PWE - Penn West Petroleum

[investor-man]

https://webcasts.welcome2theshow.com/cibcwhistler2016/penn-west

[Pelagic]

https://webcasts.welcome2theshow.com/cibcwhistler2016/penn-west

 

Thank you. I always try to be skeptical when I hear management talking but he seemed incredibly upbeat, much more so than I would have guessed any oil execs would be right now. It's good to see they have levers available to them before they have to sell any of the core assets.

[tengen]

It's new math, get with the program.  Call it "synthetic profits", or something like that.

 

Synthetic profits? Good one!

[Cardboard]

I would not call the CFO incredibly upbeat. It was a very conservative conversation with no new data being presented. He seemed hesitant to me at many occasions to discuss further. Would not state how much capex is required to keep production constant. Just that they are living on a cash in must equal cash out basis.

 

The levers seemed a little limited: cashing the FX hedges, reducing capex. Non-core asset sales are hard since financing is tough to get by for a buyer and the spread between bid and ask has widen again.

 

When he states that they don't see having to sell core assets, that is his current view. If conditions remain poor and they breach the EBITDA covenant, the banks may not consider as much as he thinks the fact that they have met all commitments and exceeded them in 2015.

 

One of the most important questions was not asked or what is the current level of oil hedging entering Q1? They had stated in the last Q that they wanted to nearly double the existing amount. There was an opportunity at the time or when $50 oil is like the new $100!

 

Cardboard

[SharperDingaan]

Agreed. He's doing what he can, folks like the assets, but are finding it hard to finance. Worst case, PWT may have to offer some secured short-term vendor financing (with their syndicates OK) to get it done.

 

Notable is a 2016 drilling budget close to zero. Excluding any successful farm-in additions, some of their core areas have decline rates of around 16-18%/yr. The also need a CAD price of 35-40/bbl to break even; still positive at $US30/bbl but not by much.

 

SD

[Uccmal]

In the interests of disclosure I have significantly reduced my PWT position.  I needed the money elsewhere and got out without too much further damage (code words for I lost some money) I still have a small position of roughly 20000 shares.

 

I sold alot of ARX as well at a small profit.  Loaded up a bit on WCP after their dividend cut.

 

Too many other long term dividend growers are on sale in Canada, to be wasting time in speculative positions.  I have been steadily moving up the quality curve in this bear market.  Two of my holdings: BCE, and BEP.un have raised their dividends in the past week.  I am expecting an increase in Enb and SSW, and possibly AQN shortly.  Mullen is holding with passable earnings.  Russell reports next week - a 30% divvy cut may be in the cards with Rus, but they will bring it back when cash flow improves.

 

 

 

[paperwerks]

I sold half my PWE position yesterday. The risk is going up with oil in the $20's and am considering putting most of the sale proceeds into Baytex which seems slightly less risky.  I will think more on this and wait a while. With some of the proceeds I bought some NRF preferreds today.

 

 

[SharperDingaan]

Very nice to see.

 

http://web.tmxmoney.com/article.php?newsid=1455606000331839771&qm_symbol=PWT

The settlement agreements provide for a payment that will be fully funded by insurance coverage maintained by Penn West.  As a result, the payment will not impact Penn West's cash resources or financial position.

 

SD

[FB]

I have to admit I am impressed by PWE’s stock performance. At that oil price, the equity is essentially worth zero and it doesn’t really have the luxury to wait very long given its leverage: my guesstimate is that covenants will probably be breached by Q1 16 if not earlier. This is a call on oil ( always was) but right now it looks very expensive. On paper, if I were to bet on oil, it would probably be much cheaper to buy OTM Jun of Dec WTI calls.

Does anyone have any explanation? I guess it’s all about covenant negotiation. The mgt team is top notch but how much leverage do they really have? Any insight into these difficult discussions? Last time round, creditors got a nice security package and a spread pickup ; what can keep them in check this time? Does anyone know who they are by the way?

Also the company could be bought as recommended by Nawar but who would pay that sort of price in this environment.

thx

 

[Uccmal]

Well I have hedged 99% of my position ;)

 

I sold virtually all of my Pwt shares this past week.  Some at a loss, some at a gain, depending on the account.  Call it a break even.  That was in this phase.  All told from the beginning of this experience in 2014 (call it two phases), I have lost a fair sum on Pwt.  The upside to that is the available tax space for equivalent gains.  Not my normal goal but it happens. 

 

This oil downturn has turned out to be more protracted than I expected.  From where I sit if Pwt manages to survive it will be a long road back with plenty of buying opportunities along the way.  I am not adverse to buying it at higher prices then I have sold, after my wash periods have cleared assuming of course the situation has dramatically improved.

 

I am seeing better recovery opportunity in Whitecap, and the peripheral companies I hold: Mullen Group, and Russell Metals - the upside is less, but the downside is also much less. 

 

Pwt specific problems I am seeing (in relation to oil price of course):

 

If oil prices stay low: they will not remain solvent, without a debt conversion, or buyout.

 

If prices rise: the hedges they hold will work against them for awhile.  Any new hedges they buy will cost. 

 

I am certainly keeping an eye on the company.  I still hold 1000 shares. 

[Cardboard]

I still think that the company is worth somewhere around $2 in the current environment which is slowly improving with production coming down in most regions and OPEC and Russia apparently serious about a freeze.

 

I did sell some because I too found other opportunities with more visible upside from here. From $1.30 to $2 is a good return but, it can be found elsewhere and without the incessant day to day volatility from oil.

 

If someone had a good stock replacement strategy using options I would be quite willing to listen but, I have yet to find one myself.

 

Longer term, this company could be worth multiples of the current price but, you need a sustained higher oil price in the $60-70 range. I do believe it will happen as this recent mantra that oil can now be produced for next to nothing is a false narrative. It is easy to cut cost when there is no demand for drilling services but, once demand picks up do you believe that costs will remain that low? Precision Drilling is one example of companies that are eliminating most if not all their older rigs. So staffing won't come back and the number of available rigs will be significantly less.

 

At some point the Saudis will hit an air pocket too. Either a conflict (war/civil war) or increased depletion at their Ghawar field. You can't inject massive quantities of water into the ground forever and produce oil at the same cost or level. At some point costs go up or the reservoir depletes.

 

Cardboard

[SharperDingaan]

We hold a similar view on the near-term pricing, & we'll all find out within the next little while.

 

Longer term we're more optimistic on PWE, but it reflects our experience to date.

We think they will still be here, but ownership may well look a little different. We also think that because they kept drilling (within CF), it will help them enormously when the industry eventually turns; if you're ain't a dance partner today - you ain't getting access to the very few remaining specialized low cost rigs available. There ain't going to be any shot gun marriages either, without their many friends approval.

 

We live in interesting times.

 

SD

 

[FB]

Hi Cardboard,

Re option profile: as per the end of Jan guidance, at WTI US$35, PWE generates ~CAD200M of EBITDA. With CAD2bn of debt, the equity is not worth much ; at that point the company essentially belongs to debtholders. Not sure exactly how that would play out but the economics are pretty clear.

To be worth something, it will need to reach a debt/ebitda ratio of, say, 5x (in fact covenants drop to 4.5 in Jun and 4 by the end of the year...) => US$400M, which, extrapolating the EBITDA sensitivity provided in the JAN update, would translate in a WTI in the region of US$50.

In that sense, PWE is essentially a call on WTI at strike of US$50 ;

I can buy calls on oil Dec16 strike US$50 for US$2.5 right now (and much cheaper with shorter maturity given the contango). If oil goes to US$60, I make 4x… Even at WTI US$60, PWE is unlikely to go back to US$4/share (in fact, last time WTI was at US$60, PWE was trading at $2…)

This is a simplistic view obviously, but it shows that PWE is not such a “convex” play on oil. It used to be very convex for sure, when it was trading in the region of 0.5 with WTI at $45 but not anymore imho…

 

[Cardboard]

Your analysis is correct as a going concern except that Penn West is more a sum of the parts story.

 

They are basically stuck with a lot of producing assets that do not produce a lot of cash flow and into which they are not deploying a dime to make them more efficient. That is not even talking about their royalty package and the Duvernay.

 

Most of these blocks are company makers and if oil continues to move upward, the asset market should re-open along with financing. Mitsue was a great example for Cardinal Energy.

 

There is a myriad of Canadian companies currently raising cash via bought deal arrangements. Some of that will go toward acquisitions and mostly tuck-in style.

 

So the key IMO with PWT is the elimination of debt via more non-core asset sales which at some point will show a solid company, well financed and profitable and looking as good as any of the favourites out there. The per boe/d valuation will go up while net debt will have come down which should accrue directly to shareholders assuming that they go fully with that process and with no dilution. $4 CAD a share or a triple from here would be a good guess. At that point, the virtuous cycle would also have started so it may double again.

 

Of course there is risk and where oil goes from here is key, although I think that in a liquidation it would be worth $2 CAD as I mentioned. Someone could also offer that amount to shareholders and likely win while they would continue the process and likely get better prices for the pieces.

 

l agree with you that buying oil directly is the way to go if one is looking to invest purely in oil. What instrument are you buying exactly?

 

I may have to think about this further since PWT is dead in the water without higher oil prices and your strategy offers as much return but, with much less capital deployed. Kind of why I was looking for a stock replacement strategy. Although, I do feel that current price and as I said $2 CAD is pretty much rock bottom for the current environment. Maybe half into PWT and half into oil calls?

 

Cardboard

[FB]

Cardboard, I am actually not buying any option on oil. I try to avoid outright directional bets, especially on something as speculative as Oil. I am not an oil expert at all and I don’t know how much credit I can actually give to the “Experts” in this volatile market. To give you the whole story, I actually bought PWE earlier on and sold WTI calls against it (Jun16 and Dec16, strikes from 40 to 50): PWE was super cheap, contango and vol through the roof, the trade was nicely convex. I unwound everything end of Dec when the play was getting more concave and came out almost flat (I would have done very well had I stuck to the “no-directional view” strategy and unwound earlier).

PWE is a little expensive imho but I would not do the opposite trade (ie short PWE / Long call) ; as you pointed out, there is more to the story of PWE than a simple call on oil and the it’s not expensive enough to take that sort of risk. So no strong recommendation I am afraid! Currently looking at the helicopter market (Era, Bristow and co), logically severely impaired by the oil collapse.

The pb with PWE is obviously its huge lvrg and the fact it does not have the means to survive another year (or less?) at these prices... Would you recommend any other oil play, which could weather a prolonged low oil price environement? thx

 

[Uccmal]

Your analysis is correct as a going concern except that Penn West is more a sum of the parts story.

 

They are basically stuck with a lot of producing assets that do not produce a lot of cash flow and into which they are not deploying a dime to make them more efficient. That is not even talking about their royalty package and the Duvernay.

 

Most of these blocks are company makers and if oil continues to move upward, the asset market should re-open along with financing. Mitsue was a great example for Cardinal Energy.

 

There is a myriad of Canadian companies currently raising cash via bought deal arrangements. Some of that will go toward acquisitions and mostly tuck-in style.

 

So the key IMO with PWT is the elimination of debt via more non-core asset sales which at some point will show a solid company, well financed and profitable and looking as good as any of the favourites out there. The per boe/d valuation will go up while net debt will have come down which should accrue directly to shareholders assuming that they go fully with that process and with no dilution. $4 CAD a share or a triple from here would be a good guess. At that point, the virtuous cycle would also have started so it may double again.

 

Of course there is risk and where oil goes from here is key, although I think that in a liquidation it would be worth $2 CAD as I mentioned. Someone could also offer that amount to shareholders and likely win while they would continue the process and likely get better prices for the pieces.

 

l agree with you that buying oil directly is the way to go if one is looking to invest purely in oil. What instrument are you buying exactly?

 

I may have to think about this further since PWT is dead in the water without higher oil prices and your strategy offers as much return but, with much less capital deployed. Kind of why I was looking for a stock replacement strategy. Although, I do feel that current price and as I said $2 CAD is pretty much rock bottom for the current environment. Maybe half into PWT and half into oil calls?

 

Cardboard

 

I am trying to DE-activate my inner gambler.  He costs me too much. 

 

Pwt is entirely at the mercy of the oil gods.  Until they get some of the debt cleaned away they are going to continue to have this near death experience.  I could put out numerous scenarios but we all know what they are, after 81 pages of discussion.  If there is a recovery in tje stock orice, ot womt be linear - there will be lows to be had even as things get better. 

 

Whitecap was trading at a multiyear low all last month, and there is little chance of a total wipeout.  It is an easy double in a rising oil environment and pays a dividend.  Same with Russel Metals, and Mullen Group (probably not a near term double), without the direct commodity exposure. 

 

 

[Cardboard]

Well, I am still interested to know how you are buying/selling these WTI calls? I don't have Interactive Brokers so futures and commodities are out of reach.

 

In terms of what looks viable now in a low price environment with good upside: SGY. To tell you the truth, I have to do some research by the end of this week on what is "new" out there. Prices move a lot and companies do change so I have to refresh some of my data.

 

That is exactly why I am looking at PWT now and wondering if there is not something better (same upside/less risk or a bit less upside/much lower risk) in the oil patch to replace it with. Things like WCP were quite expensive and came down a lot in price but, now they are issuing shares... SGY on the other hand still fits the bill, but the stock needs a little pull back.

 

Cardboard

[Uccmal]

Cardboard, Surge looks interesting.  By doing the asset sale early (last June) they have ensured that their debt levels are very low.  Basically, they got out while the getting was good.  Debt payments are only 1.7 m/q.  I did a very brief review if their financials.

 

You are correct.  Wcp issued shares - 100 m on a market cap of 2500 m, or 4% dilution.  Its barely material.  It wasn't a good price but its better than eating up the balance sheet. 

 

Several mid size companies have issued shares. 

 

Basically we are seeing the culling in real time, and I am afraid Pennwest may be on the wrong side. 

[Cardboard]

I am still going through that review of various Canadian O&G companies and what I am seeing so far is that quality in terms of high operating netbacks combined with low debt is priced high while the opposite is true. Nothing really surprising.

 

The key is to find one that has fallen through the cracks or one where there is something dynamic happening at the micro level like activism or restructuring. If not, you are buying IMO a company where the ultimate reward may be lower than buying oil itself.

 

RMP and RE seem to be two good candidates for further research. SGY I still like but, the price would have to pull back a bit. GXE remains interesting but, they have little flexibility with the credit line almost fully drawn.

 

If others have found other interesting names please feel free to share.

 

Cardboard

[influx]

http://pennwest.mediaroom.com/index.php?s=27585&item=135267

 

Additionally, in 2015 we recorded approximately $700 million of goodwill impairment due to lower commodity price forecasts. At December 31, 2015, we had no goodwill remaining.

[FB]

http://pennwest.mediaroom.com/index.php?s=27585&item=135267

 

Additionally, in 2015 we recorded approximately $700 million of goodwill impairment due to lower commodity price forecasts. At December 31, 2015, we had no goodwill remaining.

another striking number in the supplementary oil and gas information: their Net Proved Developed and Proved Undeveloped Reserves went from 334mmboe in Dec14 to 153 in Dec15 and the "Standardized measure of discounted future net cash flows" went from $4.8bn in Dec14 to $1.3bn in Dec15 (WTI was right a the same level as now, ie $37), ie 70% of the debt notional...

[Uccmal]

http://pennwest.mediaroom.com/index.php?s=27585&item=135267

 

Additionally, in 2015 we recorded approximately $700 million of goodwill impairment due to lower commodity price forecasts. At December 31, 2015, we had no goodwill remaining.

another striking number in the supplementary oil and gas information: their Net Proved Developed and Proved Undeveloped Reserves went from 334mmboe in Dec14 to 153 in Dec15 and the "Standardized measure of discounted future net cash flows" went from $4.8bn in Dec14 to $1.3bn in Dec15 (WTI was right a the same level as now, ie $37), ie 70% of the debt notional...

 

Nasty, nasty... debt only down by 200 m.  I am relieved to be out of this for now.  3 weeks left in the 3rd q and the oil price was lower than that $37 until this week.  The only hope here is significantly higher oil prices and it cant happen fast enough. 

[Cardboard]

Not sure why you guys are surprised about any of this. I am actually surprised that they are not forecasting to breach covenants earlier or as of the end of Q1.

 

What is new in the disclosure is this:

 

"...and it may consider pursuing additional sources of capital from strategic investors."

 

First time I read that from memory. I have said for a very long time that removing the "fire sale" sign from the company would allow for higher non-core asset sales proceeds. They have tried to negotiate fair prices for a long time on their own and I would say that they did well but, it has taken way too much time.

 

Cardboard

[Uccmal]

Not sure why you guys are surprised about any of this. I am actually surprised that they are not forecasting to breach covenants earlier or as of the end of Q1.

 

What is new in the disclosure is this:

 

"...and it may consider pursuing additional sources of capital from strategic investors."

 

First time I read that from memory. I have said for a very long time that removing the "fire sale" sign from the company would allow for higher non-core asset sales proceeds. They have tried to negotiate fair prices for a long time on their own and I would say that they did well but, it has taken way too much time.

 

Cardboard

 

Who is surprised?  I sold nearly all my shares well ahead. 

[SharperDingaan]

We will comment this weekend. We think there is a lot more going on here than meets the eye.

All good, but we want to do some numbers first.

 

SD