it may also be cheaper to buy versus drill; expansion/contraction from unpredictable capex.

More BS analysis.

 

Resource modeling is not the same as forecasting factory production.

Use the wrong model & you will get burned.

 

SD

 

 

[kevin4u2]

"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."

 

Oh really?

 

They sold two weeks ago a so-so asset at $43,000 per boe/d for which the buyers and financiers, I am sure, were all well aware of the current price desk.

 

And somehow we should believe your analysis that what is left or 86,000 boe/d, the Duvernay, other land/reserves is not even worth the debt or $1.75 billion or $20,350 per boe/d?

 

Cardboard

 

Don't believe me, believe the math. 

 

If they could get $43,000 per boe/d they should sell everything and pay shareholders back.  If you take that flowing BOE number and divide it by their current netbacks of $15/boe.  That means it would take the purchaser 2867 days or 7.9 years to get their investment back.  Actually it would take closer to 12 years for the acquirer to get their cash back because the production rate would decline over time. 

 

Don't shoot the messenger when reality sucks. 

 

Now lets look at the $20,000 per boe/d number.  Divide this by the current netbacks of $15 per boe and you get 1333 days or 3.7 years.  The purchasing company may be able to squeeze out some more operational efficiencies and increase the net netbacks marginally to make this a three year payback.  That's a good rule of thumb in most industries. 

 

A few more things. 

1) Netbacks.  With Edmonton Mixed Sweet back down to $CAD 57/boe.  Their netbacks will be $10/boe lower than last quarter, which was $18/boe.  Their hedges will make some of that back so lets call it around $12/boe.  This makes the math even worse. 

 

2) Don't get too excited about land.  Most of it will expire worthless.  I include all land value at cost in my asset value calculations.  The problem with land is that everyone's got it and in this price environment most land is a liability, not an asset.  It makes companies do stupid things like drilling just to retain land.  You may laugh at that but I can point to regulatory filings where that is stated.  The problem is nobody reads the regulatory filings. 

 

3) Every well always has been and always will be a NPV exercise.  Every company plasters their presentations with half cycle IRR's of 40, 50, 100%.  I guess nobody every looks at the reserve reports either.  Reserve reporting always has been an NPV exercise too.  Here's the kicker, the payback period CANNOT be calculated without an estimate of the cash flow stream for the first few years.  Payback period is a function of the cash flow stream, not the other way around. 

 

Now watch the guns come out again. 

 

[investor-man]

Hey kevin4u2, it sounds like you've put a lot of thought and effort into this. It's clear you would not invest in PWE, but are there others in the sector that you feel very good about? And if so, why do you like them so much?

 

Cheers!

[SharperDingaan]

Just to put it to rest.

 

Nobody claimed that you did not need to estimate future CF to determine payback.

What you are missing is that near-term CF estimates are far less uncertain than long term ones. If the proposed well cannot repay its loan within 12 months - it does not get drilled. Bankers are cutting back credit lines. They either do not want to lend to you - or want their cash back within 12 months; not your sniveling debt service payment instead.

 

Reserve reports assume going concern, & development over many years. You are assuming immediate liquidation (If they could get $43,000 per boe/d they should sell everything and pay shareholders back).  This is also oil/gas, not other industries (make this a three year payback.  That's a good rule of thumb in most industries). Apples to oranges comparisons.

 

The biggest assets on a mutual funds SCFP is capitalised deferred sales commission (DSC). By your approach, an investor should simply buy enough of a mutual fund to control it; then force either a liquidation, or a resale to monetize the DSC. Big $ out for small $ in.

 

It does not happen, because its a long term high margin business.

Oil/Gas is the same.

 

SD

 

[Cardboard]

It sounds to me Kevin4u2 that you are saying that the entire oil & gas sector sucks and that people are still willing to pay very high prices for it. Similar to Einhorn's claim.

 

I do read reserve reports and know recycle ratios and my own claim is the following: the vast majority of NA oil & gas producers are bankrupt/should halt most operations if prices remain as is over the long term (10 years). Those that would be able to make it would have a much smaller production base. So unless oil demand drops dramatically this scenario is highly improbable hence prices have to rebound to a higher level meaning that Q2 or coming Q3 netbacks are abnormal and should not be used to forecast the future.

 

What I can do however is to look at prices paid for assets by parties at  arm's length under very difficult circumstances and be able to conclude that PWT remaining assets are worth a lot more than the debt or $20,350 boe/d. Based on many data points, $40,000 per boe/d does not seem far fetched at all. So that is my liquidation/bankruptcy value or $3.25 a share. From $0.85, that leaves a lot of margin of safety.

 

How much is it going to be worth in the future once they pay more debt and focus mostly on their 3 core plays? Then I also have to conclude that it should approach other players with similar assets and strategy. This team is not opposed to cost cutting or looking at peers for better techniques. Once the cleanup, write-downs are done, then costs, recycle ratio and other measures should also be close to peers. That is a 5 to 20 bagger from here based on how things unfold.

 

So what part of that reality sucks for the longs?

 

Cardboard

[Cardboard]

Now, I must point out the following correction:

 

In H1, PWT produced 93,024 boe/d or 16,837,344 boe.

 

The revised guidance for 2015 following the sale of Mitsue and Weyburn as of July 1 which were 4,500 boe/d and 2,500 boe/d respectively is 84,000 - 88,000 boe/d.

 

So assuming the mid-point or 86,000 boe/d for 2015, they need to produce a further: (86,000 x 365) - 16,837,344 = 14,552,656 boe. In H2 or over the last 184 days of 2015, that is 79,090 boe/d.

 

Hence following these two sales, net debt to current or on-going flowing boe/d is really: $1.75 billion / 79,000 boe/d = $22,150 boe/d.

 

So this hurts the math on PWT a bit but, here is the more interesting part:

 

In Q1, PWT produced 94,905 boe/d.

In Q2, PWT produced 91,164 boe/d explained by the sale of 1,000 boe/d in non-core assets and shut-in of 2,000 boe/d of uneconomical production.

 

Therefore, how do we go down from 91,164 boe/d to 79,090 boe/d or a 12,000 boe/d reduction by just selling 7,000 boe/d of non-core assets and reducing yearly capex from $625 million down to $500 million? There is 5,000 boe/d that cannot be explained by decline rates alone IMO.

 

Is there still something left to be disclosed like what happened with the Waskada assets? Per the Annual Information Form, they had 458 net producing oil wells in Manitoba as of December 31, 2014. This had to be a roughly 4,000 boe/d producing asset. It cannot be explained IMO by the 1,000 boe/d sale in Q2.

 

Or are they forecasting more shut-ins for H2?

 

Cardboard

 

 

[SharperDingaan]

Very good catch, & 50/50 either way.

 

SD

[influx]

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

 

Mister market is efficient  ;D

 

Interesting..

This is more qualitative to me

Been reading the weekend more stuff on the qualitative side..I pulled partial trigger at C$0.67..BUT still looking to whether to go big..

 

This seems to me either:

1. the restriction was lifted for the insiders. no more sales at the moment, no mou's

2. someone big got in, the restriction could be still on...

 

Canada

Avg Vol (3m): 2,140,210

Friday Volume: 5,163,657

 

USA

Avg Vol (3m): 3,082,740

Friday Volume: 10,468,284

[Uccmal]

A bump from the SU/COS news. 

 

Other than the actual product PWT and COS are comparable in size.  COS pumps 15% more, and has 15% more debt.  $ 51000 per flowing barrel. 

 

COS has 2.4 B in debt.  Suncor is offering 4.3 B for COS in a share exchange that would take all of COS including the debt.  My guess is they will be pressed higher to get it through.

 

A similar offer for PWt gets us to 8.00 per share.  Obviously there are differences in each set of assets.  Both have merits and problems. 

[goldfinger]

A bump from the SU/COS news. 

 

Other than the actual product PWT and COS are comparable in size.  COS pumps 15% more, and has 15% more debt.  $ 51000 per flowing barrel. 

 

COS has 2.4 B in debt.  Suncor is offering 4.3 B for COS in a share exchange that would take all of COS including the debt.  My guess is they will be pressed higher to get it through.

 

A similar offer for PWt gets us to 8.00 per share.  Obviously there are differences in each set of assets.  Both have merits and problems.

 

CALGARY – One of Canadian Oil Sands Ltd.’s largest shareholders has vowed to go to court rather than accept Suncor Energy Inc.’s $4.3-billion hostile takeover bid.

 

“It’s not a low-ball offer, it’s a no-ball offer,” said Seymour Schulich, a Canadian billionaire who owns 25 million shares, or five per cent, of Canadian Oil Sands. “The bid is ridiculous.”

 

Suncor, Canada’s largest energy company, revealed Monday it had approached Canadian Oil Sands management twice in the spring about a deal, but had been rebuffed at a higher price. Its unsolicited all-share bid would represent a total deal value of $6.6 billion, including debt.

 

Schulich said that proposal is worth less than half the replacement value of the Syncrude Canada Ltd. joint venture, of which Canadian Oil Sands owns 37 per cent. That stake in Syncrude is Canadian Oil Sands’ only asset.

 

As a comparison, Shulich noted that Imperial Oil Ltd. recently built the Kearl oilsands mining project at a cost of $13 billion, which produces lower-grade oil than the Syncrude project.

 

“I ain’t selling at that price,” he said of Monday’s bid, adding that he believes Canadian Oil Sands is worth $20 per share. “If they succeed, I’ll go to court to get a valuation.”

[Cardboard]

He is talking tough but, you have to decide about dissenting before you vote or seeing if they succeed:

 

“If they succeed, I’ll go to court to get a valuation.”

 

Anyway, I think that Suncor made an opportunistic bid with COS shares right at the bottom but, they are kind of trapped.

 

Syncrude is their only asset and look at the list of partners:

 

http://www.syncrude.ca/about-syncrude/ownership-and-investors/

 

The only other potential bidder is Imperial Oil since the others are Chinese owned (Sinopec and Nexen) and a bid would likely get turned down by the Canadian Government no matter who wins the election IMO and others are too small or not likely to bid.

 

The other problem for an Imperial bid is that they would end up with 62% of the joint venture or a majority while Suncor ends up with 49%. There could be special rules in the joint-venture agreement protecting minority owners.

 

Cardboard

[kevin4u2]

Hey kevin4u2, it sounds like you've put a lot of thought and effort into this. It's clear you would not invest in PWE, but are there others in the sector that you feel very good about? And if so, why do you like them so much?

 

Cheers!

 

I have been looking but haven't found much if anything that makes sense today.  People on here think these companies are worth $40-50,000 per flowing barrel but that would require higher prices.  I remember back before the oil bull run, 2000-2002, most oil companies sold for $25,000 per flowing barrel.  That was the norm so I don't get excited when people balk.  I've seen this rodeo before.  When every one on this forum begin throwing in the towel, it will be time to step up.  I'm with Gary Shilling, oil will likely go down to sub $30/boe before this cycle is over.  This is well below the full cycle cost but in times like this it comes down to the marginal cost of production (the rest is sunk) which is in the $10-20/boe range.  So long as the production is cash flow positive they will keep pumping (they really have no choice).  Someone will blink first, or the bankruptcies will start. 

 

As for what I like.  I want to own the lowest cost producer, period, end of story.  That is the ONLY competitive advantage in a price taking industry such as oil and gas.  This mean two things, 1) I don't like O&G investing and 2) I like Peyto.  They have consistently been profitable for 16 years through a wide range of industry conditions.  Consistent profit margins.  Listen to their presentation at the Peter's conference a couple weeks ago and you'll get a good feel for what they are about, shareholder returns.  They have actually delivered those

 

So many of these oil and gas companies are a complete waste of time.  If you handed just the financial statements (with a name attached) to anyone who understands what they mean, they would tell you they are terrible businesses.  Peyto is a breath of fresh air in that they are actually profitable.  I also owned BXE earlier this year, make a quick buck but sold before NG tanked again.  I do not currently own any BXE shares.  I would like to see demonstration of the BXE story before committing to that name.  The predecessor to BXE was not a outstanding company.  I would also like to see a solid $3/mcf AECO gas price before investing.  The great thing about investing is that you do not have to invest in O&G.  I mean, I was reflecting the other day... Coke prices have consistently been going one direction for a long, long time. 

 

If you look at NG prices in Canada, they are selling for the marginal cost of production, around $2.5-3/mcf.  I can't comment on the US since I don't know those numbers for sure.  On a full cycle basis, NG has to be $5/mcf for the Canadian NG industry to make sense.  The current oil shale revolution happened 8 years ago in the NG business (shale gas).  Those interested should study what happened to the NG sector since then, but anyway.  With AECO gas prices at $2.60/mcf as of today, Peyto is at breakeven on a full cycle basis.  What does that mean for other NG producers?  Not good.  I would like to buy PEY but at a lower price, but this is the PWE thread so I better stop here.  Cheers!

 

[goldfinger]

I cannot see a marginal cost of production at 10-20$/boe in a graph like this: http://www.rystadenergy.com/AboutUs/NewsCenter/PressReleases/global-liquids-supply-cost-curve ?

[goldfinger]

I cannot see a marginal cost of production at 10-20$/boe in a graph like this: http://www.rystadenergy.com/AboutUs/NewsCenter/PressReleases/global-liquids-supply-cost-curve ?

 

Gary Shilling was actually bullish on NA energy producers in 2012 and a little after that. I think many of his deflation claims have value (I actually like FFH at the moment) and he has been right with 30y bonds for decades. He seems confused on plenty of other points and has had to explain disastrous forecasts many times over (like in 2013 for 2012). I wonder how much of his career is based on buying 30y treasuries?

[Green King]

I cannot see a marginal cost of production at 10-20$/boe in a graph like this: http://www.rystadenergy.com/AboutUs/NewsCenter/PressReleases/global-liquids-supply-cost-curve ?

 

Gary Shilling was actually bullish on NA energy producers in 2012 and a little after that. I think many of his deflation claims have value (I actually like FFH at the moment) and he has been right with 30y bonds for decades. He seems confused on plenty of other points and has had to explain disastrous forecasts many times over (like in 2013 for 2012). I wonder how much of his career is based on buying 30y treasuries?

 

This forecast seems like a reasonable conclusion. Since that is what happened to fiber optics and any other business that depends on CapEx and has no moat. I don't know this is the same situation since there is a cartel aspect to this industry. 

[goldfinger]

I cannot see a marginal cost of production at 10-20$/boe in a graph like this: http://www.rystadenergy.com/AboutUs/NewsCenter/PressReleases/global-liquids-supply-cost-curve ?

 

Gary Shilling was actually bullish on NA energy producers in 2012 and a little after that. I think many of his deflation claims have value (I actually like FFH at the moment) and he has been right with 30y bonds for decades. He seems confused on plenty of other points and has had to explain disastrous forecasts many times over (like in 2013 for 2012). I wonder how much of his career is based on buying 30y treasuries?

 

This forecast seems like a reasonable conclusion. Since that is what happened to fiber optics and any other business that depends on CapEx and has no moat. I don't know this is the same situation since there is a cartel aspect to this industry.

 

How do you make up for 6% decline rate worldwide (6m bow) + a loss of 1 m barrel na prod this year with the costs explained in the graph above (20000 data points across the world) in the next future with 10-20$ marginal costs barrels is difficult to explain I think...

[Green King]

I cannot see a marginal cost of production at 10-20$/boe in a graph like this: http://www.rystadenergy.com/AboutUs/NewsCenter/PressReleases/global-liquids-supply-cost-curve ?

 

Gary Shilling was actually bullish on NA energy producers in 2012 and a little after that. I think many of his deflation claims have value (I actually like FFH at the moment) and he has been right with 30y bonds for decades. He seems confused on plenty of other points and has had to explain disastrous forecasts many times over (like in 2013 for 2012). I wonder how much of his career is based on buying 30y treasuries?

 

This forecast seems like a reasonable conclusion. Since that is what happened to fiber optics and any other business that depends on CapEx and has no moat. I don't know this is the same situation since there is a cartel aspect to this industry.

 

How do you make up for 6% decline rate worldwide (6m bow) + a loss of 1 m barrel na prod this year with the costs explained in the graph above (20000 data points across the world) in the next future with 10-20$ marginal costs barrels is difficult to explain I think...

 

I think i wasn't wording it correctly. I meant it was a reasonable possibility. The future is not a singular outcome event it's more a multiple of possible event. That is one of the possible event since it has happened with other industries. But different from other industries in one way since there is a cartel involved. So there might be something similar with a different flavor.

[goldfinger]

I cannot see a marginal cost of production at 10-20$/boe in a graph like this: http://www.rystadenergy.com/AboutUs/NewsCenter/PressReleases/global-liquids-supply-cost-curve ?

 

Gary Shilling was actually bullish on NA energy producers in 2012 and a little after that. I think many of his deflation claims have value (I actually like FFH at the moment) and he has been right with 30y bonds for decades. He seems confused on plenty of other points and has had to explain disastrous forecasts many times over (like in 2013 for 2012). I wonder how much of his career is based on buying 30y treasuries?

 

This forecast seems like a reasonable conclusion. Since that is what happened to fiber optics and any other business that depends on CapEx and has no moat. I don't know this is the same situation since there is a cartel aspect to this industry.

 

How do you make up for 6% decline rate worldwide (6m bow) + a loss of 1 m barrel na prod this year with the costs explained in the graph above (20000 data points across the world) in the next future with 10-20$ marginal costs barrels is difficult to explain I think...

 

I think i wasn't wording it correctly. I meant it was a reasonable possibility. The future is not a singular outcome event it's more a multiple of possible event. That is one of the possible event since it has happened with other industries. But different from other industries in one way since there is a cartel involved. So there might be something similar with a different flavor.

 

Understood, I am not saying he is crazy and he may be right at some point (???), or he likes the publicity? But given the current data unless consumption totally falls off a cliff, it seems he is going to have to wait for that to become a reality with some degree of persistence. I feel that his predictive abilities are much better with treasuries to be honest.

[Green King]

I cannot see a marginal cost of production at 10-20$/boe in a graph like this: http://www.rystadenergy.com/AboutUs/NewsCenter/PressReleases/global-liquids-supply-cost-curve ?

 

Gary Shilling was actually bullish on NA energy producers in 2012 and a little after that. I think many of his deflation claims have value (I actually like FFH at the moment) and he has been right with 30y bonds for decades. He seems confused on plenty of other points and has had to explain disastrous forecasts many times over (like in 2013 for 2012). I wonder how much of his career is based on buying 30y treasuries?

 

This forecast seems like a reasonable conclusion. Since that is what happened to fiber optics and any other business that depends on CapEx and has no moat. I don't know this is the same situation since there is a cartel aspect to this industry.

 

How do you make up for 6% decline rate worldwide (6m bow) + a loss of 1 m barrel na prod this year with the costs explained in the graph above (20000 data points across the world) in the next future with 10-20$ marginal costs barrels is difficult to explain I think...

 

I think i wasn't wording it correctly. I meant it was a reasonable possibility. The future is not a singular outcome event it's more a multiple of possible event. That is one of the possible event since it has happened with other industries. But different from other industries in one way since there is a cartel involved. So there might be something similar with a different flavor.

 

Understood, I am not saying he is crazy and he may be right at some point (???), or he likes the publicity? But given the current data unless consumption totally falls off a cliff, it seems he is going to have to wait for that to become a reality with some degree of persistence. I feel that his predictive abilities are much better with treasuries to be honest.

 

I don't think anyone's predicative ability is worth anything. If someone can predict the future of anything with great accuracy he or she would own the world by now. Its more about knowing the possible outcomes and being sure you're not fatally hurt by it and compensated correctly for taking on the risk.

 

fyi The cartel can just make an announcement tomorrow and everything will change.

[influx]

http://www.themarketbusiness.com/2015-10-05-penn-west-petroleum-short-interest-down-14-5-in-september-pwe

West Petroleum (NYSE:PWE) was the target of a large decrease in short interest during the month of September. As of September 15th, there was short interest totalling 16,875,846 shares, a decrease of 14.5% from the August 31st total of 19,733,068 shares, MarketBeat.com reports. Currently, 3.4% of the company’s stock are short sold. Based on an average trading volume of 3,357,453 shares, the short-interest ratio is currently 5.0 days.

[Cardboard]

"People on here think these companies are worth $40-50,000 per flowing barrel but that would require higher prices.  I remember back before the oil bull run, 2000-2002, most oil companies sold for $25,000 per flowing barrel."

 

Speaking for myself, I don`t think anything. I simply observe multiples being paid by market participants. Those that are closest to the well head, sell that product everyday at spot or on the forward curve and are capable to finance their investment via equity, debt or other means and think that they can earn a return on top of it. I think that these people are more capable than I am to determine what is the value of these assets. 

 

In 2000-2002, it was before the oil bull run. Today, I think that we can call it following a crash or what must now be close to a bottom. Global demand back then was 77 million barrels a day. Today it is 94 million. Since then we have had inflation, a depletion of cheap barrels to extract and much higher finding and development costs. So maybe that this increase in the multiple that they are willing to pay or from $25,000 to $40,000-$50,000 is justified.

 

"So long as the production is cash flow positive they will keep pumping (they really have no choice).  Someone will blink first, or the bankruptcies will start."

 

You are right, they will keep pumping from their existing, completed wells since operating costs are in the $10-$20 a barrel range. However, we are seeing that this does not suffice to maintain production at current level: down over 5% in the U.S. alone in just 5 months. We need new wells being drilled and completed and with less easy capital available it is simply not happening. And bankruptcies won`t change that since it simply means shareholders losing their ownership to banks and bond holders who are already applying their restructuring plan at distressed firms. 

 

Now regarding a macro bet based on the wisdom of Gary Shilling, then I think it is a discussion for another thread.

 

Cardboard

[Cardboard]

Another asset sale, this time by Pengrowth Energy:

 

http://www.stockwatch.com/News/Item.aspx?bid=Z-C%3aPGF-2315730&symbol=PGF&region=C

 

At these metrics, PWT shares are worth just over $2 on boe/d basis and around $3.50 on 2P reserves.

 

Cardboard

[goldfinger]

I am not sure shale is going to help Gary's predictions: http://gulfnews.com/business/sectors/energy/shale-oil-pioneer-sees-dramatic-decline-in-us-output-growth-1.1596166